RM Funds portfolio manager Pietro Nicholls (pictured) explains to Marc Shoffman how the alternative investment manager is helping to boost the UK economy…
RM Funds may not be the most recognisable investment brand name but the GP surgery or student accommodation on your high street may have been built using its capital.
Its two infrastructure-focused products, the RM Infrastructure Income (RMII) investment trust and the RM Alternative Income Fund (RMAI), back real estate projects and lenders in this space.
RMII, which focuses on secured social and environmental infrastructure lending, became the only listed debt fund to take part in the government’s emergency lending schemes when it was accredited for the coronavirus business interruption loan scheme (CBILS) earlier this year.
As well as supporting the economy, the RMII investment trust’s share price is up 6.7 per cent over three years, according to Trustnet data on 16 September, while the size of the RMAI fund’s portfolio has grown by 25.7 per cent over three years. Portfolio manager Pietro Nicolls explains more.
Marc Shoffman (MS): When and why was RM Funds set up?
Pietro Nicolls (PN): RM Funds was set up 10 years ago. It was originally branded as RM Capital but has evolved organically. We started off just being an agency trading business, buying and selling securities from hedge funds and pension funds. Our advisory business then developed and we worked with companies and pension schemes to finance lots of interesting things.
That was followed by our asset management business that launched five years ago with our public vehicle RM Secured Direct Lending. We have also since launched other open-ended funds such as the RM Alternative Income Fund.
We manage capital on behalf of clients such as pension schemes, discretionary fund managers and retail investors. A lot of our retail investment comes through DIY investment platforms.
MS: What is the difference between the RMII and RMAI funds?
PN: Our investment trust focuses on lending and has a big environmental, social and governance (ESG) impact as well as our work with the British Business Bank on CBILS.
The RMAI fund focuses on the entire universe in the alternative space such as secured lending and real estate infrastructure. It tends to invest in RMII but also in a range of secured lending and real estate credit opportunities. The funds are focused on the alternative income space in the credit segment, with businesses where there is tangible security.
When we looked at the peer-to-peer lending market, we found that a lot of the lending was unsecured so it can be harder to make recoveries when things go wrong.
There is always a recovery route in real estate as you can sell the asset. We invest in businesses that lend to real estate projects or which own infrastructure assets.
MS: What makes alternative lending investable?
PN: Transparency is important. One of the big issues this sector had for a long time is a lot less transparency than you would like. We need to understand what is going on under the bonnet.
For us, the other thing is the visibility of income and a line of sight to the security itself such as the real estate, the equipment or plant machinery.
MS: Why have you steered clear from backing P2P lenders?
PN: From our perspective, because of the nature of the funds we run, we need liquidity and want to avoid a situation where we can’t raise cash. We can’t have any of those types of risks – everything has to be a publicly listed company.
We want recalls to assets directly and you don’t get that through a platform like Funding Circle which may be listed but is more about the platform and the technology. Traditional P2P lending doesn’t quite give us what we need.
The concept of P2P has changed now and it is more about institutions providing the capital and the platform being a shelf where you can pick the deals.
MS: How does the RMII social and environmental strategy work?
PN: We work with impact advisory firm The Good Economy to assess how the companies we invest in meet certain ESG metrics. Its tools look at everything from social metrics to gender pay gaps and their carbon footprint.
We can also use our position to influence change when providing capital. If we are the only ones investing, we can say how we want a building built, such as with solar panels. This creates a benefit for the company by reducing their bills and gives us a higher quality investment with more resale value.
MS: How did you end up becoming a CBILS lender?
PN: We had been speaking with the British Business Bank team for around four years. We were always looking for a way to work with them but it was hard to find the right opportunity as they couldn’t invest in our fund as a public company.
CBILS was a great opportunity to invest. We are working in areas important to the economy such as education and care homes. Our CBILS lending has gone really well. These are businesses that have been massively impacted by Covid and our support has helped create in excess of 1,000 jobs.
We maintained or created jobs through this capital and there is an environmental impact. It also provides an opportunity to use our ESG strategy and ensure borrowers meet certain green measures. We want the underlying asset to be energy efficient and if our help means a business can reduce their carbon footprint then it’s a win-win.
MS: A lot of alternative lending funds have closed or changed strategy in recent years, how have you survived?
PN: We don’t have anything negative to say about other funds. Our approach is that we always focused on three things: management teams, cashflow of those investments and the assets we are backing. When we invest, we provide a lot of transparency and investors can see every single investment we have made. That level of transparency is very rare in the public market space.
MS: What is your outlook for the funds?
PN: We are not looking to launch any more funds in the near term. Last year was a year of monitoring and control as Covid was so tricky. RMII had very few arrears during the pandemic. In our entire portfolio which had 37 investments, only two had issues.
This year is about making sure the businesses get back on track and I suspect we will have more diversification. We are in dialogue with the British Business Bank about the recovery loan scheme so that is the direction of travel.
There may be some new investments in the existing portfolios but we just want to continue delivering a steady income stream. The outlook for the alternative income sector is strong. Investors should be looking at this space more seriously as you get no returns from bank deposits and nothing on equity investments or bonds.
Read more: Recovery loan scheme deadline to be extended