M&G announces the first close of its second Specialty Finance Fund with £155 million from the Prudential With-Profits Fund and a Nordic pension fund. The Fund is targeting a final close of around £750 million and is designed for institutional investors seeking high single-digit returns.
The Fund invests primarily in portfolios of performing residential mortgage and consumer loans from across OECD countries, with a bias towards Europe. Consumer lending across Europe is dominated by retail banks, but wide-ranging regulatory changes have encouraged banks to find ways to manage their capital and balance sheets more efficiently. Over recent years, asset managers have stepped up to provide long-term capital to this market on behalf of institutional investors seeking long-term income and diversification with a return premium to the public markets. This has resulted in banks transferring residential mortgages and consumer loan portfolios to carefully selected institutional investors from time to time, while still servicing the loans and maintaining relationships with the end-consumers.
Since forming a dedicated specialty finance team in 2017, M&G has invested almost £1 billion into the market through a suite of funds, referencing pools of over £15 billion of residential mortgage and consumer debt from over 25 different counterparties. The team is supported by M&G’s extensive fixed income research team, including 16 dedicated ABS analysts, within M&G’s £65 billion Private & Alternative Assets division.
The team sources assets in a variety of ways, including acquiring back-books of pre-originated loans from bank balance sheets, non-bank finance companies and other intermediaries, through new origination partnerships with banks and innovative non-bank lending platforms (such as M&G’s long-standing partnership with Finance Ireland), or by acquiring mezzanine or junior tranches of residential mortgages and consumer loan portfolios in privately-negotiated external transactions.
“Institutional investors, including pension funds and insurance companies, have historically not invested heavily in the steady cashflows and protection from inflation that portfolios of floating-rate consumer loans and mortgages have the potential to provide. Making these assets available creates significant opportunities for investors seeking diversification and the potentially high risk-adjusted returns on offer from these pools of high-quality assets.”William Nicoll, Chief Investment Officer of Private & Alternative Assets, M&G
“In the past two years, the world has experienced the biggest consumer bailout ever seen and despite headwinds, European consumers are generally in good financial health. This, alongside regulatory changes which have prompted banks to reluctantly shift some of these portfolios away from their balance sheets so that they no longer need to hold regulatory capital against them, is creating an exciting market.
“The asset class has demonstrated its resilience through economic cycles and has provided stability and security. As banks have introduced more stringent underwriting requirements over the past decade consumer lending has become progressively stronger and safer. There is an estimated $28.5 trillion of consumer loan balances globally, meaning this market opportunity offers significant potential for growth and scale for institutional investors with flexible capital, analytical skills and the ability to provide counterparties with certainty of execution.”Jerome Henrion, Head of Specialty Finance, M&G