Ranger Direct Lending offers super income

This so-called 'direct lending' market has ballooned since the mainstream banking sector lost its appetite for small business loans following the financial crisis. The £135m raised by Ranger at its over-subscribed IPO last month is being used to capitalise on the growth of shadow banks, which make loans to a variety of businesses, from real estate to medical, equipment and asset financing. It's a business story from which retail investors have been largely excluded, until now.

Ranger will spread its investments across a range of direct lending platforms, thereby reducing exposure to any single sector or security type. Extensive due diligence on the lenders and their borrowers should limit the risk of defaults, although based on the trading history of the platforms Ranger has identified, the default rate is likely to be less than 3 per cent. To further mitigate risk, Ranger will ensure at least 65 per cent of loans are secured against assets, and that no one debt instrument exceeds 2 per cent of total assets.

It's worth mentioning that these loans aren't focused on the much-publicised (and more heavily regulated) peer-to-peer (P2P) lending platforms such as Lending Club (US: LCE) and Zopa, which connect retail investors with borrowers. This P2P market is just a fifth of the size of direct lending in the US, which stood at $50bn (£32.7bn) in 2014.

And while hedge funds and private equity have poured into P2P lending, many significant direct lenders have received and sought far less attention. With less competition, this means Ranger can still pick up high-yielding loan portfolios at a decent price; the average secured debt instrument it expects to buy is $104,000, with gross returns of 15.5 per cent, or 12.7 per cent after fees and costs. If Ranger fulfils its promise to return at least 85 per cent of all distributable income through quarterly dividends, this could easily clear the 10 per cent target yield.

You'd hope credentials match these claims, and fortunately they do. The trust is managed by Ranger Capital, a Texas-based investment group that has previous experience in non-bank loan portfolio investing. The same team manages Ranger Speciality Income, an unlisted fund that since 2010 has posted annualised returns of 10.8 per cent after performance fees and costs, and Ranger has previously bought loans from several of the platforms now targeted by the London-listed vehicle. So far, it has made seven investments, having already entered into pre-IPO agreements with platforms including IFG, Blue Bridge, Biz2Credit and AmeriMerchant.