Honeycomb Investment Trust 17 December 2020

Honeycomb Investment Trust (HONY) aims to generate a dividend yield of 8%, paid quarterly, by lending money to innovative non-bank lenders, secured against their loan books. The yield target has been met or exceeded every quarter since launch in 2015, and has continued to be paid through the pandemic (see the Dividend section).

HONY is managed by Pollen Street Capital (PSC), an investment manager which specialises in non-traditional finance. PSC uses its extensive experience in the space as well as bespoke IT systems to help identify and monitor the best of the non-bank lenders which have proliferated in recent years.

HONY’s model is very distinct from platform lending (see the Portfolio section), and involves senior lending to non-bank lenders secured on their portfolio of loans rather than directly acquiring loans from lenders. PSC has continuous oversight of each borrower’s entire book and tracks it on a month-by-month basis, altering how much HONY lends and therefore how much its investee can lend. Furthermore the underlying loans are often very short-dated, meaning that as the economic outlook darkens the lenders can run down their books and return cash. Thanks to these features, HONY has yet to register a negative quarterly NAV return, as we discuss in the Performance section.

In order to generate such a high yield, HONY employs gearing, aiming for 50% to 75% on an NAV basis. Facilities are flexible, allowing for rapid expansion or contraction of the balance sheet.

HONY’s discount has narrowed in recent months as risk appetite has returned to the markets, and it is 4.5% at the time of writing.

The performance of HONY’s portfolio since launch has been extremely impressive. The high yield has been consistently generated and NAV maintained, even through the current pandemic. Naturally, investors are likely to be wary of the immediate future. However, we think the indications from the portfolio are good so far. Although some of the underlying loans went into forbearance in Q2, the vast majority are performing once more and importantly the structure of the loans provides significant protection.

We think the counter-intuitively defensive characteristics of the asset class might be missed by some. As much of the underlying portfolio is extremely short-dated, lenders are able to stop new lending and build up cash quickly. This, and the flexible gearing facilities, means the managers have the wherewithal to expand the portfolio once more. They report the pipeline of potential investments already looks promising, as projects mothballed prior to the pandemic get under way.

We recognise a second round of lockdowns creates uncertainty in the immediate future, and this complexity is another reason the discount might persist. However, the overhang of stock held by Woodford and Barnett has long since been cleared, and so should no longer be an issue. HONY offers equity-like returns in income, should it navigate the coming six months as it has the past six.