VSL posts record 2021 performance but warns of interest rate risks
VPC Specialty Lending (VSL) has marked its best ever year for performance but has warned the rising interest rate environment could affect its portfolio.
The alternative finance-focused investment trust has revealed in its annual report for 2021 that it posted a total net asset value (NAV) return for the year of 27.6 per cent.
That surpasses its 2019 and 2020 total NAV returns of 11.34 per cent and 11.12 per cent respectively.
The company also paid its 16th consecutive quarterly dividend of 2p per share for the three-month period to December 2021.
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A note in the report from investment manager Victory Park Capital Advisors said it will continue to monitor and work with its portfolio on any issues, while highlighting the risks from rising interest rates.
“As these uncertainties are navigated, the investment manager will continue to exercise caution,” the update said.
“It structures and underwrites investments with a focus on downside protection, in addition to stress-testing collateral across various scenarios.
“For example, while the company’s investment portfolio primarily consists of floating-rate credit facilities with interest rate floors, a rising interest rate environment has the potential to affect the investments, the profitability of the portfolio companies and that of underlying borrowers, potentially leading to lower returns or changes in repayments or default rates of the underlying borrowers.”
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The note adds that one of the advantages of the portfolio that could help navigate rising interest rates is that it is focused on floating and short duration products.
“VPC believes duration is a misunderstood risk that could present significant challenges during a rising interest rate environment, particularly for those investors currently locked into long-duration fixed-rate credit,” it said.
The investment trust is currently trading on a discount to NAV of 20.75 per cent.
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