Alternative lending platforms can offer investors returns that outpace traditional assets like the stock market or bonds. But there’s another way to buy into the revolution that’s flying under the radar: alternative lending investment trusts. We’ll coin the acronym “ALIT” to keep it simple.
ALITs: A growing phenomenon
Several different types of ALITs have sprung up over the last couple of years, providing a more geographically diversified alternative to buying loans from individual platforms like Lending Club and Prosper. These trusts buy loans from platforms in the U.S., Europe and even Africa. This latest incarnation of alternative lending is rather new, and takes much of the work out of selecting and doing due diligence on the loans investors select. It’s the hassle-free pre-cooked ready meal of “buying debt.”
Getting to know the players
The first in the field, P2P Global Investments, was founded in London in 2014 and is now tradable on the London Stock Exchange with more than £500 million in assets under its control. P2P Global invests in loans on U.S. based platforms like Lending Club, Upstart and Prosper, and also lends through the U.K.’s Funding Circle, Zopa and RateSetter. The trust’s target return rates are between 5% and 15%. That same year, GLI Finance made the decision to switch its focus from collateralized loan obligations (CLOs) to the burgeoning opportunity of SME (small and mid-sized enterprise) finance platforms. The company even has its own Alternative Finance Manifesto, which implores governments to consider the benefits alternative financing provides to small businesses. GLI Finance’s Louise Beaumont warns against what could happen to entrepreneurs if alternative finance doesn’t continue to grow. “Failure to address issues of awareness and understanding means the alternative finance industry would fail to continue growing as it has, and...SMEs will not be able to access the finance they need, when they need it,” she wrote. This year, more so-called ALITs have joined the party. VPC Specialty Lending Investments (VPC) raised £200m in a funding round in March, while Ranger Direct Lending recently raised £135m. Both are also based in London.
Pros and cons
The aforementioned players package alternative loans for investors, ready vetted by an additional team of credit assessment experts. This provides a clear benefit: A second layer of risk assessment, along with measures already taken by the individual alternative lending platform. Of course, the downside of having a team of experts select your loan exposure is simple. You have less information on each party’s credit standing, and have less insight into the conditions of the loan like value and collateral levels. P2P Global, for example, barely makes a nod to transparency. The fund doesn’t publish the names of the platforms it sources loans from, or those in which it has bought equity.
Permitted secrecy and promised performance
This secrecy is for the moment permitted, because alternative lending has not yet attracted overt regulatory scrutiny. But this novelty in turn makes it hard to assess if trusts provide value for money and will continue to do so; they have a rather short track record that makes it difficult to project future performance. Still, for those willing to accept the lack of transparency, the projected yields of these funds are often higher than for your standard investment trust. P2P Global is going for annualized returns of 5% to 15% and a yearly dividend of 6% to 8% percent. VPC Specialty Lending targets a net total return of over 10% and a net dividend yield of 8% a year, while Ranger is aiming for dividends that yield 10% on its issue price.
Another risk: leverage
One final factor that could make trusts a higher-risk venture is the issuance of leverage. Trusts have written into their terms and conditions the right to use leverage – i.e. borrow money – to fund asset purchases, in addition to cash raised through funding rounds. Unfortunately, existing capital adequacy rules are not always comprehensive enough to guarantee they can provision for all investor losses in the event of multiple defaults. This is an issue that bears monitoring and is something that could face heavier regulatory scrutiny in the future.
Alternative finance is expanding at triple-digit growth rates, and naturally, investors want a way to get into a model that has the potential to return more than the S&P 500 in a given year. While there are clear risks and the so-called “ALIT” space is young, trusts provide another option outside of using individual alternative lending platforms.
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