VPC Specialty Lending (VSL) has grown its net asset value (NAV) for the fourth consecutive month, providing further evidence that a turnaround is underway.
During August, the alternative finance-focused investment company produced an NAV return of 1.01 per cent and declared a dividend of 2p per share for the period covering the three months to the end of June 2018. The board said this represents the long-term dividend target for the fund.
The positive monthly update follows a strong first half of 2018, indicating that the investment team’s decision to shift the fund’s focus away from consumer loans originated by peer-to-peer lending platforms in favour of balance sheet loans from these platforms is starting to pay off.
Over the six months to the end of June, VPC Specialty Lending grew its NAV by 4.27 per cent. A 5.5 per cent income return was able to absorb a 1.24 per cent capital loss over the period. The latter appears to have been driven by higher hedging costs caused by sterling volatility against the dollar. The fund hedges dollar exposure back to sterling and incurred a £1.7m foreign exchange loss over the period as a result.
Meanwhile, the company’s move to IFRS 9 financial reporting in January 2018 resulted in a 1.11 per cent one-off hit to NAV.
In spite of these factors, chairman Andrew Adcock was keen to point out that the fund had produced “consistent and recurring income” over the period from a diversified portfolio of senior secured floating rate balance sheet investments, which he believes continue to offer attractive risk-adjusted returns.
“With the recent strong performance of NAV returns, the company is currently anticipating that it will begin accruing performance fees payable to the investment manager in the coming months,” Adcock added.
Investment manager Victory Park Capital Advisors will earn a performance fee if the fund generates a total return of at least five per cent per annum.
With around 78 per cent of the portfolio in US-based investments, Adcock said VPC Specialty Lending had benefited from strong underlying economic growth and lower unemployment.
Likewise, higher interest rates have spelled good news for the portfolio because the majority of its income is derived from floating rate credit facilities, which benefit from increases in Libor.
However, it was a different story in the UK, where seven per cent of the portfolio is invested. The chairman noted that Brexit negotiations continue to weigh on economic growth.
“The overhang of the Brexit negotiations continued to mark a period of uncertainty and delayed business investment,” he added.
Brexit aside, Adcock feels positive about overall growth in the global fintech market, with investments in this sector totalling $57.8bn (£44.3bn) across 875 deals during the first half of the year alone.
“I believe this represents investors’ confidence in the specialty lending market, specifically the ability of the emerging financial technology ecosystem to continue to scale and deliver products and services that customers want and offers a superior customer experience in comparison to the incumbent players,” he concluded.
At the end of August, 86 per cent of gross assets were in balance sheet loans, with the remainder in equities (public and private), securitisations, market loans and cash.
Over the past 12 months, VPC Specialty Lending’s share price has risen by 12.6 per cent. The fund currently yields 10 per cent and trades on a 10.9 per cent discount to NAV.
Read more: VPC’s portfolio sales drag on performance