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Exclusive: eye on defaults, US direct lender Colchis Capital to close funds

BOSTON (Reuters) – San Francisco-based Colchis Capital Management LP, a pioneer of online direct lending platforms, cuts major funds as disruption from the novel coronavirus begins to affect its consumer and real estate lending, according to documents reviewed by Reuters.

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

Colchis asked investors to expect annual returns, based on a simulation, of around minus 1.7% if U.S. unemployment rose to 10%, compared to a 4.2% return if unemployment fell to 4%. The official unemployment rate in the United States is now around 5.5%, but is expected to be at least double, economists say.

Company representatives did not immediately respond to requests for comment.

Colchis, founded in 2005 and run by Conrads and his son Ted Conrads, managed nearly $ 1 billion 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 it was “difficult, if not impossible” to reflect the severe economic impact of the coronavirus pandemic in monthly assessments of Colchis’ loan portfolio, making it difficult to treat investors looking to cash out fairly.

As part of the drop in pace, Colchis suspended withdrawals, the letter said. He estimated a 19-month process to return all equity in the fund, 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 who used high-tech lending platforms to fill a credit gap left by banks, which had pulled out of smaller, riskier loans following the financial crisis in 2008.

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 stepped up 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