Direct Lending sector offers attractive yields from affordable housing and regional development

Investment company managers discuss sustainable lending and ESG.


The Debt – Direct Lending sector offers an average yield of 7% and has returned 16% and 44% over the last one and five years.1 However, less is known about the sustainable activity within the sector, such as exposure to clean energy, affordable housing and energy efficient homes.

On Tuesday 14 September, the Association of Investment Companies (AIC) held a media webinar to explore the direct lending sector, what it offers to investors and the sustainable themes within direct lending portfolios.

The webinar featured Matthew Potter, Manager of Honeycomb, Joanne Fisk, Manager of GCP Asset Backed Income Fund, and Thomas Le Grix De La Salle, Manager of RM Infrastructure Income. Their thoughts have been compiled below with those of Pedro Gonzalez de Cosio, Investment Manager of BioPharma Credit, Christopher Abbate and Jamie Brodsky, Managers of Riverstone Credit Opportunities Income, and Gordon Watson, Manager of VPC Specialty Lending Investments.

What do you invest in?

Joanne Fisk, Manager of GCP Asset Backed Income Fund, said: “GCP Asset Backed Income Fund is a closed-ended investment fund, lending to owners of assets that we believe are integral to society. All of our loans are secured against physical assets or dependable cash flows. The fund’s strategy is to use a project finance approach, with upfront due diligence, security packages and covenant heavy loans.

 “Broadly, we categorise our loans into four sectors: Property, Social Infrastructure, Asset Finance and Energy & Infrastructure. However, within these categories, there are a diverse range of themes and sectors ranging from boilers in people’s homes and buy-to-let mortgage portfolios, through to compressed natural gas stations and care homes.”

Matthew Potter, Partner at Pollen Street Capital, the manager of Honeycomb, said: “We operate an asset-based credit strategy whereby our lending is predominantly on a senior basis and secured against the loan portfolio of our non-bank lending partners. We are focused on providing finance to the non-bank lending sector – a sector that has grown rapidly following the financial crisis as high street banks have retrenched from a lot of traditional lending activities. This is a space which is now being filled by non-banks that are better able to service the needs of SMEs and consumers. Our portfolio is balanced and diverse, with investments across real estate lending (bridging and development finance), SME lending and consumer lending.”

Thomas Le Grix De La Salle, Manager of RM Infrastructure Income, said: “RM Infrastructure Income (RMII) invests in lending to high quality businesses, focusing on social and environmental infrastructure sectors, with loans supported by tangible security packages. These investment areas make a meaningful, positive contribution towards social and environmental outcomes that are linked to specific Sustainable Development Goals (SDGs).

“The portfolio is well diversified across investments and sectors. The investment manager, RM Funds, has made good progress on increasing the proportion of the portfolio aligned to the new investment focus with about 46% of the portfolio invested in social and environmental infrastructure investments. The investment manager was accredited by the British Business Bank as an accredited lender for the Coronavirus Business Interruption Loan Scheme (CBILS) with RMII as a funding partner. We have deployed £32m of the portfolio in CBILS facilities, 25% of the gross asset value, of which 80% is backed by a contractual government guarantee.”

Gordon Watson, Partner at Victory Park Capital Advisers, manager of VPC Specialty Lending Investments, said: “We selectively invest in growing businesses that benefit from underlying regulatory or structural factors; our investments span vital segments of the economy that are underserved by the traditional banking industry, including small businesses, working capital products, consumer finance and real estate. By focusing on emerging sectors of the digital economy where pricing margins have not yet compressed but risk can be properly underwritten, we can unearth continual value for our investors.”

What do you offer to investors?

Pedro Gonzalez de Cosio, Co-Founder and CEO of Pharmakon Advisors, investment manager of BioPharma Credit, said: “BioPharma Credit offers a unique opportunity for public investors to gain access to an asset class with extremely high barriers to entry. The company targets a total net return on NAV of 8-9% per annum over the medium term. Within this return figure, BioPharma Credit offers investors a 7-cent annual dividend (plus a variable special dividend) paid quarterly and is therefore an income focused investment for investors seeking returns that should be uncorrelated to equity market movements.”

Matthew Potter, Partner at Pollen Street Capital, the manager of Honeycomb, said: “Honeycomb aims to generate a high level of cash income for investors with a strong focus on capital preservation and asset level diversification. This is proven by our performance of 8.2% dividend yield on the current price with no missed payments and overall 45.6% NAV returns since inception in December 2015. Investors are able to access an asset class which offers diversification to their portfolio, and we believe Honeycomb provides an attractive risk reward profile for investors, and can be a strong income-producing component of any portfolio.”

Thomas Le Grix De La Salle, Manager of RM Infrastructure Income, said: “In addition to giving investors exposure to critical infrastructure assets which are not correlated to the broader economic cycle, the lack of funding in these sectors offers a deep opportunity set to generate attractive risk-adjusted returns while making a meaningful, positive contribution towards social and environmental outcomes. The CBILS (Coronavirus Business Interruption Loan Scheme) UK Government partial guarantee also offers a material credit enhancement for the portfolio. CBILS loans represent 25% of the portfolio, benefitting from a UK Government Guarantee, protecting a minimum of 80% of the principal and 100% of the first year’s interest.”

Sustainable themes

Joanne Fisk, Manager of GCP Asset Backed Income Fund, said: “At the forefront of our investment strategy is identifying projects where we can see a structural demand in society, whether this is for new affordable housing, support for the transition to renewable energy sources or student accommodation. This approach, in particular across our Social Infrastructure and Energy & Infrastructure assets, means that we’re always looking for sustainable business models which contribute positively to society. Examples in the portfolio are our investments in compressed natural gas stations, waste recycling facilities, supported living and care homes.”

Matthew Potter, Partner at Pollen Street Capital, the manager of Honeycomb, said: “The positive impact and potential for long-term and sustainable change that the non-bank lending sector provides is something we feel has been overlooked. It is only recently that we have begun to see research and data pick up on the critical role non-bank lenders play in the UK economy, from areas as diverse as driving financial inclusion, regional economic development, green transport, energy efficiency in homes and more.

“We’re passionate about the potential for positive impact through the lending we provide to non-bank lenders. It is through this lens that we assess opportunities to invest wisely, rather than just applying ESG checklists. For example, taking Pollen Street Capital as a whole, our credit facilities have supported several impactful lending initiatives: over 11,000 households installed a new boiler which both increases energy efficiency and reduces energy bills; over £195m in lending has been provided via our credit partners to support SMEs through the Coronavirus Business Interruption Loan Scheme; and over 2,000 affordable homes have been built since 2016.”

Christopher Abbate and Jamie Brodsky, Managers of Riverstone Credit Opportunities Income, said: “By devoting substantial internal and external resources towards ESG matters, we have developed clear processes that take account of leading industry standards. We believe this effort helps us to make sustainable, ethical and socially responsible decisions over the long run. With regard to our credit platform, we hold our borrowers to the same high ESG standards as our portfolio companies, and look to structure new green loans for renewable projects and sustainability-linked loans that include prescribed sustainability goals.”

Thomas Le Grix De La Salle, Manager of RM Infrastructure Income, said: “The board and investment manager are focused on enhancing the sustainability of the portfolio, investing in assets which significantly improve the quality and supply of accommodation, childcare and education services, and health and social care services, as well as renewable energy and waste management solutions. The investment manager appointed The Good Economy, a leading social advisory firm, to provide independent reporting and assurance of the company’s ESG and impact outcomes of the portfolio. This report will be made available to investors on an annual basis with the investment manager looking to publish an interim report imminently.”

Gordon Watson, Partner at Victory Park Capital Advisers, manager of VPC Specialty Lending Investments, said: “As a signatory of the UN Principles for Responsible Investment, we recognise the importance of long-term responsible investing, as demonstrated by our track record of providing capital to companies that promote important social issues, including access to capital and financial inclusion.”

Managing COVID

Joanne Fisk, Manager of GCP Asset Backed Income Fund, said: “At the onset of COVID in early 2020, we took a conservative approach to asset valuation, working with our independent valuers to increase discount rates on assets where we expected an adverse impact. In doing so, we classified our assets as being either high, medium or low impact. Positively, over the last 18 months, we’ve been able to gradually unwind these provisions on the majority of assets, bringing most of the book back to par.

 “We’ve been impressed with the way in which management teams of the businesses we support have been able to tackle the unique challenges presented in the pandemic. It has also presented some opportunities for the fund, including new investments to support an existing borrower to expand their nursery business through an acquisition, and a number of interesting transactions in the football finance space.”

Matthew Potter, Partner at Pollen Street Capital, the manager of Honeycomb, said: “Our performance through 2020 was resilient to the COVID pandemic and we were able to continue to pay dividends throughout. The nature of our senior strategy, combined with the resilient asset class and structural protection, means the risk of volatility and losses at times of heightened financial stress is considerably lower. We worked closely with our partners to ensure they continued to provide the best possible support to their clients, whilst carefully tracking performance across our portfolio.

“Ultimately Honeycomb generated £290m of cash through 2020. Looking ahead, the COVID-19 pandemic has only served to exacerbate the structural changes in the industry and the narrowing of the mainstream banks’ lending focus. We anticipate the opportunity in non-bank lending will only continue to grow.”

Gordon Watson, Partner at Victory Park Capital Advisers, manager of VPC Specialty Lending Investments, said: “As we move into the recovery phase, there will naturally be tempting opportunities created by the turbulence, but we will remain disciplined in our investment strategy and continue to implement our cycle-tested approach of careful risk management and selection, which has proven successful in allowing us to perform in any economic environment to date.”


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Notes to editors

  1. Data is the weighted average for the AIC Debt – Direct Lending sector at 31 August 2021. Performance is share price total return. Source: AIC/Morningstar.
  2. The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 364 members and the industry has total assets of approximately £265 billion.
  3. Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.
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