Are Small Business Loans the New Flavor of Fixed Income?

January 26, 2016 | By: Sean Murray

Brendan Ross, the founder of Direct Lending Investments, the oldest and largest fund that buys small business loans from non-bank lenders, has recently filed an N-2 form with the SEC. If approved, it will make his $450 million fund that is currently only open to accredited investors, open to retail investors. To make that possible, the fund’s structure would be converted so that investors become shareholders in what would essentially be a lending business.

On CNBC, Ross explained his model to Trading Nation’s Dominic Chu. “I buy those loans from the non-bank lenders that make them and make them available in portfolio form,” he said.

Ross added that 85% of his fixed income portfolio is in private credit, but adding that’s because he’s an expert in it. Returns range from 6-14%, much better than fixed income government securities.

When asked if the high yields are due to the risk premium, Ross explained that they’re actually taking advantage of an inefficiency in the market, namely that the premium they’re tapping into is related to banks’ unwillingness and inability to package up short term loans. “Many of our loans are 1 year or less,” Ross said. Banks find it difficult to securitize the type of short term loans that they have in their portfolio, he added.

Watch the discussion on CNBC below:

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Last modified: January 26, 2016