European Investment Fund and German development bank, KfW, invest in UK small businesses through securitisation of loans originated by Funding Circle
The European Investment Fund, part of the European Investment Bank Group, and KfW, the German Promotional Bank, are supporting UK small businesses through their investment in a securitisation of loans originated by Funding Circle, the world’s leading lending platform for small businesses.
The £207 million portfolio is issued by P2P Global Investments PLC, a UK-quoted investment trust managed by Pollen Street Capital. It is the second securitisation of loans originated by Funding Circle and opens up the small business loan asset class to an even wider range of investors. The transaction was rated by three rating agencies, and its senior tranche was awarded an Aa3 / A (high) / AA- ratings by Moody’s, DBRS and Kroll respectively. On closing, the spread over 1 month Libor on the senior tranche was 75bps which represents a significant tightening from [220bps] on the previous securitisation of Funding Circle loans (SBOLT-2016). Deutsche Bank acted as sole lead manager and arranger.
Small businesses make up 50% of UK GDP and 60% of private sector employment* yet continue to face difficulties accessing finance through traditional channels. In the last quarter of 2017, the combined net lending (total minus repayments) of the major high street banks to small businesses was negative (-£73 million), whilst Funding Circle investors alone lent £155 million to small businesses on a net basis in the same period.** By linking supply directly with demand through an online lending platform, much needed funding is provided to the real economy.
Today’s news is recognition of the online lending model’s ability to open up deep pools of capital to small businesses, creating more choice and competition in the small business lending market. In turn this creates a more stable ecosystem and reduces dependency on bank lending, as recommended by the Bank of England and European Central Bank.***
Sachin Patel, Chief Capital Officer, said: “This latest securitisation further validates the attractive, risk-adjusted returns that are being generated for investors in SME loans. Now investors of all shapes and sizes can support the growth of small businesses, which in turn drives much-needed job creation across the UK. This significant commitment by the EIF and KfW, alongside other key investors, will help thousands of small businesses access the finance they need to expand and grow.”
Investors at Funding Circle include 80,000 people, local authorities, the government-owned British Business Bank, the European Investment Bank and financial institutions such as pension and insurance funds. Since launching in 2010, investors have earned an average 6.4% per year after fees and bad debt.****
George Passaris, Head of Securitisation at EIF said: “We are pleased to be working again with Funding Circle to boost access to finance for businesses. Many SMEs are still struggling to obtain competitive financing from traditional funding sources and smaller businesses are often the ones most affected. EIF's participation in these new securitisation, demonstrates our continuous commitment to embracing innovative and pioneering structured finance solutions, allowing SMEs to access to funding to grow their business and ultimately help the economy overall.”
Dr. Frank Czichowski, Treasurer at KfW said: “The second securitisation of SME-loans originated by Funding Circle demonstrates the success of online lending in the UK as well as the functional business model of Funding Circle. Online lending offers great opportunities for SMEs and KfW as a future-oriented bank supports such alternative and innovative funding sources.”
Abror Ismailov, Partner, at Pollen Street Capital said: “We at Pollen Street Capital, the Investment Manager of P2P Global Investments PLC, are business partners as well as capital providers. Our partnership with Funding Circle dates back to 2014 and embodies our aim to work with high-quality specialist businesses. Since the relationship began, P2P Global Investments has issued loans through Funding Circle with original balance of over £400 million. We look forward to continuing working with Funding Circle to support small businesses in the UK.”
Launched in 2010, Funding Circle is helping to spark a global revolution in the way small businesses access finance, disrupting the traditional model of banking. To date, Funding Circle investors have lent £4.5 billion to more than 45,000 businesses in the UK, US, Germany and the Netherlands. By bringing together industry-leading risk management and cutting-edge technology, creditworthy businesses typically access the capital they need to grow in days rather than months.
* Bank of England SME forbearance and its implications for monetary and financial stability, 2013
** Data taken from Bank of England ‘Bankstats (Monetary & Financial Statistics)’ – Table A8.1 ‘Monetary financial institutions’ loans to non-financial businesses, by size of business’ under ‘Net loans (exc overdrafts).
**** This is the weighted average return across all investors lending for one year or more through Funding Circle over an annualised period. It includes all earnings and is calculated after fees and bad debt but before tax. Data is correct as of 31st December 2017.