Robert Allard, founding partner and ceo at Firebreak Capital, answers SCI's questions

Q: How did Firebreak Capital become involved in the securitisation market?
A: Firebreak Capital is categorised as a private debt fund, but this means different things to different people. Our background is in structured products (including securitisation) and we're seeking to employ this skill-set across the private debt universe. A more appropriate label for the firm is a structured private debt fund: we employ structured finance techniques in order to lend to private companies.

We're aiming to launch in 1Q17, but continue to line deals up to launch with.

Q: What are your key areas of focus today?
A: Our main business is with financial services companies; in particular, consumer finance companies or platforms active in the SME, equipment lease, residential or commercial real estate sectors. We're also active in lending against financial assets for non-financial companies, such as intellectual property in the pharmaceuticals or telecoms sectors.

We take the tried and tested securitisation framework and tailor it to the uniqueness of a borrower or the risk profile of a given pool, applying it on a private and small scale. Transactions are usually structured with two tranches, with the borrower owning the first loss.

Triggers are agreed to protect our senior investment and the borrower typically maintains the servicing of the pool. The structure could be made more complex for legal or tax requirements or for shorter-term financings, and could include a revolving/reinvestment period to improve duration.

Q: Which challenges/opportunities does the current environment bring to your business?
A: The opportunity is two-fold. First, due to onerous regulations, banks are generally unable to provide complex principal finance (they operate more as agents now), so structured solutions are more challenging for them. Second, the contraction of banks has precipitated the growth of non-bank financial institutions and fintech, and there is growing demand for structured finance solutions from these businesses.

Typically, these institutions have a growth arc where they struggle to find a financing solution that fits their development. We're aiming to fill the gap that exists between high net-worth individual or family office money, for example, and accessing the broader public markets. We can provide tailored solutions sized at US$10m-US$50m to suit this growth arc.

The majority of the intellectual and financial capital from the structured finance industry sits in large hedge funds and private equity funds now. For these players, the notion of allocating resources to a US$10m-US$20m deal is out of the question, so there is less competition in this space. Anything sized over US$100m is fiercely competed over, but competition removes our alpha proposition - which is driving the terms of a deal to structure attractive investments for our investors.

Q: How do you differentiate yourself from your competitors?
A: The typical direct lending approach is to aggregate whole loan portfolios and provide investors with broad exposure to these pools of loans. The first-movers in this space were relatively successful, but recent issues with some platforms and their business models - as well as rising defaults and charge-offs - has given investors pause. Our securitisation approach provides greater protection to investors, while the tailored aspect of the financing meets the requirements of the borrower.

In terms of our approach to the fintech space, the bar is high. Most organisations that approach us don't have the necessary corporate governance and risk controls in place for us to help.

One issue that some structured credit funds have is that their focus is too narrow and they are therefore forced to keep buying when levels become too tight. Similarly, narrowly-defined direct lending funds are forced to keep buying into tighter markets. But it is important to retain some flexibility and have a balanced approach to deliver an all-weather return strategy.

As previously mentioned, our focus on smaller opportunities means we face less direct competition, which allows us to drive deal terms and create attractive risk-adjusted returns for our investors.

Q: What is your strategy going forward?
A: We look to the public markets as part of a relative value framework. All else being equal, we want to get paid more for operating in the private market, but relative value can become inverted with volatility and liquidity issues in the public markets - for example, in February this year.

In this scenario, the private market can freeze up and the public market becomes cheaper. We have the ability to target the public market on a tactical basis, unless it becomes a more permanent repricing of risk, which will mean private markets repricing wider still. This speaks to the durability of private strategies and enables us to put capital to work in any environment.

Q: Which major developments do you expect from the market in the future?
A: We're seeing some normalisation post the Lending Club scandal and funding is returning to the marketplace lending sector. We received many calls from platforms in March and April and we expect similar situations to emerge again in the future. We'd rather deal with borrowers when they need us most.

We view the marketplace lending sector becoming better regulated and more discipline emerging around internal controls at platforms as positive developments for the industry. In terms of the bigger picture, rising rates in the US, Brexit, China issues and continued problems in Europe will continue to provide uncertainty and volatility in the market, which will be attractive opportunities to add risk.

CS