Welcome to our monthly digest about investing into alternative assets and private debt. We cover some of the top headlines from the previous month. Does BNPL have a potential to re-shape the entire credit industry? What does Portfolio for the Future look like, considering the current market conditions? Has the time come for Asian private credit to finally cross over from the nascent asset class and firm up its position in institutional portfolios? We bring these and more stories to your attention below.
Alternative Assets and Private Debt
- For 40 years, allocators didn’t need alternatives to succeed. That era is over.
- Mind the Gap: How Gen Z is trying to beat inflation
- Why private credit's time has come in Asia
- Private credit funds take page from start-up book
- Private market investing gains traction among family offices, UHNIs in India
The CAIA Association has created a new framework for investors in alternatives to reflect the reality of new market conditions: flat yields, inflation on the rise, and heightened geopolitical risks. A 20-year old professional body for alternative investments released a new guide, called the Portfolio for the Future, which highlights five features of effective investing. Among these are:
- diversification, with a heavy focus on private, illiquid assets, and
- managers who are actively engaged in socially-centered outcomes, rooted in a fiduciary mindset, and focused on generating operational alpha.
When it comes to the central question for investors - how to find alpha in the future - investors can start with beta and layer on more private assets, like credit, equity, and other alternatives. Investors need to outperform to make it work, so selecting the right manager for the job is crucial.
Inflation is at a 40-year high, according to McKinsey, and some Gen Z members are already:
- facing deeper student debt due to rising tuition
- cutting contributions to retirement accounts
- moving back in with parents to save
- looking for new jobs that provide more financial security
It's a good time to take stock and get serious about your personal finances, and financial industry does offer a few options that Gen Zs can benefit from now:
- New banking products — driven by the rise of crypto and other digital assets — could cushion the blow of inflation and help meet demand from people who are new to investing;
- Emerging financing models like “buy now, pay later” - can give you more options when you reach the cash register, such as popular “Pay in 4” services—which allow consumers to split payments into four interest-free installments—often offered through an app or integrated into online shopping sites;
- Apps and platforms for trading stocks or tokens—Coinbase, for example, which already has a staggering 68 million verified users.
While Australia is leading the way, and has now fully embraced the growth of private credit, other APAC countries are starting to catch up too. While banks remain the dominant providers of credit across the region, they cannot meet Asia's total funding needs themselves. This funding gap is particularly apparent for smaller companies and threatens to become wider as regulatory oversight intensifies, the prospect of higher interest rates ripples through markets and banks become more selective as to who they will lend to.
Private credit remains a nascent asset class in Asia-Pacific, but it is growing quickly, more than doubling to US$59 billion in the 3 years to 2020, and institutional investors show growing interest in the region.
In many APAC countries, the term "private credit" is associated with some shadowy loans, but dismissing private debt funds as unwelcome visitors to the Asia-Pacific credit market would be a mistake.
Across Asia, similar to Australia and western hemisphere, major banks have had to rethink their risk exposure in light of tighter regulatory capital requirements and under pressure from stakeholders. Private credit funds, meanwhile, do not need to worry about depositors or quarterly shareholder reports, leaving them free to take on different kinds of credit risks.
When banks were tied up working through bad loans from the financial crisis, direct lenders started to build their coffers by raising loads of cash. Apollo has some $350 billion in its credit business, a portion of which goes to such lending.
Just recently, private equity firm Thoma Bravo had agreed to acquire enterprise software company Anaplan in a $10.7 billion deal. The sponsor turned to direct lenders Owl Rock Capital and Golub Capital, as well as the credit arms of Blackstone and Apollo Global Management, who provided $2.5 billion towards the financing of the deal, structured as a unitranche loan.
Amid recent stock market turmoil, a lot of public companies are seeing their valuations nosedive. Banks, which have a fairly conservative way of financing based on a multiple of EBITDA, get nervous. This opens an opportunity for these companies to be taken private, and direct lenders step in. Similar to VCs, lenders will have a portfolio of deals, so if one goes sideways, solid returns on others can make up for it. But lending based on revenue growth rather than profit carries risks. And as time goes on, buyers looking for ever more acquisition targets might have to hunt even riskier, lower-quality companies.
There are an estimated 8,000 ultra-high net worth individuals (UHNIs) in India, who, alongside the Indian family offices, are increasing their allocation to private markets. In the last five years 40% of family offices have doubled their investments into private assets. Unlike in the past, UHNIs today can invest through intermediaries and platforms that specialize in private market products.
The focus is on private equity and private debt (venture debt more specifically). Investments by PE and VC firms in Indian companies touched an all-time high of $77 billion in 2021. Among UHNIs, private debt options such as high yield debt AIFs and venture debt AIFs are gaining momentum. The opportunity is large given that traditional lenders do not aggressively fund these companies.
- Six Alternative Lending Trends To Watch In 2022 And Beyond
- The new frontier of investment: Southeast Asia’s consumer credit
- Financial apps are engaging 1 out of 2 Filipinos
- Third Generation of BNPL Holds Potential to Reshape Entire Credit Industry
Now, more than ever before, business owners and entrepreneurs are looking to alternative lending solutions to help them build their businesses, and here are alternative lending trends that are sure to have the biggest impact on 2022 and beyond:
- Online lending is very much part of the new normal, and it's here to stay - permanently
- Peer-to-peer (P2P) lending is catching fire now that they have really cemented their reputation, proven their trustworthiness and more than delivered on their promises while blowing away expectations
- Automation (driven in large part by Big Data and machine learning technology) and artificial intelligence are going to play an increasing role in the alternative lending industry
- A new secondary market will be built around alternative lending packages — small-ticket loans that end up getting bundled up and then sold to institutional lenders to mitigate risk
- Alternative lending companies themselves are going to be very attractive investment options for major companies and big player investors
- Banks will be seeking more and more partnerships with alternative lenders to find ways to fold alternative lending services into their lending menus as much as possible.
With e-commerce experiencing strong growth during the pandemic, popularity in ‘Buy Now, Pay Later’ (BNPL) platforms has emerged as an alternative to credit cards. This, coupled with the fact that Southeast Asia had never fully adopted the credit card business model, has driven the growth in BNPL companies.
Radek Jezbera, Kilde's CEO, spoke to Liza Tan of Finance Asia about growing private debt and BNPL opportunity in the region and how it contributes to the matter of financial inclusion.
With e-commerce experiencing strong growth during the pandemic, popularity in BNPL platforms has emerged as an alternative to credit cards. BNPL is often the first product that many consumers in developing countries will use when it comes to banking. From the BNPL firms’ perspective, the product is a high yield, small ticket, and short duration, used by people who would normally not have taken a loan. However, they do so because of the convenience and unique value proposition. From the investors’ perspective, BNPL loans represent income-generating assets with attractive yield and low volatility.
According to the survey held by the global fintech holding Robocash Group, online lending and digital payments show a strong positive demand in the Philippines. 1 out of 2 surveyed use the services of a multifunctional mobile bank. The country is a leader in the popularity of mobile financial solutions across Southeast Asia. When asked about the most used digital service, 63% respondents singled out online loans, 58% payments and transfers.
Filipinos stand out in the immersion to digital financial services. The leadership position stems from the government’s goal of reaching a universal and diverse financial ecosystem and active adeptness of the population to the digital financial services.
Evolution is evident everywhere in the BNPL sector as new use cases pop up regularly, even in unexpected places like fine dining restaurants and grocery stores. With inflation at a 40-year high, affordability tools are sought even by those with enough money and access to revolving credit.
Buy now, pay later grew to 2.1% of all eCommerce globally within a fairly short period of time. But BNPL’s true impact is changing the consumer’s relationship with and ideas about getting and using credit.
The sector moves toward BNPL incarnation 3.0. Version 1.0. was instalment credit, version 2.0 legitimized BNPL at the point of sale and eCommerce checkout; BNPL 3.0 will evolve to consolidate and unleash consumer buying power in ways only possible with deep data and 5G speeds. The experience is going to be a lot cleaner, with more white-label solutions, allowing merchants to launch their own pay-in-instalments programs.
Kilde is a regulated investment platform for alternatives. We operate as a two-sided platform connecting institutions / HNWI with securitised private investments. Our main alternative asset classes are private debt, venture debt, and recurring revenue financing. Kilde has partnered with leading non-banking consumer & SME lending firms to give investors safe and controlled access to consumer lending assets. Our unfair advantage is vast accumulated data on consumer & SME assets performance as well as scalable investment and securitisation tech platform. Thanks to Kilde’s license for dealing in securities, we securitize alternative investments into digital securities.