Published on 
October 19, 2022

Alternative Investments and Private Debt Digest - September 2022 Edition

By 
Aleksandra Yurchenko

Welcome to our monthly digest about private markets, alternative asset classes and alternative lenders, where we cover some of the top headlines from the previous month.

Alternative Assets and Private Debt

  1. Private credit reaches 'tipping point' in Asia as growth in western economies stalls
  2. Low Rates Transformed Private Equity and Credit. Here’s Why Higher Rates Won’t Change a Thing.
  3. Sports Trading Cards Evolve Into a Viable Alternative Asset Class
  4. As Alternatives Reach Portfolio Limits for Institutional Investors and the Ultra- Wealthy, Blackstone Courts the Barely Rich
  5. Young, wealthy investors are flocking to alternative investments, study shows.
  6. Google Partners With Coinbase: Experts See It as ‘Just a First Step’

Private credit reaches 'tipping point' in Asia as growth in western economies stalls

Private credit may have reached a “tipping point” in Asia, as alternative asset managers flock to this fast-growing asset class, snatching shares from traditional banks and providing much needed bloodline to COVID-ridden businesses. 

Although private credit is still at a nascent stage, the market is expected to grow from an estimated $ 1.2 trillion in total assets under management (AUM) last year in the wake of rising capital costs and valuation drops amid a global market downturn. 

Low Rates Transformed Private Equity and Credit. Here’s Why Higher Rates Won’t Change a Thing

The research from PGIM points out that some fundamental changes are behind the move from public to private markets. These include the frustration with being public, including costly regulations and the “quarterly drumbeat of earnings” that can put pressure on companies, in particular those with intangible assets like software that require years of R&D to become profitable. Investors were also eager to benefit from the illiquidity premium that they could earn by locking up their money. 

There are still plenty of things that bear watching and that will be tested, now that markets are entering an environment with a heightened risk of recession. Newer direct lending players, particularly those who came from the hedge fund side, are untested across market cycles. Other things to watch are “credit managers that are overly reliant on sponsored lending…and are just kind of latching themselves [onto] the back of private equity deals. As lending moved from banks to asset managers and other non-bank lenders, there’s been plenty of talk about the risk to the overall financial system, these systemic risks still haven’t been tested.

Sports Trading Cards Evolve Into a Viable Alternative Asset Class

The trading-card auction house and storage vault PWCC Marketplace recently established a $175 million asset-based credit facility with WhiteHawk Capital Partners. This proves that marketplaces and lenders can value trading cards as assets like they would art or coins, but also helps to legitimize this specific niche of an asset class.

As Alternatives Reach Portfolio Limits for Institutional Investors and the Ultra- Wealthy, Blackstone Courts the Barely Rich

Led by Blackstone, alternative-asset managers are assaulting the last and richest bastion of fundraising: relatively plain folks with $1 million to $5 million in investable assets. Not only financial products are being tailored to this humbler clientele, but sales methods as well. Alt firms must reach out to the many more thousands of retail investors through webinars and other virtual gatherings. At stake is an $80 trillion market of individual investors. And today less than 5 percent is invested in alternative products. 

Thus far, Blackstone has launched three retail-linked alt products: BREIT, a nontradable real estate investment trust; BCRED, a private credit fund; and a private credit fund for Europeans.

Young, wealthy investors are flocking to alternative investments, study shows. What to know before adding to your portfolio

According to a Bank of America Private Bank study, 80% of high-net-worth investors between the ages of 21 and 42, are turning to so-called alternative investments, which fall outside of traditional asset classes. Younger investors are allocating three times more to alternative assets and half as much to stocks than other generations.

Amid double-digit losses in the stock and bond markets this year, there’s been an uptick in advisors turning to alternative investments. The top reasons for alternative allocations were to “reduce exposure to public markets,” “volatility dampening” and “downside risk protection”. 

Google Partners With Coinbase: Experts See It as ‘Just a First Step’

Google announced that it partnered with Coinbase to enable select customers to pay for its cloud services with several cryptocurrencies through Coinbase Commerce, in an effort “to accelerate Web3 adoption and innovation.” In addition, as part of the deal, Web3 developers will have access to Google Cloud’s blockchain data through BigQuery.

Google also will use Coinbase Prime for institutional crypto services, such as secure custody and reporting, and Coinbase selected Google Cloud as a strategic cloud provider to build advanced exchange and data services, according to the announcement.

Alternative Lending

  1. Global Alternative Lending Platform Market (2022 to 2030) - Size, Share & Trends Analysis Report
  2. BNPL apps disburse credit to over 15 million users in FY21
  3. Should Consumer Lenders Migrate Towards SMEs?
  4. Indonesia's P2P Lenders Set to Disburse $17b in Loans in 2022: Association
  5. Reuniting Borrowers and Lenders on Defi

Global Alternative Lending Platform Market (2022 to 2030) - Size, Share & Trends Analysis Report

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. 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 outbreak of the COVID-19 pandemic is expected to play a vital role in driving the growth of the market over the forecast period. Although the outbreak took a toll on the lending market, the need for credit, on the other hand, increased as many individuals suffered financial losses. This created unique opportunities for alternative lenders to cater to the vast credit requirement globally. 

BNPL apps disburse credit to over 15 million users in FY21

Despite the pandemic, unsecured retail financing products, including personal loans, credit cards and consumer durable (CD) loans, have grown at about 25% over the past three years with the rising penetration of fintech apps. As digital lending models gain momentum, short-term loans offered by BNPL apps and other fintechs have emerged as a preferred mode. 

Should Consumer Lenders Migrate Towards SMEs?

Consumer lending is about speed, low touch, and user growth. While SME lending (at the £100k range) is indeed becoming faster and more automated; it is fundamentally more relational and risk-priced driven (especially if you want your customers to return). Micro-SME and sole trader financing (sub £25,000) more are more closely aligned to a B2C offering for two reasons:

  1. Firstly, regulation. In the UK for instance, loans provided to sole traders under £25,000 are classed as ‘consumer finance’ and therefore require regulation (unless the product is a special exclusion, e.g., merchant cash advance). 
  2. Secondly, and why the first point exists, when lending to a sole trader or micro-SME you are more or less trying to determine the strength of the individual behind the business. Rather than the business itself.

A more natural migration is the westward opportunity for B2C lenders to evolve their intuitive lending experiences (and hard-fought regulation) towards the vast and underserved micro-SME space.

Indonesia's P2P Lenders Set to Disburse $17b in Loans in 2022

Indonesia's peer-to-peer lending industry is set to expand its loan disbursement by 70 percent to $16.6 billion this year, thanks to the high demand from the country's underbanked micro-, small- and medium enterprises. 

According to the World Bank, there was a huge financing gap in the Indonesian MSME sector. Conventional banks and financial institutions only provide Rp 1,000 trillion in financing for the industry, just 38 percent of its financing needs of Rp 2,600 trillion.

There is a gap of Rp. 1,650 trillion. This is what causes this industry to thrive because the demand is high. Last year, only Rp 155 trillion of the demand was met, or less than 10 percent of the gap. 

Reuniting Borrowers and Lenders on Defi

The advent of decentralized finance lending pools enabled the rise of a liquid decentralized money market. Improving DeFi lending in 2022 requires a revision of that advance and a return to the individual borrower and lender. 

Lending pools solve the shortfall in liquidity when matching individual lenders and borrowers, but this arrangement has its own costs. Pooled lending creates a notable spread between the interest rates that borrowers pay and lenders receive. Right now on Aave, lenders of USDC receive a variable interest rate of ~0.6% while borrowers pay a variable rate of ~1.7%. Peer-to-peer lending brings rates in step, improving the transaction for both borrowers and lenders. But configuring it at scale has proven tricky. Morpho has found a clever workaround – it sits atop the pools and opportunistically matches individual lenders and borrowers when possible. When matching fails, the unpaired capital reverts to the lending pools. 

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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