Choosing Between Defender Credit Fund and DCF Lending: What You Need to Know

At a time when central banks are contemplating interest rate cuts, some investors are looking to the credit market to boost their returns and protect their assets against losses. In this article, we will discuss two investment vehicles for investors in Australia. Defender Capital, a specialist alternative investment manager based in Sydney, operates two distinct entities focused on providing credit to small and medium-sized enterprises (SMEs) in Australia: the Defender Credit Fund and DCF Loans – Small Business Loan Lender. 

Both of these funds operate in the credit sector and fill in a space that has been left by major banks. However, there are notable differences and similarities between both.

Similarities Between Both Funds 

1. Investment Focus: Both the Defender Credit Fund and Defender Credit focus on providing loans to SMEs and mid-market companies, with a particular emphasis on those with appropriate collateral. 
2. Target Market: Both entities target the SME and mid-market debt sector in Australia, an area that is underserved by major banks and presents strong risk-adjusted return opportunities.
3. Experienced Team: The Defender Capital team, led by James Manning and Nick Hughes Jones, brings over 20 years of combined investment experience across various financial markets, including corporate finance, funds management, property development, and non-bank lending. As such, both teams have strong experience in managing credit and identifying winning companies and formulas to support investor return.

Differences Between Both Funds

1. Structure: The Defender Credit Fund is an investment fund that pools capital from investors, while Defender Credit operates as a direct lender to SMEs.
2. Portfolio Allocation: The Defender Credit Fund allocates up to 100% of its portfolio to diversified senior secured loans and up to 15% to special situation, subordinated, or unsecured short-dated senior loans. The allocation strategy for Defender Credit is not specified.
3. Loan Size: The Defender Credit Fund focuses on loans up to EUR 1.5 million each, while the loan size for Defender Credit is not mentioned.
4. Loan Term: The Defender Credit Fund provides loans with terms ranging from 1 to 10 years, while the loan term for Defender Credit is not specified.
5. Eligible Loan Purposes: The Defender Credit Fund supports loans for investments in tangible/intangible assets, including enterprise takeovers between independent investors, and working capital related to investment development or expansion. Loans for pure financial activities, real estate development, or consumer finance are not eligible. The eligible loan purposes for Defender Credit are not mentioned.
6. Regulatory Compliance: The Defender Credit Fund’s setup is state aid cleared, with specific requirements regarding remuneration, risk alignment, and the full transfer of financial advantage to SMEs. The regulatory compliance aspects of Defender Credit are not discussed.
7. Guarantee Mechanism: The Defender Credit Fund uses a capped portfolio guarantee, which provides risk coverage to the financial intermediary up to a certain percentage of the portfolio. Defender Credit does not appear to offer a similar guarantee mechanism.
8. Alignment of Interest: The Defender Credit Fund requires the financial intermediary to always keep at least 20% of the risk in its books, ensuring alignment of interest. The risk retention strategy for Defender Credit is not specified.
9. Leverage Effect: The Defender Credit Fund aims to achieve a leverage effect greater than that of a loan, while the leverage effect for Defender Credit is contingent on available funds for lending. 

While the Defender Credit Fund and Defender Credit share a common goal of providing credit to underserved SMEs in Australia, they differ in their structure, portfolio allocation, regulatory compliance, and guarantee mechanisms. The Defender Credit Fund operates as an investment vehicle with specific requirements and features, while Defender Credit functions as a direct lender with a less detailed public profile. 

Understanding these similarities and differences is crucial for SMEs seeking credit and investors considering exposure to the SME lending sector in Australia. It equally shows the complementarities between both and why they provide a holistic solution to investors.