DirectMoney Personal Loan Fund PDS released

Investors in lender DirectMoney's new Personal Loan Fund will pay more than three per cent a year in investment management and fund administration fees, and will have to wait three years to get all their money back when they redeem.

DirectMoney has issued a product disclosure statement for its Personal Loan Fund, which will serve as its vehicle for connecting lender/investors and borrowers.

At the same time, Basper Ltd, which is raising money to acquire DirectMoney, has issued a prospectus for a share issue that provides additional details of the DirectMoney business model.

Unlike other P2P (or marketplace) lenders, which allow lenders to select individual loans, DirectMoney will pool retail investor money in a managed fund.

The fund will pay a monthly income return with a target return in excess of deposit rates.

The fund will invest in a pool of fixed-rate, unsecured personal loans originated by DirectMoney with terms of three or five years. The minimum loan amount is A$5000 and the maximum $35,000. The expected average amount is between $10,000 and $20,000.

DirectMoney has a loan warehouse arrangement, with loans on balance sheet initially. The Personal Loan Fund will purchase those loans. Part of the money raised by Basper will be used to fund the warehouse.

The current loan book of around $6 million is held in the warehouse.

DirectMoney puts loan applicants into one of four credit bands, depending on their credit score. Each band - platinum, gold, silver and bronze - has its own interest rate.

For illustrative purposes, a table in the PDS shows platinum borrowers paying interest of 10.75 per cent, gold borrowers 14.75 per cent, silver borrowers 18.75 per cent and bronze 22.75 per cent.

DirectMoney will retain a portion of monthly interest payments to go into a reserve account, which will be used to cover shortfalls arising from delinquencies. The size of the reserve account is based on the expected loan loss rate, which has not been disclosed.

Delinquent loans will be sold.

The maximum exposure of the fund to bronze credits will be 20 per cent and to silver 50 per cent.

The minimum investment in the Personal Loan Fund is $50,000 and then a minimum of $25,000 for follow-on investments.

Investors will not be required to invest for a minimum or fixed term. However, DirectMoney has set redemptions to match the structure of the loan book; when investors withdraw from the fund their capital will be repaid in "approximately equal instalments" over 36 months.

Investors will pay an investment management fee of 1.925 per cent to the investment manager (DirectMoney) and a fund administration fee of 1.1 per cent to the responsible entity, administrator and auditor.

DirectMoney has also established a private wholesale investment company called DirectMoney Marketplace Ltd, which will be listed on the ASX.

According to Basper's fund raising prospectus, DirectMoney has invested about $2.5 million over the past few years setting up the business.

There was one surprising item under the heading of investment risk in the prospectus: "Certain aspects of DirectMoney's lending systems are manual and can be labour intensive, such as that borrower employment verification requires manual phone calls by customer service representatives and responsible lending regulations also require telephone time with borrowers. These requirements could potentially slow down the efficiency of the business."

Promoters of this new group of personal and business lenders (P2P, marketplace, AltFi) like to highlight the efficiency of their lending platforms, which use sophisticated credit scoring algorithms and automated processes. However, it seems that the new world and the old world are not that far apart.