Aura High Yield SME Fund receives ‘Commended’ Rating from Evergreen Ratings
Increasing regulatory capital requirements, a result of Basel IV for deposit taking institutions (banks) has resulted in banks refining their loan portfolios. The move is towards assets which incur the smallest regulatory capital costs.
“As a result, loans to many small to media enterprises (SMEs) are no longer able to be provided at a reasonable cost. However, the search for higher interest rates has enabled yield seeking investors to step into the gap, a regulatory arbitrage,” notes Daniel Liptak, Analyst at Evergreen Ratings, a specialist alternatives investment research ratings house, in its latest review of the alternative finance sector.
“Additionally, improvements in IT systems and cloud computing have made look through on loan performance, allowing for quicker action on delinquent loans. This means that investors can gain improved returns as a result of tight control over bad loans.
“Today investors are able to take advantage of the regulatory arbitrage through improved technology platforms without the need to pay franchise overheads of a traditional main street banks. The limiting factor is looking for a secure entry point, this is where a strong investment team at an investment manager can play an important role,” notes Liptak.
As part of the review, Evergreen Ratings has awarded the Aura High Yield SME Fund with a ‘Commended’ rating.
The fund is an open-ended unlisted fund that invests in online (non-bank) lenders specialising in providing finance to small-to-medium businesses (SME) in Australia.
The ‘Commended’ Rating shows that the research house has “confidence in this investment product. This is an Investment Product that has scored consistently well across most areas of Evergreen Ratings’ research and analysis framework.”
“We believe the Fund has a high probability of meeting its objectives,” notes Liptak.
The Fund provides competitive yield generation from investments in structured notes, backed by secured and unsecured loans to SMEs. The structured notes are typically through a portfolio of senior and subordinated loans. Since inception the Fund has achieved 9.27% p.a.
Liptak adds: “SMEs in Australia are under-serviced by the banking sector, mainly since the introduction of tighter regulatory capital constraints post the financial crisis. Domestic SME non-bank lenders now can assess credit risk efficiently and effectively such that SME can borrow funds with terms that match the duration of their funding needs, on a secured or unsecured basis. The Fund currently provides funds to five approved non-bank platforms.
“An investment in the Fund provides an appropriate investment alternative principally to wholesale investors, but also high net worth (HNW) individuals, substantial self-directed superannuation funds and well-established family offices. We believe that such an investment can be funded from investor’s credit/yield allocation, and due to investment process and return series to date, provides a basis to our view that the Fund can offer diversification benefits.”
Brett Craig, Portfolio Manager, Aura High Yield SME Fund adds: “We are pleased that a ‘Commended’ rating has been initiated by the team at Evergreen Ratings. This is a validation of our robust management process with a focus on delivering strong risk-adjusted returns to our investors. Through continued diversification of the underlying loan assets, we aim to continue our strong performance in volatile markets, such as those seen throughout 2020.”
The Fund, as at 31 July 2020 had a portfolio of 408 loans with an average size of $66,906 across five originator platforms. Pleasingly, in the middle of Covid-19 only 1.18% of loans were past 30 days due.
Craig notes: “The Fund will continue to focus on investing in high-quality debt exposures to SMEs, that are originated by focused FinTech and AltFi lenders.”
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About Evergreen Ratings
Evergreen Ratings is a subsidiary of Evergreen Consultants, a leading Australian investment consultant. We specialise in the research and analysis of closed ended and complex investment vehicles. This includes property syndicates, private equity, venture capital and hedge funds. Our ratings are available to licenced advisers and other sophisticated investors. Our staff are amongst the most experienced in the Australian industry, so that we can provide valuable, independent insight into complex investment products.
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