Welcome to our monthly digest about investing into alternative assets and digital lending companies, where we cover some of the top headlines from the previous month.
Alternative Assets and Private Debt
- More advisors turn to alternative investments to further diversify their clients in volatile market
- In VC market slowdown, alternative financing emerges as a path to funding
- Not the Same Old Private Credit Opportunities
- Traditional asset managers race to expand private investment alternatives
- Demand for alternative assets to rise 46 per cent over next 12 months
- Why Billionaires Like Jeff Bezos Invest Millions In Contemporary Art
- Fine Wine Continues To Outperform The Stock Market
More financial advisors looking to further diversify their clients are turning to alternative investments, according to a recent survey, which found average alternative allocations of 14.5%, with advisors aiming to boost percentages to 17.5% in two years.
Top reasons quoted for allocations to alternatives include “reducing exposure to public markets”, “volatility dampening” and “downside risk protection”. The most popular alternative assets are so-called liquid alternative mutual funds and exchange-traded funds, offering hedge fund-like strategies to everyday investors.
The key risk identified is mismatch in expectations, when investors do not fully understand the underlying asset.
In today’s bearish conditions, driving lower valuations and more stringent deal terms, revenue-based financing has emerged as an especially appealing capital alternative for startups with contractual or predictable sales models. Companies that lend upfront capital against startups' recurring revenue say they have seen a surge in demand since the beginning of the downturn. Startups and boot-strapped companies of all sizes are taking upfront capital from the likes of Pipe, Capchase and Founderpath, which, unlike venture debt firms, make quick data-based decisions and increase credit lines automatically, once the borrowing company’s revenue grows. One concern could be the effect of a rising rate environment on the cost of borrowing from such providers.
Institutional investors, which have been targeting their assets in private equity and private credit, started to show more interest in distressed credit and emerging markets credit opportunities.
This has been a year of transition to what may be a new post-Covid normal, and in emerging market private credit that means being prepared for whatever hand investors are dealt. In developed markets senior private credit strategies were barely producing low single-digit yield in the recent years, whereas in emerging markets, investors with the right appetite realize that they have a chance to lock up good opportunities from a risk and return perspective.
The primary risk in emerging markets is associated with the periods of currency devaluations, which ultimately affect the performance of the companies, hence, institutional investors targeting opportunities in these markets provide loans in hard currencies.
Mainstream asset managers are competing with private equity groups for a bigger slice of the growing private asset market, which includes a broad spectrum of alternative assets, such as private equity, private debt, infrastructure, real estate, venture capital, growth capital and natural resources. The rush is underpinned by the need to boost profitability and tap into new avenues of growth at a time when cheaper exchange traded funds are taking market share, and a downward pressure on fees is eating into their margins. On top of that, private assets are appealing to the fund managers because they typically command higher fees and lock up investors’ capital for several years.
Preqin predicts that the overall size of the private capital industry will grow from over $10tn last year to almost $18tn by 2026. The retail and wealth markets are key areas where fund managers could make inroads with private capital strategies.
In a recent survey focused on High Net Worth Individuals, 53 % of the 580 investors surveyed across the UK and Europe said their appetite for alternative investments would grow over the next year. 75% cited real estate as the most popular type of alternative asset, followed by long-term asset funds and carbon net zero funds.
Why has there been so much interest in fine art with the super-wealthy, like George Soros and Jeff Bezos—just to name a couple?
Contemporary art prices actually outpaced the S&P 500 by nearly three times from 1995 to 2020. Contemporary art has also appreciated faster than equities, REITs and even gold during periods of high inflation. Investing into artwork is still a challenge for an average investor, luckily, there are new startups that allow you to purchase “shares” of fine art for a minimal investment. These works are securely stored while they appreciate in value, then later sold and the proceeds distributed to shareholders.
Fine wine is a growing alternative investment class. Limited supply and rarity drive the continuous demand for fine wines. These wines can be classified as investment-grade since they have sufficient demand in the secondary market to support ongoing price growth. Investing in wine can provide higher returns that can beat inflation and aren’t subject to the many factors that make equity markets so volatile.
Regardless of the economy, wine and other alcoholic beverages will continue to be in demand. For instance, alcohol sales rose by 20% from March 2020 to September 2020 during the worst months of the COVID-19 pandemic. The one-year return of the Liv-ex Fine Wine 1000 index is 24.6%, compared to the S&P 500’s one-year return of -1.18%.
It’s becoming even easier to gain exposure to this asset class via alternative investment platforms and consumer staples exchange-traded funds (ETFs). Besides investing in physical wine bottles, investors can gain exposure to this sector via consumer staples ETFs. No ETFs specifically focus on wine, but consumer staples ETFs own companies that produce alcoholic beverages.
- Global Alternative Lending Platform Market Estimated to Surpass 730 Billion with a CAGR of 5.1% by 2028 - Report by Vantage Market Research
- Crypto Lending: Earn Money From Your Crypto Holdings
- Virgin Money enters buy now pay later market
- Deutsche Bank develops its own buy now, pay later solution for e-commerce and digital marketplaces
- Blockchain and decentralized finance's impact on lending
Global Alternative Lending Platform Market Estimated to Surpass USD 730 Billion with a CAGR of 5.1% by 2028
The recent analysis found that alternative lending platform market revenue was valued at USD 541.7 Billion in the year 2021 and is expected to grow to exhibit a Compound Annual Growth Rate (CAGR) of 5.1% during the forecast period, with Asia Pacific projected to dominate the worldwide Alternative Lending Platform market.
The major drivers for the market growth are anticipated to be: increasing digitization, technological advancement, a growing number of small- and medium-sized enterprises, and high usage of blockchain & artificial intelligence technology to make quick lending decisions & provide faster loan disbursement.
Crypto lending has become one of the most successful and widely used DeFi (decentralized finance) services, and many crypto exchanges and other crypto platforms offer borrowing and lending services.
Crypto lending is a decentralized finance service that allows investors to lend out their crypto holdings to borrowers. Lenders then receive regular crypto interest, similar to interest payments earned in a traditional savings account. Borrowers can use cryptocurrency lending platforms to secure cash loans using their crypto holdings as collateral. Crypto lending can be an attractive opportunity for both lenders and borrowers, but recent turmoil in the crypto lending market underscores the tremendous risks involved in the industry.
- crypto borrowers can secure a loan without a credit check, making loans available to borrowers that might not be eligible for a bank loan;
- borrowers can often secure a crypto-backed loan at a lower interest rate than a bank loan;
- crypto lenders can generate passive income on their crypto holdings at rates that are generally much higher than rates on savings accounts.
- institutional borrowers typically make a deal on individual terms with the crypto lending firms, hence, the risk exposure to one borrower;
- loan holders risk losing their money if the platform provider goes insolvent;
- high liquidation risk;
- sudden price drops and illiquidity in the market may prevent the lending platform from selling the borrower’s collateral fast enough and at a high enough price to cover the lender’s principal.
Virgin Money is entering the fast growing BNPL market, alongside mainstream lenders, with a new offering of a credit card that allows customers to spread repayments over a number of months, it said, with instalment fees added if they repay in nine months or longer.
Deutsche Bank is developing its own BNPL (buy now, pay later) solution for invoice and instalment purchases in a collaboration with Vienna-based fintech Credi2. The white-label – own brand – solution for online merchants and e-commerce marketplaces in Germany can be flexibly integrated into the payment process. Pilot projects are scheduled to start this year.
Invoice purchasing, which has dominated in Germany for decades, has firmly established itself among the top 3 payment methods in terms of the number of transactions in e-commerce, alongside wallet payments and direct debits. Juniper Research projects annual global BNPL transaction volume growth of more than 30 percent through 2026.
Current financial transactions likely grew out of the necessity to have a systematic way to verify the identities of individuals and businesses, thereby creating trust between transacting parties. Decentralized finance system may redefine P2P lending, as blockchain technology offers new ways of addressing these issues with lending by offering:
- A tamper-proof, virtual, global network that can span borders and regulatory regimes
- “Smart contracts” where actions can be taken automatically, based on the current metrics of the contract
The following DeFi features that may require changes in established lending practices:
- Defi application is a marketplace always open for business, and participants can transact 24/7, giving lenders access to a global clientele and exploring new lending opportunities.
- Turnaround time - the time to make lending decisions is significantly compressed compared to traditional due diligence.
- Regulatory compliance requirements may exponentially increase.
- Lending will bring in a new set of collateral that can be instantly authenticated and evaluated on the blockchain and thereby used as collateral.
- Blockchain and DeFi leverage smart contracts that can build a lot of measurement and intelligence into the contract - this capability will require a new way of thinking about lending contracts.