Funding Circle launches European SME fund as revenue forecasts slashed

The firm is looking to build its institutional offering as its peer-to-peer lending business runs into difficulty.

Funding Circle has launched a private debt fund to target European SME loans in Germany and the Netherlands.

The news came as the firm revealed it has slashed its growth targets, causing its shares to plunge in Tuesday trading.

Funding Circle European SME Direct Lending Fund I will provide institutional investors with the opportunity to invest in a diversified portfolio of small and mid-sized SME loans to German and Dutch small businesses.

The fund has already raised €40 million from two Finnish insurance companies which invested alongside Funding Circle and is looking to raise at least €200 million. The fund is aiming to be fully raised within 18 months and will have an eight-year lifespan. It follows Funding Circle’s launch of a UK SME direct lending fund in June, the company’s first foray into more traditional private debt fundraising.

The firm expects loans to average around €60,000 and will focus on established businesses that have been trading for approximately 15 years. The fund will aim to deliver net returns of between 5.5 and 6.5 percent.

Funding Circle was founded as a digital peer-to-peer lending platform targeting retail investors and providing small business loans. It floated in 2018 on the London Stock Exchange but slow growth in lending volumes has hit its share price which has dropped from 440p when it listed in late 2018 to 140p following the announcement. The firm is also likely to be hit by new regulations limiting peer-to-peer lending.

In an unscheduled update ahead of its half-year results, due on 8 August, Funding Circle said it now expects revenues to grow by 20 percent this year, down from a previous forecast of 40 percent.

The firm said this was partly driven by tighter lending criteria which would impact loan demand but also provide better security for its investors.

The company has also suspended plans to expand its business in the Canadian market to focus on its existing markets. It said loan performance remains in line with previous projections but there is a slight increase in bad expectations for those originated in the UK last year.