Exclusive: In case of default, US direct lender Colchis Capital closes its funds

BOSTON (Reuters) – San Francisco-based Colchis Capital Management LP, a pioneer in online direct lending platforms, is cutting its major funds as disruptions from the novel coronavirus began to hit its consumer and home loans, according to materials reviewed by Reuters.

“The biggest risk to Colchis Income Funds is unemployment for our consumer loans and weak housing market conditions for our bridging home loans,” Colchis Chief Investment Officer Robert Conrads wrote in a letter. to investors on March 31. no consensus on the timing or strength of the recovery in employment and economic conditions.

Colchis told investors to expect annual returns, based on a simulation, of around minus 1.7% if US unemployment hits 10%, versus a return of 4.2% if unemployment drops to 4%. The official unemployment rate in the United States is now around 5.5%, but should be at least double, according to economists.

Company representatives did not immediately respond to requests for comment.

Colchis, founded in 2005 and run by Conrads and his son Ted Conrads, had nearly $1 billion under management as of Dec. 31, 2019, according to a filing with the U.S. Securities and Exchange Commission (SEC). The company invests in consumer and real estate loans and related securities and facilities, including relationships with online lenders Marlette Funding and PeerStreet, according to another document sent to investors last week.

Colchis has invested around $6 billion in more than 500,000 digital loans since 2011, according to its website.

Conrads also wrote that the severe economic impact of the coronavirus pandemic was “difficult, if not impossible” to reflect in the monthly valuations of Colchis’ loan portfolio, making it difficult to treat investors looking to cash in fairly.

As part of the liquidation, Colchis has suspended withdrawals, the letter says. He estimated a 19-month process to return all equity, according to client documents.

Colchis is considering launching a successor investment vehicle focused on more attractive distressed debt opportunities, such as asset-backed bonds and consumer loan portfolios, according to one of the documents.

Colchis was part of a wave of fund managers using high-tech lending platforms to fill a lending void left by banks, which had withdrawn from smaller, riskier loans following the 2008 financial crisis. .

Private debt funds managed a record $812 billion globally, more than double the amount in 2012, with nearly $500 billion in North America as of June 1, 2019, according to data provider Preqin. The increase in assets and managers has increased risk and reduced returns, as Reuters reported here in 2017.

Reuters recently reported that the SEC has tightened its scrutiny of private credit funds here given the potential manipulation of loan pricing, especially in a negative economic environment.

Reporting by Lawrence Delevingne; Editing by Michelle Price and Bernadette Baum