Alternative finance-focused investment trusts are facing an ‘existential crisis’ with funds failing to live up to expectations, analysts claim.
A review of the direct lending investment trust sector, by brokerage Numis, warned the sector has been hit by poor credit underwriting that has led to losses or significant uncertainty over portfolio valuations.
“This is down to a number of factors, including inexperienced managers with limited track records and a focus on rapid deployment rather than quality,” Numis said.
“In addition, the high costs of structuring debt facilities, high fees and the cost of hedging overseas income streams into sterling have impacted returns.”
The report warned portfolios have been too concentrated by position or asset class and have not been able to name specific positions due to confidentially agreements in place.
Read more: Invesco slashes Honeycomb holding
Numis predicted the market will shrink as funds struggle to perform.
It said investment trusts such as Honeycomb and Pollen Street are suffering from major backers including Woodford and Invesco exiting the sector, while Funding Circle and Ranger are winding down their trusts after “failing to live up to expectations.”
Numis repeated its belief that the Honeycomb and Pollen Street Secured Lending (PSSL) investment trusts – run by the same manager – would be better off merging and maintained a buy recommendation for VPC Specialty Lending (VSL), which has shifted its focus from marketplace to balance sheet finance.
VSL and PSSL have both pivoted away from P2P lending in order to boost performance and focus more on secured assets.
“We believe there remains a place for listed investment focused on private debt, but we also expect to see the sector to continue to shrink, with funds winding-up, returning capital or changing manager, and there may be only a few survivors,” Numis said.
The analysts suggested that funds should improve their transparency to boost demand, by allowing investors to assess the underlying risks more easily as well as the portfolio’s individual exposure to certain platforms.