The increasing use of warehouse facilities and securitisation to fund non-bank lenders has led to the emergence of warehouse funding as an investor asset class, with managed funds catering to investors looking for exposure to high-yield credit.
Aura Group has taken a lead in this market, offering warehouse funding to SME lenders through its High Yield SME Fund.
Founded in 2009, Aura also has private equity, venture capital and real assets (infrastructure and aviation) funds.
The High Yield SME Fund was launched in 2017 setting a benchmark return of the RBA cash rate plus 5 per cent. Over the 12 months to the end of October it returned 9.3 per cent.
Aura director, credit, Brett Craig, said he looks for diversification in the lenders and also the types of finance they originate.
Craig said: “We don’t want lenders that are writing just mortgage-backed loans. We are looking for exposure to invoice finance, asset lending and agri lending.”
The fund is currently providing capital to five lenders, including Banjo Loans, AgLend Finance, Interim Finance and Tradeplus 24.
Aura’s approach to warehouse funding works like securitisation in the sense that the lenders must have skin in the game.
Craig, who worked in the securitisation team at Macquarie for 11 years, said: “If their pool performs poorly we want them to have capital at risk through a first-loss piece. That gives them an incentive to write high quality loans.”
Aura also works with its lenders to review their policies and, if need be, adjust their exposures in light of changing economic conditions. This year that has involved reducing exposure to the retail and accommodation sectors, reviewing China exposures and increasing exposure to agri.
At the end of July, only 1.18 per cent of loans were in arrears (past due by 30 days or more).
Graig said lending conditions tightened between March and June. At the same time businesses were not that keen to increase their leverage.
Inquiries have been increasing since June and have really picked up since the end of August.
“My feeling is that we will see significant SME lending growth in 2021,” he said.
“What we see in the bank space is that banks are targeting their existing customers with cheap loans and looking to do property-secured lending. Our view is that more SMEs are looking for non-bank lending so they can get finance that better suits their needs.”
Last month, investment researcher Evergreen Ratings gave the fund a “commended” rating, noting that the fund had not suffered any loss of capital from loan defaults.
Craig said technology has allowed Aura to gain a complete view of its investment, right down to the origination level.
“During COVID we have been in contact with our lenders every day. We could assure ourselves that their systems were robust. We could track missed payments on a daily basis,” he said.