KLS in £132m partnership with Funding Circle

The US firm plans to securitise and sell on its loan investment with the UK online business lender.

New York-based KLS Diversified Asset Management has agreed a £132 million ($207 million; €166 million) loan investment with UK-based Funding Circle. KLS intends to package the loans the capital is deployed into as securitised bonds, KLS partner Gyan Sinha, explained to PDI.

KLS was drawn to the Funding Circle investment by the marketplace lending platform’s strong track-record and its business lending model. The larger and well-established marketplace lenders in the US concentrate on consumer loans but KLS was seeking small business loans for its preferred securitisation strategy.

The investment from KLS does not have a maturity and capital will be recycled into new loans as the initial loans amortise and mature, said Sinha.

Funding Circle’s head of UK capital markets, Sachin Patel, said that the partnership with KLS and the interest in the sector from institutional capital is a natural extension of the development of marketplace lending.

As the sector has evolved from its peer-to-peer origins, where small investors made direct loans to small businesses, its expansion and decent returns on investments have attracted larger investors. KLS’s agreement with Funding Circle is the first between a US investor and European lender in the sector.

The first marketplace loan securitisation was structured by Eaglewood Capital in 2013. Earlier this year, it increased the $53 million in unrated notes backed by consumer loans made by US peer-to-peer lender LendingClub. Eaglewood upsized the deal by $47 million to total $100 million in April.

KLS intends to seek ratings for its securitised assets. The US asset manager will be a passive investor across all risk bands putting it on the same footing as smaller investors in the platform. “It is very important to Funding Circle that there is not adverse selection,” said Patel.

For KLS, the passive position is not a problem, the fund has faith in the quality of the assets and the scale of its investment means that an active role is not feasible, said Sinha.

Launched in 2010, Funding Circle has facilitated more than $750 million in lending to 7,000 businesses, of which $380 million was lent this year.

KLS Diversified Asset Management invests across U.S. and global rates, credit and structured products with over $3.2 billion of client assets.