RiverNorth Capital Management launched RiverNorth Marketplace Lending Corporation (RMPLX), a closed-end interval fund dedicated to marketplace lending (a/k/a “online lending”) asset class. They’re in pursuit of high current income.
“Marketplace lending” are all of those companies that allow small borrowers to get quick access to loans for unconventional (that is, non-bank) lenders. Lending Club would be a familiar example for most of us. The volume of lending has increased 700% in four years to about $17 billion a year.
The U.S. Department of the Treasury published a long report in May on the state of the market. Here’s there description of its key characteristics:
Online marketplace lenders share key similarities. First, companies operating in this space typically provide borrowers with faster access to credit than the traditional face-to-face credit application process, often providing funding decisions within 48 to 72 hours. Second, most online marketplace lenders are able to offer small loans with short-term maturities, often with daily remittances of funds processed directly from linked bank accounts. Third, they use automated online loan applications and have no retail branches. Fourth, they rely on a variety of funding sources, including institutional investors, hedge funds, individual investors, venture capital, and depository institutions. Finally, online marketplace lenders use electronic data sources and technology-enabled underwriting models to automate processes such as determining a borrower’s identity or credit risk. (Opportunities and challenges in online marketplace lending, 05/10/2016)
The fund will invest in a mix of marketplace lending sectors, including unsecured consumer, small business, and specialty finance loan segments.
The fund will be managed by Philip Bartow and RiverNorth’s CIO, Patrick Galley. Mr. Bartow joined RiverNorth in 2015 and has 12 years of work in investment manager and capital markets. Before RiverNorth he was a Principal at Spring Hill Capital where he focused on the analysis and trading of structured credit, commercial mortgage and asset-backed fixed income investments.
As a closed-end interval fund, you’ll be able to purchase shares daily but redeem them only quarterly. The minimum amount that they’ll redeem is 5% per quarter but the Board of Trustees has the right to limit the extent of redemptions beyond that. As a practical matter, that allows the manager to sidestep the pressure of day-to-day liquidity and the risk of needing to liquidate illiquid positions in the face of some transitory investor panic. In theory, that allows stronger long-term returns and a more rational portfolio.
The decision to adopt an interval fund structure is an implicit recognition of the exceptional risks posed by this asset class. Steve Eisman, the hero of The Big Short for his prescient bet against the housing market in 2007, warns that Silicon Valley, which has helped launch 160 online lenders since 2009, “is clueless.” The rewards of the strategy may well substantially outweigh the risks, but that shouldn’t be taken for granted. Proceed with care and vigilance.
The minimum initial investment is $1 million and the initial expense ratio after waivers is 2.40%. There’s a substantial amount of detail at the fund’s homepage.