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September 14, 2018  

Fund Operators Chase Online Loan Portfolios

Several large investment firms are setting up funds that would purchase personal loans, student loans and small-business loans from online originators — moves that could reduce the potential for those receivables to be securitized.

Franklin Templeton and Neuberger Berman are among the shops forming such vehicles. Pimco, already an active buyer, also is seen a candidate. Several others are testing the waters by building loan portfolios within funds with broader mandates, with an eye toward starting stand-alone vehicles in the future.

The offerings could take the form of mutual funds or quasi-public ’40 Act funds. They are entering the pipeline at a time when Morgan Stanley Investment Management is aiming for October to launch a ’40 Act vehicle of its own, and Stone Ridge Asset Management and RiverNorth Capital have been adding to the portfolios of entities they already run.

The increased fund-formation efforts signal that online originators are gaining more traction with institutional-scale fund operators, as opposed to the smaller firms that currently absorb the bulk of their loans. And with that switch could come a change in how the receivables are financed.

Some of the new buyers, including Morgan Stanley, could funnel the accounts into asset-backed bond deals. But most have told originators they have no interest in participating in “club” securitizations that combine loans from multiple buyers — with some signaling that they aren’t looking at securitization at all.

Given instrumental roles that club deals have played in fueling growth among originators, those shops could hesitate to stray from that strategy. In such arrangements, the loan contributors are responsible for supporting the accounts’ representations and warranties while often keeping subordinate interests in the resulting bond offerings.

But it’s even less likely that originators would shun funds with billions of dollars of potential buying power. In fact, there are questions about whether they even can generate enough loans to keep the new breed of buyers satisfied. “These mutual funds want to buy a ton of loans, but they don’t want to be stuck with the [club] approach,” one source said. “The bottom line has been: If the investors want to buy enough volume, the [originators] say, ‘Fine.’ ”

The fund operators’ attitudes toward securitization are unsurprising, considering that they would be raising large sums of capital from investors. “There is no crushing urgency for big funds . . . to participate in a securitization,” one issuer said. “It doesn’t do anything for them, so why take the cost and do the brain damage?”

That said, it could take some time for the full effects of their presence to materialize. And some doubt that the landscape will change dramatically, at least not in the near term.

The exact fund-formation plans of Franklin Templeton and Neuberger Berman remain fuzzy. Pimco, meanwhile, has been buying from virtually every big originator. “If you had to point to one firm that has stealthily been buying everything, it’s Pimco,” another source said.

In a sign of its interest in nonbank loans, Pimco in January took a $200 million stake in GreenSky, a “point-of-sale” lender that writes its accounts through merchants including Home Depot. GreenSky went public in May.