Published on 
September 15, 2022

Alternative Investments and Private Debt Digest - August 2022 Edition

By 
Aleksandra Yurchenko

Welcome to our monthly digest about private markets, alternative asset classes and alternative lenders, where we cover some of the top headlines from the previous month.

Alternative Assets and Private Debt

  1. China and India emerging as key Asian private credit markets: CPP Investments
  2. Trade finance is an asset class for private credit funds
  3. The alternative asset class needs new infrastructure — who will build it?
  4. Seeking income in private credit
  5. Many HNWIs in APAC are shifting to alternative investments such as PE, realty: report
  6. The future of money: Which alternative assets are worth investing in?

China and India emerging as key Asian private credit markets

Asia’s private credit market is seeing a surge in investments from foreign asset owners and institutions in search of portfolio diversification amid uncertain economic conditions. Investor interest in Asia is turning increasingly towards private credit - a highly resilient sector amid mounting economic challenges - as public credit and the loan markets take a battering from rising inflation and interest rates. Private credit in Asia has grown as an asset class by almost 500% in the last ten years alone and is still on a high growth trajectory, with the diversification potential of the asset really coming to the surface now.

Investors see a lot of opportunities in businesses that will see limited impact on their end demand despite the economic conditions - such as telecom towers, pharmaceuticals, data centers, or sectors that will show a quick recovery, such as healthcare, education, and business software. Still, the biggest risks for foreign investors looking to capitalise on Asia’s private credit opportunities remain “execution”, as navigating the complexity of the region is not easy.

Trade finance is an asset class for private credit funds

Coupled with technology advances, positive ESG considerations could unleash the potential of private credit to reduce the global trade finance gap.

Trade finance is a no-brainer for private credit: it is a multi-trillion dollar asset class, based on the flow of physical goods and services, making it less susceptible to financial markets volatility. However, trade finance assets have historically struggled to scale, as investors find them complex, trusted quantitative benchmarks are hard to find, and there’s lack of necessary infrastructure to process them properly.

The digitalization of trade finance has been a key driver for institutional investors to become involved in the market. The asset class can be a catalyst for sustainable economic growth and is at the heart of more than half of the UN's sustainable development goals, and can provide an effective platform to realize responsible investment objectives.

The alternative asset class needs new infrastructure — who will build it?

Alternative asset classes have now firmly become must-have portfolio allocations, with advisors recommending allocating 10%-25% to these assets. As liquid alternative asset classes are enjoying record private investments, new ones are emerging through dozen of platforms launched to fractionalize, package and distribute everything from farmland, litigation finance and P2P lending to art, wine and collectibles.

As these asset classes scale and diversify their investor bases, they need a serious upgrade in digital infrastructure to improve customer experience. The old and labor-intensive processes built around 30-year tech stacks will not scale to 100,000+ financial advisers and millions of accredited investors.

Seeking income in private credit

Rising inflation and interest rates have created challenges for public credit and loan markets, raising concerns over whether it's still a good time to invest in private credit. While selectivity and rigorous underwriting are key in this environment, private credit investing remains sound and attractive for investors seeking differentiated sources of income for the following reasons:

  • Private loans are less affected by market sentiment, given they are not traded on exchanges.
  • In the face of economic recession fears, managers have become more selective and are negotiating better spreads, lower leverage, and stronger covenants.
  • Private credit fundamentals remain healthy, and, even in the case of a recession, direct loans as an asset class can provide resilience in a portfolio.

Many HNWIs in APAC are shifting to alternative investments such as PE, realty: report

As the impact of high inflation and rate hikes reverberates across the global economy, high-net-worth-individuals (HNWIs) in Asia Pacific are churning their portfolios, with 37% of them starting to shift their portfolio allocations to alternatives.

HNWIs are embracing diversification and seeking “safer” assets, such as private equity and real estate, which seem to be less wavering, with clearer visibility on associated risks, when compared to bonds and equities.

The future of money: Which alternative assets are worth investing in?

For Asian clients, properties make up the majority of their total net worth, whereas international clients tend to invest in discretionary mandates with an Asian tilt. Private equity investments are also on the rise. Due to their low correlation with other financial assets, luxury collectibles such as wine, art, watches, and handbags offer significant diversification benefits. As with financial assets, collectibles differ from one another. Watches and jewellery are classic stores of value with lower volatility than wine, while fine art is more of a capital growth asset with higher average returns but also higher volatility.

When it comes to fine art, collectors are still going for timeless blue chip investments and big names such as Marc Chagall, Bernard Buffet, and Keith Haring. At the same time, there is increasing interest in emerging and younger artists. Experts believe that financial value is secondary to personal value, even if the two inevitably overlap. Once you have a piece of art that you cannot live without, you understand that the return on investment and appreciation in market value are just bonuses, the icing on the cake.

Alternative Lending

  1. Embedded finance and open banking are driving alternative lending across Europe
  2. Back to the 1970s? Fintech lenders brace for the future
  3. Poll on buy-now-pay-later shows positive view among BNPL users
  4. Funding Societies signs US$50 million credit facility with HSBC to drive SME growth in Southeast Asia
  5. Fintech lenders flex their bank charters

Embedded finance and open banking are driving alternative lending across Europe

Two trends are helping to drive still-nascent alternative lending in many markets.

Key alternative lending markets like the UK and France are set to grow substantially this year while alternative lenders continue to be a powerhouse force in the Baltic countries. This is helped by customer fatigue with incumbent banks and fintechs embracing new technology like open banking and embedded finance.

The latter is said to be the future of SME lending across Europe and to entirely transform how SME loans are distributed.

Back to the 1970s? Fintech lenders brace for the future

Lenders are preparing for a difficult year ahead as pandemic tailwinds cease at the same as high inflation and a host of related economic headwinds start to gather. But some also see opportunity.

The economic recovery after the corona pandemic is now slowing down and there are severe economic consequences for consumers. Mostly inflation and rising energy costs which certainly put pressure on affordability of customers. A key question for lenders is whether to pull back from lending in such uncertain times. Lenders need to know which customers are ‘good’ risks and which customers are now most vulnerable when a complete pullback is not an option. There's an economic reality, that having to deploy funding is also part of surviving as a lender. Everyone's trying to find good businesses to lend to and trying to find lending models that protect them.

Whichever you play it there are amplified business risks. Pulling back from lending means losing income. Lending responsibly also means losses. Some, however, also believe it can be a huge opportunity for fintech lenders can calcify a stronger market position over the medium term despite it being their first experience of an economic downturn.

Poll on buy-now-pay-later shows positive view among BNPL users

The results of a recent poll on buy-now-pay-later (BNPL) conducted on behalf of the Financial Technology Association (FTA) indicate that BNPL products are viewed favourably by a strong majority of adults who have used BNPL.

Key findings included the following:

  • Trust in BNPL is significantly driven by those who have used BNPL, with users not only having a high favorability but also trusting BNPL dramatically more than those who have never used it.
  • BNPL has a positive force on the financial future of its users.  43% of those have used BNPL reported that they felt their finances would be better off in one year.
  • BNPL is seen as having clear and understandable terms and conditions of service among nearly all its users.  More than nine in ten (94%) users of BNPL, across demographics, found that they could easily understand the terms and services.
  • Using multiple BNPL products has made it easier for consumers to pay for their purchases.  

Funding Societies signs US$50 million credit facility with HSBC to drive SME growth in Southeast Asia

Funding Societies, Southeast Asia's largest Small and Medium Enterprises (SME) digital financing platform, announced the signing of a US$50 million credit facility with HSBC Singapore to continue expanding the firm's reach to serving underserved SMEs in the region.

SMEs make up 97% of all enterprises in Southeast Asia bringing 40% of GDP value across the region.The signing will enable HSBC to extend its global capabilities by tapping on the underserved segments across the region. Furthermore, HSBC will act as the structuring bank, lender, facility and security agent in providing a flexible, scalable and pan-regional financing solution to support Funding Societies' business expansion in the region.

Fintech lenders flex their bank charters

Fintech lenders long avoided the costly banking charters required to lend from deposits and live the 3-6-3 life, growing fast by instead relying on banking partners and institutional investors to fund consumer loans. But a pair of fintech lenders that recently became chartered banks say the investment has positioned them well as rising interest rates make marketplace funding more expensive and scarce.

LendingClub says its banking operation gives it the best of both worlds. In a bull market, it leverages the capitalized advantages of its pure fintech to seize market share, and in a bear market, it can lean on the funding stability and advantages of a bank to drive resiliency and profitability.

A charter may help boost a lending business, but it’s not an easy ticket back into Wall Street’s good graces. Don’t expect a rush of fintechs getting banking charters. For one, they are hard to obtain, with a long list of fintechs that have withdrawn applications in recent years. And they may not equally benefit everyone.

About the author

Aleksandra Yurchenko

Aleksandra Yurchenko

Aleksandra is managing investor relations at KILDE, a regulated platform for alternative investments. KILDE is powering digital lending firms with debt capital to reach underbanked customers in South East Asia.

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