KIWI SET FOR DEBUT IN TEST OF CREDIT FUND THAT INVESTS IN UNSECURED LOANS.

Private credit fund to meet local platforms

The next stage in the development of the country’s first credit fund that invests in marketplace loans — unsecured consumer and small- business loans provided by online lending companies — is set to play out over the next month.

T he gang behind t he KiWi Private Credit Fund — formed last summer with $30 million of contributions from institutional and highnet- worth investors — is planning to meet the Canadian platforms.

The idea is to see whether a relationship — similar to the three the fund’s manager, Kilgour Williams Capital, has with three U.S. platforms — can be formed in Canada, even if the local market is not as well- developed as in the U.S.

“We are looking to launch in Canada,” Colin Kilgour, the fund’s portfolio manager, said of the expansion plans that will require due diligence on the platforms. Expansion will also be helped by the extent to which investors — either institutional or high- net- worth individuals — are attracted to the growing private debt asset class. ( Entities including Bridging Finance and Third Eye Capital also operate in this sector.)

As a manager, Kilgour Williams sits in an enviable position. Thanks to relationships it has established with its three U. S. platforms — Lending Club, Prosper and Biz2Credit — it is not required to source or originate the loans. Instead it selects from what it is offered with the goal being to create a diversified portfolio of loans that it owns.

Nor is it involved in administering the loans.

“Our strength is portfolio management, credit management and fund management ,” Kilgour said, as opposed to the sourcing, underwriting, selling and servicing loan skills of the fintech companies.

“We get paid for managing the credit risk,” he said noting the portfolio of amortizing loans spins off cash on a regular basis, which must be reinvested. Those cash flows are boosted because the borrower can often prepay the loan without penalty.

This week, Kilgour Williams, issued its January 2018 report that shows the fund has now fully deployed the original $30 million provided by the original backers. To invest that $ 30 million takes a lot of work given that the fund’s average loan is US$ 12,254. Of the 2,000 loans, 90 per cent are consumer loans with small-business loans making up nine per cent. ( Cash accounts for the other one per cent.) From a yield perspective, the original loans are attractive as they come with an average interest rate of 17.02 per cent. Of the loans, 95.8 per cent are current; four per cent are late and a mere 0.2 per cent are in defaults.

The January numbers are similar to the December results. Then the average interest and the average loan provided were a tad smaller at 15.75 per cent and US$12,026, respectively.

For those who provided the original $ 30 million investment, the news is also good. For the month the distribution was 0.7 per cent or 8.40 per cent on an annual basis — in line with the target rate of return. At 0.7 per cent the distribution is the highest so far.

“Over the past six weeks there has been considerable volatility in equities and bond markets,” said Kilgour, noting that inflation fears have led to a sell- off in fixed income markets. “But in the private credit world we have a stable net asset value and we are splitting our income.”

If rates rise, Kilgour argues the portfolio’s short duration ( the relationship between price and a change in interest rates) will provide some protection for the portfolio. “We will be reinvesting principal at the higher rates,” he said.