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
- Blackstone Targets $5 Billion for Asia Private Credit Business
- Alternative investment funds’ popularity curbed by operating inefficiencies
- Why foreign private equity is eyeing deals in Japan
- Private Markets Offer Sustainable Opportunities
- JPMorgan Says Bitcoin Is Undervalued By 28%, Cryptocurrencies Are Now A ‘Preferred Alternative Asset’
- 5 Ways to Discover Opportunities in Alternative Strategies
- Institutional Investors Favor Alternative and Sustainable, Socially Conscious Investments in 2022
- Private Credit Boomed Amid Low Yields — And Now It’s Set to Flourish
Blackstone Inc. is seeking a tenfold increase of its private credit assets in Asia-Pacific to at least $5 billion in the “near term” from the $500 million committed as of the fourth quarter of last year, to tap a market with a growing appetite for such financing.
Blackstone is betting that demand will build as companies in the region increasingly look to diversify debt financing away from bank loans, and Asia’s nascent private debt markets are set to be on the rise given the accelerating growth in private equity activities.
The number of small-ticket investors entering the alternative investment space is set to explode in the coming years, but the private market will urgently need to update its outdated operations and cumbersome onboarding in order to capture this potential.
In the hunt for that holy grail of investing - yield, sophisticated retail investors have been slowly entering the alternatives’ territory, that is private credit, real estate, infrastructure, private equity and venture capital. However, the alternative funds are not as easy for sophisticated retail investors to access as those in the public market. HNWI is a $80 trillion market, but only single digits of that amount are currently flowing.
The challenges of processing 15-20 institutional investors is very different for hundreds or thousands of HNWI into the alternatives space, but there are a few solutions in the works.
For some years, private equity firms have set their sights on the many profitable yet unloved parts of corporate Japan that sit under the umbrellas of conglomerates such as Toshiba, Hitachi and others.
Much of the “dry powder” sitting in funds raised for Asian dealmaking is now less likely to be used in China than to back increasingly ambitious deals in Japan. As the business world is being re-engineered from a focus on efficiency to a focus on security, Japan is finding itself in a new strategic position, as the country increasingly represents the safest choice for a regional hub. This is most obviously seen in the speed that big companies like Amazon, Google and Salesforce are taking office space in Tokyo, which, in turn, is broadening the demands on law firms.
For the Japanese government, eager to offset the decline of its manufacturing industry and years of offshoring production to China and other parts of Asia, this current combination of circumstances appears a huge opportunity.
Environmental, social, and governance analysis is fast becoming a standard feature of private equity and venture capital investing. Private markets offer many unique opportunities to address pressing problems facing the world, particularly climate change, natural resource constraints, and economic inequality.
Today, more investors think early stages are the best place for companies to start considering their broader social and environmental impacts, focusing on stakeholders, and addressing the particular ESG risks and opportunities facing their industry.
Challenges remain, of course. The availability of ESG metrics for private companies is limited. And the effectiveness of impact investments is difficult to measure for impact investors who want to see an “impact return” alongside their financial return.
JPMorgan Says Bitcoin Is Undervalued By 28%, Cryptocurrencies Are Now A ‘Preferred Alternative Asset’
Despite the crypto slump, banking giant JPMorgan says bitcoin is massively undervalued. The bank has also stated that it is replacing real estate with digital, or crypto, assets as its preferred alternative asset class along with hedge funds.
To the bank, the past month's crypto market correction looks more like capitulation relative to last January/February and going forward it sees upside for bitcoin and crypto markets more generally.
In the current environment, when traditional investing playbooks may no longer be as effective, alternative investments may play an important strategic role in select portfolios. These are five strategies that can guide investor thinking on alternative investing:
- Diversifying away from the traditional "40"
- Reaching for excess return using appropriate hedge funds
- Looking for complementary sources of return in private credit
- Finding opportunity in health care innovation
- Finding value in corporate stress (“distressed debt” and “special situations” investing strategies)
It's important to recognize that alternative strategies are not all the same, nor are they right for all investors, who need to evaluate return, risk, income and liquidity profiles depending on the fund they are considering.
Sustainable investments have become serious additions to the playbook for this sophisticated investor group, paving the way for expanded interest in additional socially conscious strategies with emphasis on diversity, equity and inclusion.
Institutional investors are turning their attention to alternative investments at unprecedented levels. Three-quarters (75%) are using private equity, while nearly eight in ten (78%) now hold real assets or commodities, up from 67% a year ago. Moreover, 42% of institutional investors report allocations to digital assets and cryptocurrencies, significantly higher than the 28% recorded in 2021.
Other emerging investment trends include the increased allocation to environmental, social and governance (ESG) investments. Additionally, institutional investors are growing more aware of Diversity, Equity and Inclusion (DE&I) investments, which are likely to follow the rise of ESG investments closely over the coming year as attention grows. Pure profit is no longer the sole benchmark for asset managers. Across the board, institutional investors are more and more conscious of the world around them and the role their investments play in that world.
Assets in private credit funds reached a record $1.6 trillion in assets as of March 2022, representing a 53 percent increase from five years ago. In fact, the private credit industry is growing so rapidly that the bigger players are already squeezing the smaller ones out of the market.
One reason behind the rise of private debt recently is that the instruments can protect investors against rising interest rates, who find the floating rate hedge associated with private debt instruments is “very attractive.” Besides being a floating rate hedge, private debt also emerged as a “safer third way” to bypass volatility in the public markets, especially for investors with a long-term outlook.
- Can P2P lenders leverage success in the growing BNPL market?
- Apple will handle lending itself with the 'buy now, pay later' service
- Is the alternative lending market set to grow or decline? Business Leader investigates
Peer-to-peer lending platforms are well placed to become dominant in the lucrative buy-now-pay-later (BNPL) field, and several P2P platforms have already signalled an interest in the BNPL market.
While there are plenty of innovative fintech solutions available to improve BNPL services, regulation is likely to slow down the pace of progress. However, the opportunity for P2P lenders is immense. The global BNPL market has been predicted to grow to $4trn ($3.2trn) by 2030.
Apple pushes deeper into the financial services industry with the launch of Apple Pay Later - its own “buy now, pay later” offering. Wholly owned subsidiary will oversee credit checks and make decisions on loans, while transactions will be capped depending on a user’s credit history.
In addition to taking on lending, credit checks and decision-making, Apple is working on its own payment processing engine. Financial services help keep users glued to their iPhones. That’s why the company wants greater control over the process, letting it roll out new options more quickly and potentially collect more revenue.
The alternative lending market has emerged over the past decade to supplement the traditional banks and is now worth over £6.2bn, thanks to rapid growth in the number of providers and product ranges. The total transaction value is expected to show an annual growth rate (CAGR 2022-2025) of 1.89%. Currently, the market’s largest segment is crowdfunding, with a projected total transaction value of £2bn.
The biggest advantage to alternative lending is the sheer diversity of products and providers and their ability to meet the needs of those businesses that don’t fit into neat boxes and require a more tailored approach.
At the same time, with the traditional financial institutions well-placed to return to dominating the market, and life returning to ‘normal’, there isn’t the same levels of volatility that enabled alternative funding to have the incredible level of growth it has experienced in recent years.
The main challenges facing the industry for the years ahead:
- Largely unregulated market;
- Uncertainty around what alternative lenders can provide compared to the established financial institutions
- Businesses with less knowledge of this space can find it harder to get to grips with alternative lending.