Funding Circle launches private direct lending fund with £30m

The platform lender is making its first major foray into more conventional private debt, but will continue to focus on providing SME loans.

Funding Circle is launching a direct lending fund to back small businesses in the UK with an initial £30 million ($38.2 milllion, €33.6 million) commitment from Merseyside Pension Fund.

The UK Economic Impact Fund will raise capital from institutional investors to lend directly to UK SMEs. It will predominantly target mid-sized pension funds, insurance companies and local authorities looking to access private debt at a lower ticket size.

Funding Circle has set a target of £200 million for the vehicle but may raise more if there is sufficient demand.

The fund is structured as a closed-ended vehicle with an eight-year lifespan and will target annualised net returns of 5.5-6.5 percent. It will have 18 months of marketing followed by an 18-month investment period and a five-year amortisation on the loans.

Funding Circle said the direct lending market had traditionally focused on mid-market private equity-backed companies rather than small businesses. The firm already runs a digital platform for SME lending, through which it provides small loans – with an average ticket size of £70,000 – using capital from retail and institutional investors.

Sachin Patel, chief capital officer of Funding Circle, said: “Today’s announcement is further validation of the important role lending platforms play in making the SME loan asset class accessible to a wide range of investors.

“Through our latest UK Economic Impact Fund, investors can contribute to economic growth and job creation by supporting small businesses, whilst earning attractive, stable returns as a result.”

Merseyside Pension Fund, which is part of the UK’s Local Government Pension Scheme and has more than £9 billion in assets under management, said it was working with Funding Circle because the lender has the infrastructure necessary to support small business lending while delivering good returns for the fund.