Published on 
December 15, 2022

Alternative Investments and Private Debt Digest - November 2022 Edition

By 
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. Which Companies Are The Biggest Inflation Winners And Losers?
  2. How Millionaires Invest During a Bear Market
  3. Art and Art Funds as Alternative Investments
  4. ETN vs ETF: What's the Difference?
  5. The Search for Hidden Opportunities
  6. Learn about the importance of diversifying your assets for the 100-year life

Which Companies Are The Biggest Inflation Winners And Losers?

Throughout periods of high inflation, there are certain companies that come out as winners and others that are losers. Sectors like consumer discretionary and tech can often struggle during periods of rising prices, while consumer staples and the energy sector tend to remain much more resistant. As well as certain stocks, there are a number of alternative assets which can hold up well. So you can see that even during times of economic crisis and record high inflation, there are winners to be found. 

How Millionaires Invest During a Bear Market

With many retail investors suffering their first real bear market after a decade of low interest rates and U.S. stock outperformance, some might be wondering: "How is the other half faring?".  That is, what are millionaire investors doing? The average high-net-worth investor is likely sitting on smaller losses, or even outright gains in some cases.

How do they do it? By staying broadly diversified, using alternative investments and maintaining a long-term, strategic perspective. The article gives some insights into the investing strategies of millionaires from experts who have experience with high-net-worth, or HNW, clients:

  • Maintain a holistic total wealth perspective.
  • Diversify your portfolio with alternatives.
  • Have a long-term plan and stick to it.

Art and Art Funds as Alternative Investments

Deloitte has come out with its Art and Finance Report 2021, and there are several interesting observations:

  1. The rise in wealth in 2020 will likely bleed over into the art market.
  2. The volatility in the stock and other traditional markets is driving a demand for diversification into alternative investments, including into art-related assets.
  3. The ultra-high-net-worth (UHNW) population now holds an estimated $1.481 trillion in art.
  4. The art market has transformed itself during and after the pandemic, becoming more resilient.
  5. Although New York remains the dominant geographical location for auctions, Hong Kong is a strong rival for auction locations.
  6. The online art sales by auction houses, spurred by the lockdowns during the pandemic, are now firmly established at the major auction houses; and,
  7. Nonfungible tokens (NFTs) are a legitimate alternative art market channel.

High interest rates, high inflation rates, and political and financial uncertainty have roiled the stock market. Many clients now seek alternative investments in general and artwork and art-related funds in particular. If you have the risk tolerance, the willingness to be charged higher fees and costs, and you have an established liquid investment portfolio that can provide financial security if the art investment requires a longer period to reach the returns desired, then investing in art is a viable option.

ETN vs ETF: What's the Difference?

ETN stands for exchange-traded note, which is a debt note issued by a financial institution, usually a bank. Like a bond, an ETN can be bought by an investor and held to maturity, or it may also be sold in the secondary market to another investor for a market price.  

Like ETFs, ETNs are exchange-traded products that typically track the performance of an underlying benchmark index or asset. Compared to ETFs, ETNs can be more tax-efficient and offer less tracking error, but they are more complex and tend to carry more types of market risks.

The Search for Hidden Opportunities

Given the global backdrop, investment experts explored the implications on issues such as strategic asset allocation, the dynamics of public and private credit, tech-driven megatrends impacting society and investing, managing risk in concentrated equity portfolios, and the impact of food security on geopolitical stability. Some key takeaways: 

  • Both equity and fixed income markets can function in environments of 3%-5% inflation, and alpha opportunities often emerge as interest rates rise and stabilize.
  • With interest rates now elevated, there is room for monetary policy easing in many parts of the world if there are signs of economic stress. This makes fixed income attractive at current yields, particularly in shorter-duration debt and high-quality corporates.
  • Private real estate generally benefits from higher inflation and enjoys tailwinds as the combination of rising e-commerce and supply chain realignment toward “just-in-case” inventory management favors continued growth in industrial warehousing.
  • Higher interest rates have helped lead to a higher US dollar, which is likely to persist if there is uncertainty on the magnitude of the global slowdown.
  • The direction of the dollar will heavily influence emerging markets. Most global investors under-own, undervalue and underestimate the asset class.
  • Quality is also a key theme within both private credit and private equity. A focus on better debt covenants and favorable deal structures in private credit reflects this.
  • Looking longer term, the megatrends around the changing face of asset management will lead to more personalized portfolios, an expanded set of manageable assets, and new niche and specialty marketplaces.

Learn about the importance of diversifying your assets for the 100-year life

Diversification is important to investors as it is a way of harmonising the risk-reward ratio and capitalising on beneficial investor opportunities. Allocating capital into a variety of assets lowers risk exposure when it’s based on an investor’s personal comfort level with risk.  

Alternative assets are often attractive because of the types of returns they can offer, and the opportunity they provide to diversify an investment portfolio that may already include traditional investments. Therefore, this reduces overall portfolio risk. 

Preqin defines alternative assets as either ‘return enhancers’ or ‘return diversifiers’:

  • Return enhancers are assets that are expected to generate a higher-than-average return.
  • Return diversifiers are assets that have a low correlation to other assets, and tend to lower investment risks across the overall portfolio.

Informed investing is a trial-and-error game and even though you may diversify your investment portfolio, investing by its very nature still carries some risks. When it comes to alternative assets, set aside money that you can see is going to be a more certain bet. Then set aside money for investing in alternative assets that you are taking a gamble on as this is part of the learning curve; if you never try, you will never know how it could have turned out.

Becoming financially literate will take away the barriers to understanding how to make your money work for you, and vitally, the myth that becoming financially independent and having a financial freedom mindset is only available to the elite of the upper class.

Alternative Lending

  1. Alternative Lending Platform Market to be Worth $14.47 Billion by 2030
  2. How co-lending is reshaping MSME credit
  3. New opportunities, new risks: Now is the time to invest in alternative lending
  4. Fintech innovation and the alternative finance space
  5. Bringing DeFi Lending Mainstream

Alternative Lending Platform Market to be Worth $14.47 Billion by 2030

The global alternative lending platform market size is expected to reach USD 14.47 billion by 2030, growing at a CAGR of 23.6% from 2022 to 2030, according to a new study conducted by Grand View Research, Inc. The growing integration of technology in the financial sector worldwide is anticipated to drive the growth. The strong emphasis by market players on offering enhanced lending solutions to revolutionize the financing ecosystem also bodes well for the development of the industry. 

The Asia Pacific is expected to witness the fastest growth during the forecast period. The rapid technological developments and acceptance of algorithm-based modern credit solutions that can match borrowers with a best-suited lender are the primary factors boosting the growth.

How co-lending is reshaping MSME credit

Given the role of MSMEs in driving economic growth, the collaborative model between new-age digital lenders and traditional financial institutions can help bridge the credit gap, and bring micro and small firms within the ambit of the formal financial ecosystem. 

In the co-lending setup, banks and NBFCs can disburse joint loans to end borrowers. Banks can leverage the partnerships to build a scalable priority sector lending (PSL) - compliant retail portfolio and extend loans to MSMEs. NBFCs, on the other hand, have distribution networks in areas where the presence of banks is minimal, and can target customer segments that are creditworthy but not able to access credit from the formal banking ecosystem. NBFCs specialize in underwriting MSMEs using assessed income and a deep knowledge of the local ecosystem, are cost-efficient in collections, and have sustained low delinquency numbers.

New opportunities, new risks: Now is the time to invest in alternative lending

A radical shift is underway as small and medium-sized enterprises (SMEs) – often referred to as the backbone of the economy – are increasingly moving beyond traditional bank financing to innovative services, such as crowd and peer-to-peer marketplace lending. As well as flexibility in sector type, alternative lenders have a wide variety of innovative loan instruments to deploy which financing by banks seldom use. There are three primary reasons why now is the time to invest in alternative lending. 

Firstly, the current economic environment of stagflation has eroded SME margins while depreciating their dry powder, resulting in record high demand for alternative leveraging.

Secondly, in an environment in which only the most nimble and resilient SMEs will thrive, cash is king and being able to access liquidity is crucial to survival. 

Finally, despite SMEs and start-ups being the future of the UK economy, traditional lenders will not leverage these high-risk companies, leaving them vulnerable and in dire need of financial support.

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. Innovation and lower cost services are the key drivers behind the growing popularity of alternative finance. 

The alternative financing space is growing so rapidly, that very soon – possibly even in 2023 – a new, secondary market will emerge in terms of alternative lending packages. In short, this 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.

We will see more fintech partnerships emerging and not just partnerships between fintechs and technology providers, but those between incumbents and innovative startups.

Providing businesses from both the fiat and crypto worlds with a wide range of financial services that are accessible through API integration – digital currencies will also play a major role in the future of alternative finance.

Bringing DeFi Lending Mainstream

Compared to the arduous process of getting an equity-backed loan through a bank, those who have participated in DeFi lending have experienced the “magic moment” of getting a loan within minutes through software. You press a few buttons and your assets are cryptographically verified, then collateralized via a smart contract, and then you can instantly receive money (stablecoins) that you can withdraw, transfer, or spend.

That magic comes from a simple concept: crypto is built on a shared ledger that all participants can read and write into using software. By extension, the inherent attributes of DeFi lending make it cheaper, faster, and more secure for consumers. 

DeFi Lending’s Key Advantages: 

  • Verified on-chain assets
  • A marketplace of underwriting
  • P2P marketplace & reduction of middlemen fees
  • Contracts enforced by code
  • Self-custody of assets and data

DeFi lending is useful – at least in theory. But today it’s both niche and underdeveloped. The main blocker today is that if someone wants a DeFi loan, they need crypto assets. That means DeFi lending is only useful for crypto early adopters. These are five areas that are essential to build in order to break DeFi lending out of the niche of early crypto adopters and into an open system for everyone:

  • Representation of off-chain assets on-chain
  • Enablement of identity and credit linked to wallet addresses
  • Creation of a marketplace of borrowers, lenders and underwriters
  • Underlying scalability and privacy infrastructure
  • Regulatory clarity

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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