Merseyside Pension Fund has committed £30m to be the seed investor in a direct lending fund for SMEs that could eventually raise hundreds of millions of pounds.
Merseyside has partnered with Funding Circle, the small business loans lending platform, to launch the UK Economic Impact Fund – with the initial intention of offering loans to an estimated 430 small enterprises across the UK.
Merseyside, the first LGPS fund to work with Funding Circle, is targeting a 5.5-6.5% annual return after fees.
The average loan acquired through Funding Circle is around £70,000 while traditional funds targeting mid-sized companies offer loans ranging from £20m to £400m.
Linda Desforges, senior portfolio manager at the pension fund, told Room 151 that the drivers for working with the platform were the potential returns as well as the “impact” lending could have on local economies.
“We regard Funding Circle as the preeminent operator in this space, having the technology to do the credit assessment properly and provide the service that is required by the borrower, and be a disruptor to the banks in this market,” she said.
While Funding Circle may be new to LGPS, the platform has previously worked with 19 local authorities to manage loans for small businesses.
In 2015 Spelthorne council put up £300,000 to be lent to local businesses through Funding Circle’s platform.
In 2014 Sefton and Newcastle councils both invested £100,000 into funds aimed at small local enterprises.
Other councils partnered with Funding Circle include Nottinghamshire, Camden and Gloucester.
At the time councillors spoke of the deals enabling local authorities to “strengthen the fabric of our communities” through helping local enterprise.
Desforges made plain that while “impact” was a big factor in partnering with Funding Circle, it also enabled Merseyside to diversify its investment portfolio away from direct lending to “highly leveraged” larger companies. The short duration of the SME loans was also an attraction.
Sachin Patel, chief capital officer at Funding Circle, said he hoped other LGPS funds would join Merseyside. He added that the fund did not have a target figure but said Funding Circle hoped the fund would rise to “several hundred million pounds”.
“We feel very optimistic over what we can achieve with the fundraising,” he said.
Patel also agreed the fund would aid with “granular” diversification. He said: “If you put a few hundred million to work, you’re diversifying across hundreds, if not thousands of businesses.
“Whereas if you’re lending to much larger companies, there may be just two or three loans—not really diversified.”
According to Sachin, the SME market is attractive because it produces 50% of UK GDP and because it is poorly supported by mainstream lenders.
Political developments have also undermined the ability of small businesses to access loans.
“This is the largest part of the economy,” said Sachin, “with the largest number of jobs by a long way, and this part of the economy has been really underserved as banks have pulled back from lending to small companies; firstly as a consequence of the financial crisis but, more recently, because of Brexit.
“Whereas the much larger companies can go to other asset managers, the companies we lend to don’t really have anywhere else to turn to beyond the main High Street banks.”
