ALLEN: Today I’m joined by Portfolio Manager Philip Bartow to discuss the launch of the RiverNorth Marketplace Lending Corporation. Philip, first off, congratulations on the launch of one of the first 1940 Act Registered Funds dedicated to investing in marketplace lending. I’m sure that’s exciting for you.
PHILIP: Thanks, Allen. It’s been very exciting. We’ve put quite a lot of work in the launch of this fund, and to have it up and running is very exciting, and I think it’s really going to be a great fit in the RiverNorth Fund complex.
ALLEN: Philip, to start off, for those that did not see our video back in March, which took a deep dive into marketplace lending, can you give us a refresher course on marketplace lending as an asset class?
PHILIP: Marketplace lending is a term that’s meant to describe financial services technology companies that essentially line up lenders and borrowers. The borrowers typically are consumers of the United States and small business, and the lenders typically are either retail investors or institutional investors. What gets generated from there is a debt product, and that’s the asset class that we’re focused on when we think about marketplace lending.
ALLEN: So sort of like Match.com for borrowers and lenders.
PHILIP: Yeah, that’s one way to think about it. I think marketplace lending fits into some bigger trends that are going on in the U.S. economy. If we think about Airbnb and Uber, right there are match makers. Marketplace lending, much like that, is doing that in the lending landscape.
ALLEN: Philip, turning to the fund, I’m going to tick off some of the structural attributes and maybe get a couple comments from you about the way the fund is structured. The name of the fund is RiverNorth Marketplace Lending Corporation. The ticker is RMPLX. The fund is structured as a closed-end interval fund, which means daily purchases, but quarterly redemptions, so you can buy it any day, but you can redeem four times a year. Distributions are quarterly, and the fund is available directly from RiverNorth, or it is available at your typical mutual fund supermarkets.
PHILIP: I think you hit all the salient points there. The only other two points I would add are as – I think we talked a little bit about, we do strike a daily NAV, we do loan level valuation on each loan. We look at the data associated with each borrower on a daily basis, and then roll that into our valuation process on each loan, make a determination of each loan, and then that rolls into the NAV of the portfolio, and I think that’s important as we think about that NAV process. Secondly, I’d just highlight a little bit, or give some insight into the interval structure. We thought very critically around what was the right structure to fit with this asset class. These are short duration loans, but there isn’t a lot of secondary liquidity. There isn’t a secondary market, really, efficiently trading these loans, so the interval structure allows us to match the liquidity that would be offered and the asset itself. Said another way, what we don’t want to do is offer liquidity that the asset doesn’t have. That’s where we think investment managers can potentially make mistakes there. The interval fund allows us to match the amount of cash that’s being thrown off by the asset through its self-liquidating nature with the liquidity that we offer to investors on a quarterly basis.
ALLEN: On that note, so daily purchases and daily redemptions is more liquid than the underlying assets are, but perhaps a typical LP (Limited Partnership) structure is a little too liquid, and so this gives advisors and others who are used to registered funds sort of a happy medium, if you will.
PHILIP: Yeah, I think that’s a great point. We’ve talked to a lot of advisors out there, and they say we’ve been interested in marketplace lending. We’ve looked at it. The private funds, to your point, have longer lock ups and liquidity terms that don’t fit as well for their portfolios. The interval structure, hopefully, is a big step in that right direction. Also, by way of being 40 Act, there’s a lot more transparency about what we have. We state very clearly in our prospectus what kind of loans we’re buying. We’re only buying loans in the U.S. So We think that, as we bring a 40 Act fund, we think we solve a lot of the problems for advisors and other investors that would like exposure to the asset class but don’t want to invest through a private partnership.
ALLEN: Philip, turning to the portfolio, can you talk at a high level about what you’re actually putting in the fund?
PHILIP: Sure. We are buying whole loans directly from marketplace lending originators that we have existing relationships with, so we’ve spent a lot of time with these marketplace lenders in their offices performing our due diligence, looking at all the segments of their business that we think are really important in the sustainability of their business, so once we get comfort with an originator, then we look to move forward to buying whole loans directly from that originator at origination or a day after origination, so we get that loan brand new, right after it’s originated, in whole loan form, so we’re not buying pieces of loans. We buy the whole loan directly into the fund. The fund buys different segments of loans. We buy unsecured consumer loans and small business loans as well as specialty finance. Specialty finance is a header that we use to describe other new segments that are coming in the marketplace lending channel. A few examples of that would be franchise loans, trade factoring or receivables, as well as equipment leases. Those are channels that we’re watching. They’re sort of newer in their lifecycle, but we will buy whole loans directly from the platforms across all those different segments.
ALLEN: I’m assuming this then leads to some diversification across the type of marketplace loan and diversification across the type of marketplace platform.
PHILIP: Yeah, that’s a great point. We think diversification in this segment is really important as we put together a 40 Act fund, so by way of buying from a few different originators, we get diversification there from an idiosyncratic risk that might arise at one originator, as well as we get different types of loan segments, so unsecured consumer, small business and specialty finance... there’s diversification in those different segments. Then, again, to further thinking about diversification, there is diversification across geography. We have loans in all 50 states. We have a variety of different credit characteristics, so there’s lots of diversification in this pool.
ALLEN: Philip, putting your allocator hat on for a second, what are some of the attributes of the fund that you would like to highlight, and what type of investor might be attracted to this strategy?
PHILIP: Yeah, it’s a great question. The loans are short duration and quite high in coupon, so when we think about where we are in taxable fixed income, rates are quite low, the risk-free rate is quite low. To get excess returns, it’s quite hard these days, and we think that consumer loans and small business loans originated from this channel are pretty high in coupon, coupled with the fact that they are fully amortizing, meaning they pay principle and interest each month, so they’re quite short in duration. A three-year loan, ends up its last dollar gets paid back over three years, but it’s paying you 36 payments over the life, so you get a lot of your principle back throughout the life of that loan, and that makes for short-duration loans. When we think about where should it fit in a portfolio, it looks really interesting relative to taxable fixed income and other alternative investments.
ALLEN: Obviously, investors that are looking for yield or would like some type of yield component in their portfolio, this might be something they should look at.
PHILIP: Absolutely. There’s certainly an income approach to what we’re putting together.
ALLEN: Philip, thanks for your comments and, again, congratulations on the launch of the fund.
PHILIP: Thanks, Allen.
ALLEN: Once again, that’s the RiverNorth Marketplace Lending Corporation, ticker RMPLX, and as we mentioned earlier, you can buy the fund directly from RiverNorth or at any of your typical mutual fund supermarkets. If the fund is not available on your specific platform, please reach out to one of the RiverNorth portfolio specialists for some help.
Video recorded 6.28.2016.
Produced by RiverNorth Capital Management, LLC ("RiverNorth" "we" or "us").
Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This information is provided for informational purposes only and should not be considered tax, legal, or investment advice. References to specific securities, asset classes, and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. Opinions referenced are as of the day recorded and are subject to change due to changes in the market, economic conditions, or changes in the legal and/or regulatory environment and may not necessarily come to pass.
Past performance is not a guarantee of future results. Diversification does not ensure a profit or guarantee against loss.
Investing involves risk. Principal loss is possible.
The Fund's investment objectives, risks, charges and expenses must be considered carefully before investing. The prospectus (and summary prospectus, if available) contains this and other important information about the investment company, and it may be obtained by calling 844.569.4750. Read it carefully before investing.
RiverNorth Marketplace Lending Corporation is distributed by Quasar Distributors, LLC. RiverNorth Capital Management, LLC, Quasar Distributors, LLC and ALPS Distributors, Inc. are not affiliated.
NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
Pursuant to Rule 23c-3 of the 1940 Act, the Fund must make a quarterly repurchase offer of at least 5% of the Fund’s outstanding shares. The Fund’s Board of Directors will set the actual level of the quarterly repurchase offers. It is possible that a repurchase offer may be oversubscribed, in which case Shareholders may only have a portion of their shares repurchased. Subject to the above, quarterly repurchase offers and liquidity are limited.
Distributions may consist of income, capital gains and return of capital.
Daily subscriptions are subject to caps per management’s discretion.
There are many differences between 1940 Act Funds and Private Funds. Private Funds are subject to lock-ups, which generally limit liquidity. 1940 Act Funds provide more frequent liquidity. RMPLX will provide quarterly liquidity. Private Funds generally have higher fees than 1940 Act Funds because they typically charge performance-based incentive fees in addition to the Management Fee. 1940 Act Funds do not charge incentive fees. Private Funds have certain tax benefits that 1940 Act Funds do not have.
Unlike marketplace lending assets, other traditional fixed income assets represented are traded via the over-the-counter markets. In terms of risk of default, high yield has a greater risk of default than high grade. AAA-rated ABS bonds have a low risk of loss. US Treasuries are guaranteed by the US Government. All assets are listed as taxable in the US. US Treasuries are exempt from state and local taxes.
Duration is a measure of the sensitivity of the price of a fixed income investment to a change in interest rates. Duration is expressed as a number of years.
Coupon is the annual interest rate paid on a bond/loan.
Yield is the income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment's cost, its current market value or its face value.
Annual percentage yield (APY) is a normalized representation of an interest rate, based on a compounding period of one year.
Net asset value (NAV) is the value per share of a mutual fund.
Excess Returns are investment returns that exceed the return of a security perceived to be risk free.
The S&P/LSTA U.S. Leveraged Loan 100 Index is designed to reflect the performance of the largest facilities in the leveraged loan market. The Orchard U.S. Consumer Marketplace Lending index is designed to measure the performance of direct online lending to U.S. consumers. The Index tracks the performance of the aggregate amount of loans to consumers originated and funded on eligible U.S.-based online lending platforms. The CMBS Baa Index, or Barclays CMBS ERISA-Eligible Index, includes investment grade securities that are ERISA eligible under the underwriter’s exemption and is the CMBS sector that is included in the U.S. Aggregate Index. The Barclays U.S. High Yield Index covers the universe of fixed rate, non-investment grade debt. The Barclays ABS Non AAA Index tracks the fixed-rate ABS market for bonds with collateral types of credit cards, autos and stranded-cost utility (rate reduction bonds). To be included in the index, an issue must have a fixed-rate coupon structure, have an average life of greater than or equal to one year and be part of a public deal. The indexes cannot be invested in directly and do not reflect fees & expenses.
IMPORTANT RISK INFORMATION
Investing in the Shares involves certain risks, including loss of principal, that are described in the “Risks” section of the prospectus, including the following:
The Fund’s Shares will not be immediately listed on an exchange and it is not anticipated that a secondary market for its Shares will develop unless the Shares are listed on an exchange. Thus, an investment in the Fund is not suitable for investors who might need access to the money they invest for several years or longer.
The Fund may decline to accept any subscription requests for any reason regardless of the order in which such subscription request was submitted to the Fund in a particular subscription period.
If a borrower is unable to make its payments on a loan (defined as Marketplace Lending Instruments in the Fund’s prospectus), the Fund may be greatly limited in its ability to recover any outstanding principal and interest under such loan, as (among other reasons) the Fund may not have direct recourse against the borrower or may otherwise be limited in its ability to directly enforce its rights under the loan, whether through the borrower or the platform through which such loan was originated, the loan may be unsecured or under-collateralized, and/or it may be impracticable to commence a legal proceeding against the defaulting borrower.
The Marketplace Lending Instruments in which the Fund may invest will not typically be guaranteed or insured by any third-party and will not typically be backed by any governmental authority.
Prospective borrowers supply a variety of information regarding the purpose of the loan, income, occupation and employment status (as applicable) to the lending platforms. As a general matter, platforms do not verify the majority of this information, which may be incomplete, inaccurate, false or misleading. Prospective borrowers may misrepresent any of the information they provide to the platforms, including their intentions for the use of the loan proceeds.
Marketplace Lending Instruments are not rated by the nationally recognized statistical rating organizations (“NRSROs”). Such unrated instruments may be comparable in quality to securities falling into any of the ratings categories used by such NRSROs. Accordingly, certain of the Fund’s unrated investments could constitute a highly risky and speculative investment, similar to an investment in “junk” bonds.
The Marketplace Lending Instruments in which the Fund may invest may have varying degrees of credit risk and the Fund will not be restricted by any borrower credit criteria or credit risk limitation. There can be no assurance that payments due on underlying Marketplace Loans will be made.
At any given time, the Fund’s portfolio may be substantially illiquid and subject to increased credit and default risk. The Shares therefore should be purchased only by investors who could afford the loss of the entire amount of their investment. Investors should consider their investment goals, time horizons and risk.
The Fund's fees and expenses may be considered high and, as a result, such fees and expenses may offset the Fund's profits. For a summary of certain of these and other risks, please see the "Risk Factors" section of the prospectus.
Allen Webb is a registered representative of ALPS Distributors, Inc
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