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30/8/2019
5
min read

Downing Development Finance commits £100M funding for SME developers

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Parik Chandra
Parik Chandra

Partner and Head of Specialist Lending

Downing launches new actively managed liquid alternatives fund aiming to deliver 7% to 10%+ per annum and positive returns in most markets. The new MGTS Downing Active Defined Return Assets Fund (‘Active Defined Returns’, the ‘Fund’), is the first fund from its new Liquid Alternatives team.

The Fund is aimed at institutional investors, Discretionary Fund Managers, IFAs and advised sophisticated individual investors, and will primarily consist of UK Government bonds and large-cap equity index options, which provide significant scalability and strong liquidity. It aims to deliver 7% to 10%+ per annum and positive returns in all markets except for a sustained equity market fall (generally more than 35%), over a period of at least six years.  

The Fund is the first to be launched by the new Liquid Alternatives Team established by Downing. Collectively, the team has over 125 years of experience and sector knowledge, and includes Tony Stenning, who held senior roles at BlackRock and most recently was CEO of Atlantic House Group; Russell Catley, founder and also a former CEO of Atlantic House Group; Huw Price, a former Executive Director at Santander Asset Management, and Paul Adams, former Head of Cash Equities and Derivatives Sales, Royal Bank of Canada.          

The Fund offers investors a compelling building block for multi-asset portfolios, aiming to add consistent and predictable returns, typically secured with a portfolio of UK Government bonds. The unique proposition includes a hybrid approach of using systematic derivative strategies and active management, combining liquid investments with predictable returns, and an equity like risk profile.

Investment strategy: Maximising the probability of delivering predictable defined returns across the economic cycle.

  • Systematic Liquid Derivatives:  Systematic, derivative strategies optimise the equity risk-return profile. The Fund uses rules-based derivative strategies linked to the most liquid, large-cap global equity indices (i.e. FTSE100, S&P500) with the aim of harvesting well-proven consistent returns across a wide corridor of market conditions. 
  • Strong security:  The Fund will hold a high-quality portfolio of assets as secure collateral – typically UK Government bonds.
  • Active benefits: At times, rules-based, passive derivative strategies can underperform when markets move strongly – this is when specialist active management can add incremental gains by monitoring and monetising positions and applying active risk management.

Key benefits

  • Increased consistency and predictability of returns: Positive returns in all markets except for a sustained equity market fall of more than 35% over at least six years.
  • Diversification of risk: The Fund’s risk components are diversified across large, liquid equity indices, observation levels and counterparties. Secured with high-quality assets – typically UK Government bonds.
  • Active management: Our experienced team will actively manage the Fund and its investments to optimise risk and reward for investors.
Russell Catley, Head of Retail, Liquid Alternatives at Downing, said: “Put simply, we focus your investment risk on the probability of receiving the returns you need, not those you don’t.  We target the highest probability of delivering 7% to 10%+ per annum with active management adding material incremental gains. We believe that we are building the next evolution of the proven success of Defined Returns funds
The Downing team is seeing strong demand from clients looking for alternatives to large-cap equity funds which are becoming concentrated in technology stocks, or alternatives to UK equity income funds and illiquid alternatives.”   
Tony Stenning, Head of Liquid Alternatives at Downing, said: “The launch of our Active Defined Return Assets Fund is a significant milestone in the ambitious build-out of our new Liquid Alternatives strategies. It is a solution-focused fund that should deliver stable high single or low double-digit returns across a wide spectrum of equity market conditions, except for a persistent multi-year bear market. The Fund is designed to enhance balanced portfolios by providing consistent, predictable returns and is suitable for accumulation or drawdown.
“We aim to deliver a unique combination of proven systematic derivative strategies and specialist active management, and we are doing so at a very compelling fee level, below our closest competitors and in line with active ETFs.”

How the Fund is expected to perform in different markets

  • In bullish markets:  UK Government bonds secure the capital, and the equity index options deliver a predictable 7-10%+ return per annum – giving up some less likely upside.
  • In neutral markets and normal market corrections:  UK Government bonds secure the capital, and the index options deliver a predictable 7-10%+ return per annum.
  • In a sustained sell-off:  if markets fall more than the cover to capital loss and do not recover for six years. Then capital is eroded 1:1 in line with the worst performing index.
  • The average Cover to Capital Loss is targeted at 35%:  the average cover to capital loss represents the average level the Global indices within the Fund could fall before capital is at risk.

Fund key risks

  • Performance:  Capital is at risk. Investors may not get back the full amount invested.
  • Liquidity:  Access to capital is always subject to liquidity.
  • Counterparty risk: Other parties could default on the contractual obligations.

Fund Structure

  • UK regulated OEIC fund structure, fully UCITS compliant
  • Daily dealing, at published NAV
  • Minimum investment: £100,000
  • SRRI: 6 out of 7
  • Depositary: Bank of New York
  • Authorised corporate Director (‘ACD’): Margetts Fund Management Ltd.
  • I share-class:  SEDOL: BM8J604 / ISIN: GB00BM8J6044
  • F share-class: SEDOL: BM8J615 / ISIN: GB00BM8J6150

Learn more about the Fund here.


Risk warning: Opinions expressed represent the views of the fund manager at the time of publication, are subject to change, and should not be interpreted as investment advice. Please refer to the latest full Prospectus and KIID before investing; your attention is drawn to the risk, fees and taxation factors contained therein. Please note that past performance is not a reliable indicator of future results. Capital is at risk. Investments and the income derived from them can fall as well as rise and investors may not get back the full amount invested. Investments in this fund should be held for the long term. 

Important notice: This document is intended for professional investors and has been approved as a financial promotion in line with Section 21 of the FSMA by Downing LLP (“Downing”). This document is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. Downing does not offer investment or tax advice or make recommendations regarding investments. Downing is a trading name of Downing LLP. Downing LLP is authorised and regulated by the Financial Conduct Authority (Firm Reference No. 545025). Registered in England and Wales (No. OC341575). Registered Office: 10 Lower Thames Street, London EC3R 6AF.

Downing Development Finance (DDF) has successfully committed secured loans of over £100 million to small and medium-sized enterprise (SME) property developers, in less than two years since launch.

DDF focuses on making secured loans to property developers delivering residential-led schemes across the country.  

To date, the DDF team has committed funding across 37 deals and worked with over 25 developers since its launch in December 2017. Parik Chandra, Partner and Head of Property Finance at Downing LLP, explains how this reflects Downing’s unique approach in the current market:

“This is funding which will have a tangible impact in the real economy, facilitating the development of around 500 units and delivering family housing across the UK. While market conditions are more challenging than they were a year ago, reaching the £100 million milestone in these conditions demonstrates our desire and ability to lend through market cycles.

“A significant driver of our success, and something that also sets us apart from other funders, is that we genuinely invest across the UK instead of being too London-centric.”

Investing across the regions

DDF has provided funding for developers in parts of the UK where mainstream funding is not generally an option, and current sites being funded include ones in Belfast; Kingsbridge (Devon); Highbridge (Somerset); Liverpool; Fitzwilliam (West Yorks); Stockton-on-Tees; Coxheath (Kent) and dozens of places in between.  The most recent deals include a £4.2 million development facility for the construction of 19 units in Gloucester. Typically, DDF lends between £1 million and £10 million, but has the ability to make larger loans by exception.

Access to funding

Many developers still find it difficult to access traditional funding, but, as Parik explains, those considering alternative finance options should carefully assess individual lenders before making a decision on which funder to partner with:  

“Traditional, large scale, banks pulled out of the sub £10 million end of the property development market as a result of the financial crisis and, where they do lend, they do so at very conservative leverage levels which is largely inappropriate for most SME developers in the regions. While this may have driven some developers towards alternative financing options, there are many players in this field and not all lenders will be suitable for all schemes. Many lenders are volume driven which may create problems including higher default rates and liquidity crunches in a downturn.

“It’s important for developers to look carefully at how a lender is funded, for example, as well as their track record – particularly during a downturn - before making any decisions. We can lend up to 90% loan to cost/70% loan to gross development value but also expect a meaningful equity contribution from management on every deal.”

Looking to the future – headwinds on the horizon?

Parik goes on to give his outlook for the next 12 months and beyond, including any potential impact from Brexit and wider political and economic influences:

“We are not volume-driven, as many funders in this space are, and based on current market conditions we expect to commit around £100 million over the next 12 months.  The uncertainty around Brexit and the repercussions of our withdrawal from the EU are likely to persist, so there will continue to be an element of risk in the sector. In this environment inevitably some loans will enter distress, however with a well-diversified book, no hard defaults and with repayments of £21 million to date cementing our track record, I genuinely believe we have one of the best teams and one of the best performing books in the market.”

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