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Fund Profile

Disclaimer

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by SQN Secured Income. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

Overview
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Overview

SQN Secured Income Fund (SSIF) lends to small and medium-sized businesses, targeting a 7p dividend paid monthly and a total return of 8% net of costs.

The company, previously named the SME Loan Fund, has been transformed under the new manager Dawn Kendall of SQN Asset Management, who took over in April 2017. A number of funds in the peer to peer lending space have run into trouble in recent months and the new strategy of SSIF is designed to avoid these errors and benefit from the reduction of competition in this niche area.

The new strategy focuses on direct lending to corporates, originated and underwritten by the manager, with exposure to P2P platforms cut to 33% from 100%, thanks to jettisoning investments with poorer underwriting standards made by the previous manager. Platform-sourced investments will fall to just 20% of the portfolio when the manager-led transformation has been completed, allowing the manager greater control over the quality of the underlying loans.

The company is designed to take advantage of a gap in the market: banks do little lending in the £1m to £20m issue size space due to regulatory capital requirements and the complexity of the deals, meaning that SSIF can be highly selective and generate yields of 9-12% on their lending. Under the new manager the dividend, forecast by the manager to be 7p this financial year (for a prospective yield of 7.6%), we understand will be covered once committed capital is deployed by the end of February.

Thanks to a (since reversed) dividend cut when the manager changed and an overhang of stock held by an investor associated with the previous management, Somerston, the company has slipped onto a discount of 4%. Somerston has now agreed to sell the majority of its 28% shareholding either in the market or to the new manager, which will reduce the overhang and diversify the shareholder base. We understand a capital raise is planned for the first quarter of 2019, in order to take advantage of the opportunities the managers see in this overlooked area. The company will conduct a continuation vote if the net assets are less than £250m on 31 December 2019.

Thomas McMahon
Thomas is Investment Trust Research Manager and joined Kepler in April 2018. Previously he was senior analyst at FE Invest, where he was responsible for fund selection for a range of model portfolios. He covered all asset classes over time, but has particular experience with emerging markets and fixed income as well as UK smaller companies funds. He has a degree in Philosophy from Warwick University and is a CFA charterholder.
Kepler View

SSIF offers a highly attractive yield from an asset class to which few investors will have exposure, thereby offering valuable diversification. If the proposed capital raises are successful, they will allow the company to achieve a scale which opens up greater opportunities – we understand Dawn Kendall is currently forced to turn down exciting opportunities that earn attractive yields due to lack of capital or scale. Many direct lending investment companies have run into trouble thanks to their investments in poorer quality loans, but we believe SSIF is well-positioned to avoid this due to its focus on directly originated loans, extensive due diligence and avoiding small-scale loans dependent on individuals’ consumer credit. The 9%-12% p.a. returns generated on the underlying loans provides a decent cushion to the 7p dividend target, which we think is highly attractive to income-seekers.

Bull Bear
A highly attractive yield from a portfolio with low loss provisions The stock overhang needs to be cleared, although progress has been made
A broad opportunity set which should allow scaling up to be effective and efficient The UK exposure brings with it ‘Brexit risk’
The strategy is uncorrelated to other markets such as equity, bonds and real estate Credit cycle may turn, and previous recovery rates may not be achieved
Continue to Portfolio

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Current Site Kepler Trust Intelligence is produced by the investment companies team at Kepler Partners and is the UK’s premier source of detailed qualitative research on investment trusts. Absolute Hedge is a market leading UCITS research database providing proprietary research on funds, themes and strategies in the UCITS space. Kepler Liquid Strategies is a Dublin domiciled UCITS fund platform featuring a number of best-of-breed fund managers. Kepler Partners is a corporate advisory and asset raising boutique specialising in the regulated funds market in Europe and investment trusts in the UK.