A new hedge fund firm is positioning itself to finance companies that write subprime consumer loans.
Princeton Alternative Funding is starting a marketing campaign for its Princeton Alternative Fund this week, with the goal of raising $50 million by year end. It would use the capital to offer lines of credit to "alternative" lenders whose borrowers have poor or no credit histories, with the typical line of credit about $250,000.
Those shops originate their loans through channels like auto-repair shops, rent-to-own furniture stores and used-car dealerships. Princeton Alternative will concentrate its funding efforts on lenders that originate accounts of about $1,500 apiece with average terms of nine months. To identify lenders with the best asset performance, the firm is tapping into a consumer database maintained by its majority owner, credit-data company MicroBilt.
Princeton Alternative also will track all of the loans written by its clients, receiving instant notification if underlying accounts become delinquent.
The plan is to offer the first of the credit facilities in February, using an undisclosed amount of money from friends and family members to finance as many as five lenders. From there, Princeton Alternative would eventually expand its network to include as many as 50 such shops.
The lenders, which in recent years have faced a shortage of funding from banks, would pay interest rates of 20% or more — with the fund offering projected annual returns of 13-15%.
Limited partners will pay fees equal to 2% of assets and 20% of profits, with the charges halved for the first $5 million of commitments. Princeton Alternative is structuring its fund as an open-end vehicle with a monthly redemption period, subject to notice of 180 days. Investors can choose monthly distributions from the underlying loans, or have that capital reinvested.
MicroBilt’s main line of business involves compiling data on the 110 million Americans that it views as underserved by lenders because they have thin or tarnished credit histories. Of the more than 27 million short-term loans written by its clients from 2007 to 2013, about 15% have defaulted, with the failure rate remaining fairly consistent during that time.
Some 8,000 customers use MicroBilt’s information for credit-check purposes, split about evenly between lenders and other clients like landlords. The idea for Princeton Alternative sprouted when a hedge fund operator asked for access to the data. Rather than helping that shop with its lending program, MicroBilt began developing a fund affiliate of its own — while declining to offer its information to any other investment operation.
To avoid potential conflicts with its clients, MicroBilt won’t invest in Princeton Alternative’s fund. But it’s possible the firm’s executives or owners will kick in some capital. The privately held operation shares its Princeton, N.J., headquarters with Princeton Alternative.
Princeton Alternative is led by Alonzo Primus. Primus most recently ran his own consumer-credit consulting business, LJP Consulting, and before that was chief executive of First Bank of Delaware.
MicroBilt Chief Executive Walt Wojciechowski is acting as an advisor to the firm. So is Pat Nanda, who heads MicroBilt’s analysis team and also runs a consulting business called Creative Business Decisions.