Hedge Fund Boosts U.K. Bet With $1.3 Billion Funding Circle Deal

(Bloomberg) -- Amid warnings from politicians and central bankers of potential economic damage from Britain’s exit from the European Union, a New York investor is betting all’s well with the country’s small businesses.

Waterfall Asset Management, a credit-focused hedge fund with $7.3 billion in assets, plans to fund 1 billion pounds ($1.28 billion) of loans to small and medium-sized U.K. companies via Funding Circle Holdings Plc, according to a statement on Friday. Deutsche Bank AG is partially financing Waterfall’s investment.

Funding Circle’s Chief Executive Officer Samir Desai declined to comment in an interview Friday on how much of the 1 billion pounds Deutsche Bank will provide. A spokeswoman at Deutsche Bank also declined to comment on the deal. Henrik Malmer, London-based managing director at Waterfall said small businesses in the U.K. are “underserved by traditional lenders,” according to the statement.

Waterfall plans to start securitizing the pool of about 14,000 loans and sell off some tranches to other money managers, Desai said.

Malmer and James Cuby, who also helps run Waterfall’s operation in London, didn’t respond to emailed requests for comment on further details of the deal.

The hedge fund’s move to increase exposure to the U.K. stands in sharp contrast to the widespread gloom around the country’s prospects as its divorce from the EU approaches with no clear blueprint in place for the future relationship. A Bank of England analysis outlining a worst-case scenario for a no-deal Brexit has warned of an economy shrinking 8 percent, property prices plunging almost a third and the pound losing a quarter of its value.

However, the central bank’s former governor Mervyn King said the study used assumptions that weren’t plausible.

The Funding Circle deal is at least the third Waterfall investment in the U.K. since the country voted to leave the EU in 2016.

Later that same year the fund bought the riskiest portion of a 1.5 billion-pound securitization backed by U.K. mortgages. In May this year, it announced a 100 million-pound credit facility for Future Finance, a private-sector provider of high-interest student loans.

Funding Circle listed in September and its shares are currently trading at about 10 percent below the initial public offering price.

A typical Funding Circle loan charges an interest rate between 5 percent and 7 percent, Desai said. It acts as an online platform connecting borrowers to wealthy individuals and other sources of capital such as the state-owned British Business Bank.

--With assistance from Edward Robinson.

To contact the reporter on this story: Thomas Beardsworth in London at tbeardsworth@bloomberg.net

To contact the editors responsible for this story: Shelley Robinson at ssmith118@bloomberg.net, Chris Vellacott, Abigail Moses

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