The Finite Solar Finance Fund (SOLRX) seeks to earn attractive, long-term risk-adjusted returns by investing primarily in private solar assets.
Investing in the less-efficient private solar markets offers the chance to capture an illiquidity premium for investors while serving an undercapitalized sector. The Fund’s portfolio is supplemented with publicly traded securities that provide liquidity and allow the Fund to make opportunistic investments.
So – reflecting on the first quarter of 2022 (our first full quarter since inception), how has the Fund’s strategy borne out for our early investors?
Born into a tempest
To make sense of Q1 2022, we must head back to 12/31/21, the day SOLRX went effective.
The S&P 500 was at $4,766, just two days removed from its then-all time high of $4,793 on the 29th, and three days shy of its now-all time high of $4,797 that it would reach on January 3rd.
The 3-month Treasury bill was yielding 4 basis points, and the 10-Year Treasury was paying 1.51%.
At that point the Federal Reserve was on the record signaling intentions to start raising interest rates, to be followed by selling assets off of its balance sheet.
Our view on launch day was that public markets offered outsized risk with little opportunity for return. We all know what happened in Q1 and what has continued to happen since. The S&P 500 ended the quarter at $4,530, a drop of almost 5%. Today it’s down nearly 13% YTD.
Of course, interest rates rose at a historic clip, with the Fed raising its benchmark rate by 75 bps on June 15th, the largest single increase since 1994.
We recognized the high level of risk and came out of the gates cautiously, holding cash until early February when we began deploying capital into short-term Treasury bills as an attempt to protect the Fund from credit risk and rising rates.
We’re fixed-income managers, so it’s easy to hold cash in the name of capital preservation. At times, holding cash can be the “easy way out” in terms of managing risk. At other times, like in 2022, it has proven itself to be a prudent path forward. We’re glad it paid off for SOLRX in Q1.
As markets sold off and interest rates rose, our patience was rewarded and we started hunting for opportunities to invest in assets with more favorable risk/return profiles.
Because the markets were so volatile, we started with public securities to maintain liquidity and flexibility – private markets generally re-price more slowly than public markets, so the risk/return trade-off was less favorable at the start of the quarter. We deployed ~21% of fund capital into three bond purchases in Q1. The solar sector is comprised mostly of high-yield bond and convertible note issuers, offering us alternatives to common equity (depending where we wanted to be in the “capital stack,” i.e. what level of seniority we want as creditors on a loan).
Our focus to date has shifted to the credit side of the balance sheet, which generates more current income than convertible securities, and is less volatile than common equity.
The remaining 79% of portfolio assets were invested in short-term Treasures or cash. While our long-term target is to keep Treasuries and cash to a minimum, which would attempt to hedge against from rate increases and credit sell-offs, the approach helped preserve value as markets sold off during the first quarter, and positions us quite well today.
Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by calling 844-4-FINITE or www.finite.io.
While our goal is still to generate attractive returns, we will continue to be cautious with your money. Our first quarter loss of 40 basis points is a testimony to our prudence as we outperformed nearly every asset class and asset manager during the quarter.
Private market valuations are finally beginning to reflect the turmoil in the public markets, and we are eyeing deployment into assets that we expect to benefit the return while maintaining our risk/return focus.
Learn more about Finite’s investment strategy here.
Investors should carefully consider the investment objective, risks, charges, and expenses of the Fund before investing. This and other important information about the Fund is in the prospectus which can be obtained by contacting your financial advisor or by calling 844-4-FINITE. The prospectus should be read carefully before investing.
The Finite Solar Finance Fund is distributed by Foreside Fund Services, LLC.
Some of the Risks of Investing in the Fund:
An investment in the Fund is speculative with a substantial risk of loss. Investors should consider their investment goals, time horizons and risk tolerance before investing in the Fund. An investment in the Fund is not appropriate for all investors, and the Fund is not intended to be a complete investment program. See “Risk Factors” within the Prospectus to read about the risks you should consider before buying the Fund’s Shares.
The Fund is newly organized, and its Shares are not listed on any securities exchange and no market for the Shares exists or is expected to develop. In addition, the Fund’s investments in Solar Assets will primarily be investments in Solar Loans and other alternative lending-related securities, which have special risks as described in more detail with the Prospectus (linked above).
Before investing, you should read the Fund’s Prospectus regarding the Fund’s risks. These risks include, but are not limited to, those outlined below:
An investment in the Fund is not suitable for investors who need certainty about their ability to access all of the money they invest in the short term. You may not have access to the money you invest for an extended period of time.
The Fund has implemented a Share repurchase program, however, the Fund is not required to repurchase more than 5% of its outstanding Shares each quarter. Shares will not be redeemable at a Shareholder’s option nor will they be exchangeable for Shares of any other fund. Investors should therefore consider Shares of the Fund to be an illiquid investment. You should not expect to be able to sell your Shares (other than through the repurchase process), regardless of how the Fund performs.
Because you will be unable to sell your Shares at the time of your choosing or have them repurchased immediately, you will find it difficult to reduce your exposure on a timely basis during market volatility.
Although the Fund is not permitted to invest in loans that are of subprime quality at the time of investment, an investment in the Fund’s Shares should be considered speculative and involving a substantial degree of risk, including the risk of loss of investment. There can be no assurance that payments due on loans or other alternative lending-related securities in which the Fund will invest will be made.
At any given time, the Fund’s portfolio may be substantially illiquid and subject to increased credit and default risk. The Shares therefore should be purchased only by investors who could afford the loss of the entire amount of their investment.
The Fund intends to accrue and declare dividends daily and distribute them on a quarterly basis; however, the amount of distributions that the Fund may pay, if any, is uncertain. The Fund may pay distributions in significant part from sources that may not be available in the future and that are unrelated to the Fund’s performance, such as from offering proceeds, and borrowings. A portion or all of any distribution of the Fund may consist of a return of capital and may result in potentially adverse tax consequences to the Fund or its shareholders.
The Fund’s distribution policy could result in a return of capital, resulting in less of a shareholder’s assets being invested in the Fund and, over time, potentially causing the Fund’s expense ratio to increase.
The distribution policy also may cause the Fund to sell a security at a time it would not otherwise do so.
If the borrower of the loan or other alternative lending-related security in which the Fund invests is unable to make its payments on a loan, the Fund may be greatly limited in its ability to recover any outstanding principal and interest due under such loan, as (among other reasons) the Fund may not have direct recourse against the borrower or may otherwise be limited in its ability to directly enforce its rights under the loan, whether through the borrower or the platform through which such loan was originated, the loan may be unsecured or undercollateralized, and/or it may be impracticable to commence a legal proceeding against the defaulting borrower.
Substantially all of the Solar Assets in which the Fund invests will not be guaranteed or insured by a third party or will not be backed by any governmental authority.
Prospective borrowers supply a variety of information regarding income, occupation and employment status (as applicable) to the alternative lending platforms that may originate or source loans. As a general matter, platforms do not verify the majority of this information, which may be incomplete, inaccurate, false or misleading. Prospective borrowers may misrepresent any of the information they provide to the platforms.
Under the 1940 Act, the Fund may utilize leverage through the issuance of preferred stock in an amount up to 50% of its total assets and/or through borrowings and/or the issuance of notes or debt securities in an aggregate amount of up to 33 1/3% of its total assets which could magnify losses as well as gains. There can be no assurance that any leveraging strategy the Fund employs will be successful during any period in which it is employed.
The Fund’s gross expense ratio is 2.51% without leverage, or estimated 3.23% with 25% leverage. Expense ratios are annualized and calculated as a percentage of estimated average total assets.