FinEx Asia, a Hong Kong-based manager of private funds that invest in U.S. consumer loans traded over electronic markets, is laying the groundwork to create a securitized version.
The company hopes to list a closed-end fund on the Hong Kong Stock Exchange early in 2019, provided it can secure a type-1 license to deal in securities from the Hong Kong Securities and Futures Commission, says Maggie Ng, founder and CEO.
Since the company launched last year, it has amassed about #230 million in assets under management, of which roughly half are in mutual funds that invest in loans sourced from U.S. peer-to-peer electronic networks. Until recently there was just one such fund, but in the past few weeks it introduced a second fund that uses leverage.
The other half of its AUM is from a longer-term private-equity fund, Ng says. Dianrong, the Chinese P2P company, provides the underlying technology connecting FinEx to U.S. loan venues.
Tapping new investors
The logic of creating a listed version of the strategy is to enable entire categories of institutional investors to access it. Ng says insurance companies, banks and fund managers are interested in a credit strategy that can deliver steady yields; she says the unleveraged mutual fund has returned nearly 8% year to date.
“U.S. consumer loans is a good asset class, especially in an environment of rising interest rates,” she said.
But many institutional investors cannot invest in illiquid funds or those without a secondary market, so creating the strategy in the form of a security that lists on an exchange (in the form of a closed-end fund) would open it to potential clients. And once listed on HKEx, it would also qualify for China’s qualified foreign institutional investment (QFII) program, making it eligible for mainland institutions.
“A side benefit is that a listed fund makes the company look more established,” Ng said. Investors are increasingly sensitive to being able to report on their risk exposures, and a security is easier to quantify than a private fund.
Although FinEx has no intention to market its products to retail investors, a listed version would be eligible for consumers, and so wholesale distributors like banks could add it to their shelves if they wished.
A U.S. bank is providing financing to allow FinEx to offer leverage up to 3x on its new mutual fund. Ng hopes she can get an additional bank to support a similar level of leverage in a listed closed-end fund, which would allow her team to maintain high returns with lower-risk loans. “I’m hoping to open this to a regional bank,” she said, in order to diversify FinEx’s counterparties.
FinEx also needs a trust company to track subscriptions and redemptions, and to provide third-party custody. Details of the fund structure have yet to be finalized.
Ng’s ambition is to move into supply-chain financing via blockchain, and she hopes to grow her existing bank relationships into bigger ones.
Assuming the licensing and the service providers are in place, she intends to open the closed-end fund for a few months to raise capital. Interest from the loans will be distributed back to investors while the principal will go to acquiring more assets within the fund; FinEx can also open the fund to additional rounds of fund raising.