Published on 
March 11, 2022

Private Debt and Digital Lending Digest - February 2022 Edition

By 
Aleksandra Yurchenko

Welcome to our monthly digest about the Private Debt and investing in alternative assets. We cover some of the top headlines from the previous month: big players are rewriting the rules as private debt market matures, direct lending is hot in 2022, crypto lending market continues to grow and new metaverse lenders are emerging as sales of virtual property skyrocket. We bring these and more stories to your attention below.

Alternative Assets and Private Debt

  1. In Private Credit, Bigger Is Better —At Least When Attracting Assets
  2. Six Reasons Behind Direct Lending's Rise To The Top
  3. Bitcoin-backed lending continues market expansion into 2022
  4. The Coming Boom In Metaverse Lending For Banks

1. In Private Credit, Bigger Is Better —At Least When Attracting Assets

As competition in private credit heats up, larger managers have begun to squeeze their smaller and newer competitors out of the market. 42% of capital raised by private credit managers last year was taken in by the 10 largest funds, according to Preqin’s latest Global Private Debt report. As the market matures, the rules of the game are being rewritten by the bigger players: the barrier to entry is rising, creating a problem for first-time fund managers. The number of funds that participated in fundraising decreased from 255 to 202, raising the average fund size from $663 million in 2020 to $958 billion in 2021.

57% of institutional investors plan to increase their allocations to private debt in the next 3 years. Direct lending will be a key strategy in 2022, favored for its high yields, floating rates, and comparatively lower volatility.

2. Six Reasons Behind Direct Lending's Rise To The Top

Funds focused on direct lending represent a significant share of the private credit market, accounting for approximately 58% of capital raised globally by credit funds during 2021. Here’s why direct lending loans are an attractive investment:

  • they offer higher returns than other credit investments but with less risk;
  • they offer greater protection from rising interest rates as they have a shorter duration than fixed rate debt;
  • they don't decline in value as interest rates increase (due to floating rate coupons);
  • they carry seniority on the lien of assets;
  • they offer greater protections to lenders because they are secured by company assets;
  • they offer lower potential losses in default and have significantly higher recovery rates.

3. Bitcoin-backed lending continues market expansion into 2022

Secured crypto lending refers to arrangements where a borrower pledges crypto assets as security for a loan, often in the form of fiat currency. Bitcoin-backed loans and other secured lending arrangements involving crypto assets continue to grow in variety, scope, and access, and offer borrowers access to capital that can be used to finance businesses, homes, cars, and other personal property.

The primary drivers behind the growth of the crypto lending market:

  • the desire of borrowers to obtain liquidity by leveraging value that has accrued and is stored in digital assets without selling those digital assets;
  • certain types of secured crypto loans are often not subject to credit checks, making them a potential source of capital for a broad range of borrowers;
  • the settlement of secured crypto loans can be accomplished quickly, a key advantage for both borrowers and lenders over traditional secured lending arrangements in terms of speed, transaction costs, and efficiency.

Key considerations:

  • the process of granting or taking security over digital assets and determining if the processes applicable to securing other “intangible” assets applies to crypto assets;
  • given the volatility in the price of many crypto assets, both borrowers and lenders should be mindful of, and carefully negotiate, the provisions of the loan arrangement relating to the LTV ratio;
  • crypto lending arrangements may give rise to securities law issues, including the transfer of securities.

4. The Coming Boom In Metaverse Lending For Banks

Virtual real estate sales are skyrocketing. In the past month, sales of property on the six most popular virtual worlds brought in more than 52,000 ETH—roughly $169 million—on NFT trading platform OpenSea.

Buying real estate with a loan is becoming an option for the metaverse as well, which is similar to commercial real estate lending. Smart and entrepreneurial banks will develop the capability to evaluate virtual real estate lending, as many of the same principles apply to both real and virtual estate. Early lenders will be able to establish themselves as “metaverse lenders, and they won’t even need to open a branch in the metaverse.

Alternative Lending

  1. A look at nonbank loans and the alternative lending industry business model in 2022
  2. Expanding Small Business Lending Online Helps Black-Owned Firms And Other Small Companies
  3. What are the building blocks of digital lending?
  4. American Express and Delta Air Lines introduce Buy now, Pay later option for flight fares
  5. SME lender Funding Societies raises $144M led by SoftBank Vision Fund 2, plus $150M in debt lines

1. A look at nonbank loans and the alternative lending industry business model in 2022

Alternative lenders are nonbanks - financial institutions that do not have a full banking license but provide users with easier access to obtaining loans — especially for consumers who may not have the best credit or meet certain requirements.

Alternative lenders are pressuring traditional financial institutions to digitize their own lending options - over 40% of customers surveyed think nonbanks can better assist them with personal money management and investment needs. Nonbanks offer customers and businesses a variety of loan options including mortgage loans, small business loans, and peer-to-peer loans. Through technology that uses AI and machine learning, alt lenders are able to efficiently onboard customers, and their market share in business lending continues to grow steadily.

2. Expanding Small Business Lending Online Helps Black-Owned Firms And Other Small Companies

Banks and most non-bank lenders are slowly but steadily increasing in their loan approval percentages, as business owners look to reinvest in their businesses. Still, approval percentages are rising slower than anyone had hoped. Two years ago, bank approval rates were almost double what they are today. In January 2020, big banks approved 28.3% of loan requests vs 14.5% at the start of 2022. Non-bank lender percentages in 2020 were even higher: institutional lenders approved nearly two-thirds (66.4%) of requests vs 25.1% today, and alternative lenders granted 56.1% versus 26.3% in January 2022.  

A positive result of the COVID crisis is that it accelerated the shift towards digital lending to small businesses. Online small business lenders are willing to issue smaller loans (typically less than $250,000) on shorter terms that are well suited for the day-to-day operating needs or short-term use cases. This reality has spurred banks and non-bank lenders alike to increasingly look to digitize their small business loan application process.

3. What are the building blocks of digital lending?

Digital lending is now a must-have for organizations that need to differentiate in the marketplace. Digital lending core building blocks are:

  • a document engine that provides the core inputs for a digital loan transaction – fully automated with warranted loan agreements and contracts;
  • an authoritative copy to consolidate digital loans in one system and ensure digital asset certainty with full ownership and control of assets;
  • digital asset certainty based on an immutable history and digital chain of custody for all digital financial assets;
  • analytics and reporting tools are needed to analyze risk and ensure compliance through information sharing and accurate reporting.

A digital lending platform lowers the classic “barriers to entry.” Companies can adopt new technology faster while increasing efficiency, reducing cost, and growing margin and profitability. And most importantly: they can deliver better customer experiences.

4. American Express and Delta Air Lines introduce Buy now, Pay later option for flight fares

Now, American Express cardholders will be able to use Plan It, Amex’s branded buy now, pay later (BNPL) feature, to cover Delta flights of $100 or more. With this option selected at checkout, the total price of the flight will be divided into equal monthly installments with a monthly fixed fee.

Other travel providers have started their own creative financing options, but this move makes Delta the first merchant partner to offer Amex’s BNPL as a payment method, and the first airline website in the U.S. to offer an on-card BNPL feature at checkout.

4. SME lender Funding Societies raises $144M led by SoftBank Vision Fund 2, plus $150M in debt lines

Funding Societies, South East Asia’s largest SME digital financing platform, announced it has raised $144 million in an oversubscribed Series C+ equity round led by SoftBank Vision Fund 2, with participation from new investors like VNG Corporation, Rapyd Ventures, EDBI, Indies Capital, K3 Ventures and Ascend Vietnam. It also received $150 million in debt lines from institutional investors, some of which have been drawn down since last year. Part of its newest funding, or $16 million, will be distributed to former and existing employees through its stock option plan in the form of share buybacks.

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.

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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