The Cadillac of Credit
Business loans are the Cadillac of credit products, with the highest yields and lowest default rates. Portfolio returns of 13-17% are the norm for successful underwriters - generally private, non-bank institutions.
P2P Loans Evolve
As I've written, P2P lending has put consumer loans in the hands of investors. LendingClub alone has lent $1.5 billion, all owned by individual investors earning an average of 9% on a diversified portfolio.
But the more lucrative business loans have been unavailable in P2P...until now.
Business Rates are High...
Local, established businesses such as medical offices, restaurants, and gas stations routinely pay 20%+ for one year loans, including a base 15% rate plus the effects of various surcharges.
Loans at lower rates, such as from the Small Business Administration, are unavailable without extensive paperwork and long delays. Ditto for traditional bank loans.
...Because Speed Matters
Imagine that you and your partner run a dental practice. Your x-ray machine breaks, and you need a new one yesterday. Every hour without a new machine is costing you money and annoying your patients.
Providing rapid credit to established businesses at high rates is the domain of private non-bank lending institutions.
How Borrowers Qualify for Loans
Underwriting is based on dozens of factors, of which the most important are:
Personal Credit - typically in the top quartile
Business History - typically 5-10 years
Bank Balance - usually a floor of $3,000 average daily balance
Bank Statements - many, small, daily transactions indicating a stable, retail business
Notice what's not on the list: income statements, balance sheets, and the like. Local businesses do not maintain these documents on a monthly basis, and they have proven unnecessary to successful underwriting.
Internet-Based Business Lending Takes Off
A new breed of internet-enabled underwriters is tackling business loans in the same way that LendingClub and Prosper have conquered personal loans. The major players are all small but growing at over 100% per year.
On Deck Capital - Banked a $42 million round in February on top of a $100 million credit facility from Goldman
IOU Central - A public company with offices in Atlanta, IOU's focus is on keeping default rates extremely low
Kabbage - Raised $30 million in September and is now expanding to the UK
And the Winner Is...
In April of 2012 I began a round of due diligence on internet-based small business lenders, looking for one that could provide a portfolio of business loans to myself and my Ross Asset clients.
At that time, none of the lenders had investment vehicles available. My conversations with IOU Financial CEO Phil Marleau persuaded me to start my own fund, which I did in November.
Our Sixth Incoming Class
Our sixth group of investors came aboard in April, and they join dozens of other limited partners with investments ranging from $100K-500K.
Returns are averaging 1.27% per month, net of all fees. This is equal to a 15% annual rate. These returns are in line with expectations, and typical for this asset class.
Here is the pro-forma, including returns prior to November based on IOU's audited financials:
Why IOU Central
I chose to partner with IOU Central for three reasons:
Public Company - Audited by BDO, financially sound, and CEO with extensive financial services experience
Great Underwriting - Making loans since 12/2009 with a 1.78% default rate
Good Mix of Businesses - IOU has 28% medical, which I like, and a good geographical mix
Finding a Lower Minimum
Ross Asset Advisors has always had a high minimum of $500K, something that has kept my services out of reach of many in my network. Servicing my high net worth clients continues to be an important part of what I do every day.
Fortunately, the Direct Lending Income Fund is different. I apply my energy at the Fund level, and have an administrator, Opus Fund Services, that does all investor-level work. Thanks to this support I can accept Limited Partners down to a minimum of $100,000.
Is The Fund Right For You?
The Direct Lending Income Fund may be right for any of the following types of investors:
Investors who want to begin their foray into private debt with a modest fund investment
Mid-career savers with $100K IRA accounts that have seen little improvement in a dozen years
Retirees and others who want regular cash income from their investments
Investors who want higher returns from their fixed income portfolio
Investors who wish to diversify away from equities without sacrificing potential returns
Let's Get Started
As I hit send, the Fund is fully booked for April and May, with space available in June and the back half of 2013.
I look forward to having conversations with anyone interested in learning more about either this Fund, or my services at Ross Asset Advisors, where I specialize in combining traditional and private debt investments for higher expected yields with less risk.
This material is not intended as and does not constitute an offer to sell any securities or a solicitation of any offer to purchase any securities. Such an offer or solicitation may be made only by the confidential private placement memorandum of Direct Lending Income Fund, L.P. If you are considering whether to invest in Direct Lending Income Fund, L.P. you should rely not on the information in this material, but instead on the information in the private placement memorandum, which you may obtain from Direct Lending Income Fund, L.P. No part of this material may be copied or duplicated in any form or by any means, or redistributed, without Direct Lending Income Fund, L.P.'s consent.