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Alternative Market Briefing

US SME lending fund in a sweet spot

Thursday, October 14, 2021

amb
Craig Reeves
B. G., Opalesque Geneva:

SMEs (small- and medium-sized enterprises) are the backbone of the American and European economies. The U.S.' 30 million SMEs have accounted for nearly two-thirds of net new private sector jobs in recent decades. SMEs that export tend to grow even faster, create more jobs, and pay higher wages than similar businesses that do not.

Small businesses account for a significant amount of small business borrowing: loans going to them are split between banks and financing companies, roughly 50/50 depending on the year. Total loans guaranteed by the U.S. Small Business Administration in 2019 totalled $28bn.

Since the Dodd-Frank Act was introduced in the U.S. in 2010 (to protect the banking system from the systemic threats it faced in 2008), many SMEs have been finding it harder to secure much-needed cash flow finance in order to survive and to grow. This need for cash flow facilities has increased since the onset of the COVID-19 crisis and SMEs have been turning more to non-bank finance providers.

"The U.S. bank lending rules (such as Dodd-Frank) since the financial crisis have hurt many small businesses," Craig Reeves, founder of the Prestige Group, a private lender, explains to Opalesque. "Furthermore, Covid 19 has increased demand for funding during the height of the pandemic because many small businesses suffered from reduced cash flow. With the subsequent recovery/stimulus, demand across most commercial and industrial sectors has increased dramatically, the economy has opened up and companies have started to recruit more staff, hold larger inventories, and expand their operations and customer base."

Private lending has therefore become even more of a sweet spot to be in and companies that focus on private debt are reaping the benefits. Prestige's Business Finance Opportunities (BFO) I-Class USD, for example, has compounded 4.6% in net returns from January to August.

Prestige founder Craig Reeves will present at the Small Managers BIG ALPHA Episode 4 webinar on October 21st.

The Fund

BFO I-Class focuses on asset-based direct lending to SMEs mainly in the U.S. It invests in short and medium-term commercial loans, industrial loans, and working capital credit facilities.

The Caymans-domiciled fund is managed by London-based Prestige Fund Management Ltd, which is part of the Prestige Group.

"We do a lot of lending in the construction and electrical services area," Reeves said. "These are areas where we find SMEs having to turn down work from even existing clients because of cash flow issues. Contractors regularly face cash flow issues that are caused by issues out of their control. Many have been increasing competition in the bidding process - e.g. for municipal contracts. They need to meet payroll obligations and pay suppliers. But they also have to manage loan covenants and manage debt hangovers. It can pose a complex challenge before you even introduce the change to the national lending landscape caused by Dodd-Frank.

"That said, we also work with many other sectors. For example, we have lent to companies in the mobile games development industry, where firms are operating on work-for-hire contracts that require software development and operational milestones to be met. Master factoring facilities can help games companies to migrate from self-publishing to the more lucrative work hire opportunities in this fast-growing market."

The absolute return fund aims to outperform traditional equity and fixed income-based investments in terms of annualised market-based risk. This is achieved by maintaining strong lending criteria, a rigorous screening and evaluation process, often resulting in lower loan default risk. Most lending activities are secured on a range of assets, such as including accounts receivable, inventory, equipment, machinery, vehicles, or real estate. Whenever possible, debentures over bank accounts and personal guarantees are taken from the directors and controllers of the underlying borrower.

Over the medium term, the investment strategy has consistently retained near-zero volatility and near-zero correlation to traditional equity markets and has regularly outperformed them on an absolute return basis. The fund is up 4.6% (net) YTD (to end-August), compared to -1.2% for the U.S. S&P Treasury Bond Index - and 0% for U.S. bank rates. Since January 2009, the strategy, which has $67m in AuM, has annualised 8.8% with no negative year, compared to 2.3% for the S&P Treasury Bond Index and 0.57% for bank rates.

***

Founded in 2007, the Prestige group manages approximately $1bn in assets and has raised over $2bn of fund investments and $300m of wholesale debt. Its 120 team members are based in the U.K., Malta, Luxembourg, and the Cayman Islands. Prestige specialises in direct lending to small businesses primarily in the U.K. and the U.S. It owns equity stakes in several dedicated, specialist Finance Arrangers, amongst these Capstone Capital Asset Management, Inc., which was founded in 1990, and has lent approximately $6.5bn representing thousands of transactions.


Next webinar:

Small Managers - BIG ALPHA Episode 4
When: Thursday, October 21st at 10:30 am ET
Free registration: www.opalesque.com/webinar/

With larger quantities of capital chasing the same Alpha strategies and continuing to erode Alpha, savvy investors are turning to smaller and/or emerging managers as they look for alternative sources of return.

We are proud to present you Episode 4 of this groundbreaking webinar series with the following carefully screened panel of investment managers:
- Heeten Dosch, Doshi Capital Management
- Craig Reeves, Prestige Funds
- Randy Baron, Pinnacle Associates
- Andreas Schweitzer, Arjan Capital


Related article:
17.June.2021 Opalesque Exclusive: "The timing is exquisite" for alternative credit fund manager specialising in SME lending and green infrastructure

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