Published on 
January 20, 2023

Alternative Investments and Private Debt Digest - December 2022 Edition

Aleksandra Yurchenko

Welcome to our monthly digest about investing into alternative assets and digital lending companies. We covered some of the top headlines from the previous month.

We bring these and more stories to your attention below.

Alternative Assets and Private Debt

  1. Yieldstreet Comments on Legal Finance as Investment Option, Reveals that Platform Returned $600M to Investors in 2022
  2. Private Markets And The Liquidity Tradeoff
  3. Public pension plans tilt toward alternatives
  4. Real Estate And Private Credit Poised To Outperform in 2023: How Investors Can Gain Access
  5. 2023 European Private Credit Outlook: Direct lenders retain optimism

Yieldstreet Comments on Legal Finance as Investment Option, Reveals that Platform Returned $600M to Investors in 2022

Yieldstreet notes that in this challenging market environment, where stocks and bonds have been largely underperforming, investors “may be looking to allocate their capital to assets with little correlation to public markets.”

Yieldstreet points out that one of the most, if not the most, uncorrelated alternative asset class “is legal finance.” Legal finance is an investment strategy that monetizes the contingent assets inherent in litigation, and is based on the concept of investing in or lending against lawsuits and the litigating firm’s contingency fees. Its performance is strictly tied to the outcome of the case, therefore, investors can use legal finance to hedge against some of the current market headwinds.

To date, investors in the space have a net annualized return of 13% and they’ve recovered approximately $350 million in proceeds.

In another update, it was noted that despite it being one of the worst years on record for a traditional portfolio, private market performance and demand remain strong as Yieldstreet breaks several key records in 2022.

Private Markets And The Liquidity Tradeoff

What practices of institutional investors could individual investors adopt to improve their investment outcomes? Diversify, rebalance, invest for the long run, and accept liquidity risk.

As demonstrated once again in 2022, stock and bond funds tend to suffer during times of rising inflation and tightening monetary policy. Investors seeking greater diversification and potentially higher returns may seek out less liquid and more alternative investment strategies. Investments in real assets, such as commodities, infrastructure, and real estate may provide investors protection against inflation that can ravage the value of stock and bond portfolios. Investors, especially those with the income or assets to qualify as accredited investors, may be able to earn higher returns in private equity and private credit than the returns offered in more liquid stock and bond investments.

Investors who choose to allocate to alternative investments to access the potential benefits of greater diversification, higher returns, and greater inflation protection must realize that there is a liquidity tradeoff. Alternative investments are less liquid for a reason, as many investment strategies require substantial time to come to fruition. Investors who can’t commit to a long-term investment program should consider whether alternative investments are right for them.

Public pension plans tilt toward alternatives

Over the last two decades, state and local government pension funds significantly increased allocations to alternative investments (from 9% in 2001 to 34% in 2022) while reducing exposure to more traditional asset classes like public equities and fixed income.

The key rationale, often cited by pension fund managers, is the attractive risk-return profile of alternatives. They offer diversification benefits, owing to their lower correlation with traditional asset classes. While the jury may be out on a precise estimate of the benefit alternative investments provide, one thing is clear: They will play a much more significant role in determining overall public pension portfolio characteristics and performance in the years to come, given their rising allocations. While states have shown resilience in the face of current market volatility, pension dynamics will continue to be an important driver of their long term credit quality.

Real Estate And Private Credit Poised To Outperform in 2023: How Investors Can Gain Access

Many advisors have moved away from the 60/40 portfolio model and welcomed alternatives as an inflation and recession hedge, since the traditional portfolio model has faced significant challenges in recent periods. Notably, stocks and bonds have been highly correlated to each other this year with significant value declines. The good news is there has been widespread democratization of institutionally favored alternative investments underway for many years by quality asset managers to provide individual investors greater access to alternative asset classes. This includes real estate, private credit and debt, and many others, all with varying levels of risk. Accordingly, meaningful allocations to alternatives of approximately 20% or more of investable assets are commonplace today. 

In the private credit sector, collateralized loan obligations have delivered both high income—14.8% annual average since 2003—and very strong total returns through several market cycles, including periods with rising rates and inflation such as the current environment. They also have required structural safeguards such as ongoing diversification and collateral tests for the benefit of the investor. 

2023 European Private Credit Outlook: Direct lenders retain optimism

In a difficult economic setting, private debt could be the big winner, however caution is the main watchword at the moment, and the liquid credit market is still not easy. Everybody is adopting a more cautious approach now and monitoring is key. 

A trend that started during the Covid pandemic—whereby lenders became much closer to issuers and held regular board meetings to avoid a breach of covenants—is also helping to meet today’s economic challenges.

What we can expect in 2023 is the continuation of trends that started in 2022, sources say, such as more lender-friendly documentation, more conservative leverage, and pricing roughly 50 bps higher than before the war in Ukraine, while cov-lite supply may be difficult to find. For the right asset everything is possible, though it is definitely the end of cheap debt with skyrocketing leverage, sources note.

Alternative Lending

  1. Fintech innovation and the alternative finance space
  2. Growth of Business and Consumer Lending Slows in Eurozone
  3. Why India is experiencing a digital lending boom

Fintech innovation and the alternative finance space

Alternative finance is a blanket term that refers to any type of financial service managed outside the parameters of the traditional banking system. These services are driven by fintech and are part of a swiftly growing network of service providers that are linked to the digital ecosystem. 

Alternative finance has gained a lot of popularity due to innovation and lower cost services. The alternative finance space has a critical role to play on two fronts: accessibility and speed. Moreover, it has the ability to move much faster and with a more streamlined approach than traditional incumbents. 

The secondary market for alternative lending packages is expected to emerge in 2023, which will consist of small ticket loans that will be sold in packages with other services and purchased by large-scale lenders as a means to reduce risk. 

Growth of Business and Consumer Lending Slows in Eurozone

The consultancy EY predicts that lending will decline by 1.8% in 2023 after rising by 4.6% this year.

As well as having an effect on businesses, alternative lenders are also suffering from rising interest rates. Without the customer deposits that banks use to issue loans, FinTech lenders, buy now pay later (BNPL) firms, car sellers and non-bank mortgage lenders will need to pass on the increased cost of borrowing to their customers.

In a sign that the slowdown of bank lending is already hurting alternative lenders, shares in the artificial intelligence (AI)-lending platform Upstart plunged more than 20% in November after the company said rising interest rates and a slowing economy were behind a significant dip in the number of new loans it was issuing.

Why India is experiencing a digital lending boom

Dozens of start-ups are tapping India's burgeoning digital lending market, which is expected to hit $1.3 trillion by 2030, growing more than four times in value from $270 billion currently. Digital lending will account for 60 per cent of the country's financial technology market by 2030.

Factors including rising internet access in India, an expanding economy and the difficulties that many people face accessing finance through the mainstream banking system are major drivers behind the growth of digital loans, experts say.

Regulatory issues are also steadily being addressed as India's digital lending sector is helping to drive the country's consumer spending trends, and as its reach expands across a range of categories.

About the author

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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