Investment trust insider on VPC Speciality Lending – James Carthew: High-yield debt fund VPC looks too cheap even in these troubled times
I think that there is a tendency amongst investors to view funds on very high yields with suspicion, reasoning that the opportunity is too good to be true. VPC Speciality Lending (VSL) could have fallen into this trap. Why else would a debt fund that has delivered annualised returns of close to 12% over the past five years be trading on a 24% discount to net asset value (NAV)?
I met Gordon Watson, a partner at Victory Park Capital Advisors, LLC (the manager) recently to find out.
VSL’s returns come from the loans that it makes. Every loan must be backed by assets, which can be sold to repay the loan if the borrower runs into trouble. Assets that are easy to sell are viewed as less risky, and the asset cover that VSL demands is higher on illiquid assets. Deals are priced based on the value of the collateral in a default scenario. The manager is observing the portfolio carefully given the current environment.
The investment company lends by providing lines of credit, primarily to tech-enabled lenders. The loans that they make in turn must meet VSL’s lending criteria. In a situation where loans the finance company had made ran into trouble and the assets backing the loans didn’t fetch enough to cover the repayment, it would be down to the finance company to make up the difference – providing additional security to VSL. In the past, finance companies have raised fresh equity to make up shortfalls. In extremis, Victory Park is willing to take control of businesses.
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