Welcome to our monthly digest about Private Debt and investing in Digital Lending providers. This time we could not pass by and included some insightful pieces on alternative assets and investing - a necessity in a portfolio of a modern investor. Private debt is part of the alternative assets universe, which helps to generate alpha returns and hedge against volatility. Please, feel free to reach out in case of questions or feedback.
- What role do alternatives currently play in investors’ portfolios?
- How much should you allocate to alternative investments?
- What's fueling the growth of alternative investments?
- How rising alternative investment is demanding digital dexterity from GPs
There is a need to clarify what alternative investments are before thinking about allocation. The ambiguity around different types of alternatives can lead to potential risks, such as over-concentration, when an alternatives bucket consists of a single real asset fund.
The underlying impetus towards alternatives comes from finding ways to manage volatility, particularly in regards to equities, and finding alternative sources of income in the absence of positive real returns in most of the government bond markets.
An alternatives bucket can be a catchall for any type of thing that doesn’t fit neatly into traditional equity or fixed income categories. The key is to understand exactly what the role of that alternatives bucket is supposed to be in your portfolio.
The right level of exposure to alternative assets depends on factors including your risk appetite, investment time horizon and the purpose of the pot of money invested.
As a private investor, you are unlikely to be able to invest in alternative assets directly, but rather have to access them via funds, often investment trusts, which are listed on the stock market. This means that you won’t necessarily get the returns of those assets because these trusts’ share prices can move more in line with mainstream equities than the underlying investments. And you might not get the diversification you hoped for. On top of that, alternatives funds also tend to have higher fees than ones that invest in traditional asset classes.
One of the solutions is investing directly, which would potentially improve returns, lower correlation with traditional assets and management fees. Still, it would be increasingly important to understand the alternative asset you are allocating to, and the risks involved, or rely on the expertise of the deal arranger.
Things are changing for individual investors seeking to allocate part of their portfolio to alternative investments. Due to recent SEC rule changes, the qualifications to be an accredited investor are becoming broader and apart from yearly income will now factor in professional certifications, working for a private-fund issuer and the kind of investment involved, among other qualifiers. Ultimately, this means that more investors will be finally able to assess many out of reach asset classes.
Shifts in regulation is one of the factors fueling the growth of alternative investments. A few others worth mentioning:
- Market swings show no signs of slowing down. The S&P 500 finished September down 4.8 percent for its worst month since March 2020;
- Expense of the most blue-chip stocks: in September 2021, the S&P 500 was trading at more than 21 times the forecasted earnings of the companies in its index;
- Low rates, low returns: JPMorgan’s Global Alternatives Outlook 2021 forecasts a 4.2 percent return during the next 10 to 15 years for portfolios that adhere to the 60/40 rule;
- Fears of incoming inflation;
- Technology’s making alternatives easier.
The capability to deliver efficient and real-time data through digital tools has become a key differential for asset managers in the private market. Alternatives are less quantitatively driven than traditional investment types. Data science can assist with transforming unstructured data into meaningful insights, unlock new ways to reach investors and propel assets under management (AUM) growth.
Dry powder levels in the private market are at an all-time high of $1.6 trillion globally, including $180 billion in the Asia Pacific region. In the next 5 yo 7 years the capital, which is currently locked in in funds, will need to be redeployed, which will further drive growth of private markets in Asia Pacific. To meet the demand and to remain competitive, managers would need to invest in a variety of data tools that can meet the transparency it needs.
The key obstacles to effective data management for alternative asset managers are:
- the difficulty of aggregating data across fragmented systems;
- unstructured data sources and the reliability, completeness and freshness of data.
Private Debt & Digital Lending
- New Report Assesses Digital Lender Impact on Southeast Asian MSMEs
- PayPal says 'buy now, pay later' volumes surged 400% on Black Friday
- China’s buy now pay later market is growing — but challenges remain, experts say
In Southeast Asia, micro, small and medium-sized enterprises (MSMEs) are the backbone of the economy, making up for 97%-99% of the region’s total enterprises and contributing between 52% and 97% of total employment. Of the 73 million MSMEs that operate in the ASEAN, around 39 million (51%) are either unserved or underserved by traditional lenders. This is leading to a financing gap of US$272 billion.
Out of the 400+ MSMEs polled, 57% said they used a portion of their loan proceeds for working capital, 20% used the capital for inventory, and 9% used it for business expansion. Overall, a staggering 72% said financing from non-traditional lenders has helped them boost their revenue.
Volumes on PayPal’s 'buy now, pay later' platform were five times higher on Black Friday compared with a year earlier, exhibiting 400% year-on-year rise with more than 9 million people who had used it. Unlike regulators, PayPal doesn’t express concerns that popularity of BNPL will lead to higher indebtedness, especially among younger consumers. The company’s senior management believes that the scale of PayPal's customer base means they could offer the service responsibly. The platform has one of the highest approval rates and one of the lowest default rates in the industry.
There’s been a surge of interest in BNPL services in China over the last decade, but the industry is still at a nascent stage, and challenges lie ahead. BNPL payment in the country is expected to grow by 51.3% on an annual basis, and could reach $82.78 billion in 2021. Few factors are fueling the “perfect storm” for the growing trend, and they include:
- unprecedented low interest rates;
- the rise of online payment through “super apps” like Alipay and WeChat;
- extremely well-funded fintech start-ups eager to acquire new customers;
- China’s cashless society, huge e-commerce market and mobile and online shopping.
The rise of online shopping and “seamless integration” of BNPL payments with e-commerce platforms has encouraged more purchase decisions to be made but the trend can fuel overspending habits. The growth in BNPL is “inevitable” in China, where, unlike other markets, the e-commerce and mobile payments industries are already “very stable” and are dominated by several big players like Alibaba and Tencent. That means there may be limited opportunities for new players like international companies to break into the Chinese market.
Still, BNPL schemes are still “relatively new” in China. The regulatory framework and industry guidelines are not yet mature, and hence, it is important to develop the system.