Welcome to our monthly digest about the Private Debt and investing in Digital Lending providers and alternative assets. The year has kicked off quickly and we see that the alternatives are stealing the spotlight, as the traditional portfolios of stocks and bonds do not deliver anymore. The macroeconomic environment pushes investors outside of the comfort zone of the public markets and into the lesser-understood private markets.
BNPL providers are pushing the boundaries and are trying to extend the product to the food and beverage and trade finance spaces. We bring these and more recent news to your attention below.
Alternative Assets and Private Debt
- The 60/40 Portfolio Is Dead. Long Live 33/33/33
- Private Credit: Too Risky? Not for Asset Allocators
- Private Credit Assets as Catalysts for Climate Impact
- Private markets are a hot topic for 2022
- Which alternative investments can work as inflation rises?
A portfolio of stocks and bonds used to be the gold standard, but it just doesn’t cut it anymore. It’s time to throw some alternative investments into the mix. While many advisers have been trained to regard the 60/40 as a benchmark from the early days of their careers, a low interest rate environment means we need to get more creative.
J.P. Morgan Asset Management’s “Guide to Alternatives” revealed that allocating just 30% to alternatives in your portfolio can substantially increase your annual returns, while simultaneously strengthening portfolio stability and decreasing risk. While these are not for everyone, for high-net-worth and affluent investors who don’t need cash in the short-term and are willing to take on some temporary illiquidity, alternative investments make sense.
Still, there aren’t many financial advisers offering alternatives, as they continue piling their clients into liquid model portfolios because it’s easier for them to scale without having to truly customize based on each individual client's needs.
Moody’s takes a dim view of direct lending, but the asset’s safety record is pretty good. The ratings agency warned in a recent report that private debt could go south, criticizing it for lack of disclosure, concentration among a few large money managers, and plain old low-end creditor quality.
But these loans haven’t had big problems. And they have been tested by fire. In the horrible, pandemic-damaged 2020 second quarter, US private loan defaults peaked at 8.1%, according to the Proskauer Private Credit Default Index. In last year’s third quarter, that had fallen to 1.5%. Loans are most often senior secured with a first lien on all borrower assets. Many of the loans have strong covenants and are subject to constant monitoring.
To avoid private debt is to ignore a big opportunity, argued a paper from Russell Investments. Among institutional investors, in particular pension programs, direct lending has found favor. Smaller institutions and individual investors have started to catch up slowly.
Globally, private debt assets will more than double to $2.7 trillion by 2026, Preqin projected.
The broad versatility of solutions-oriented private credit is positioned to play an important role in accelerating the transition into a low-carbon carbon-resilient economy.
As enterprises seek to scale disruptive climate solutions, access to low-cost capital will remain a key driver of a virtuous cycle of asset creation. While equity is a necessary component of business development, particularly in funding earlier stage technological and business development activities, properly structured private credit capital can help catalyze growth. Drawing on structured, specialty and infrastructure finance methodologies, private lenders can provide well-covenanted tailored liquidity to borrowers not typically available in public markets.
Worn down by pricey equities and super-skinny bond yields, asset managers are increasingly looking beyond public markets in search of decent returns.
The acceleration in consumer price inflation since the first set of the pandemic lockdowns means investors are guaranteed a loss on many of their investments into government bond markets. The central bank stimulus that has squished yields on government bonds has also dragged down yields on corporate credit. That all pushes investors beyond the well-trodden path of listed, straightforward markets and into more adventurous waters.
Naturally, the alternatives carry higher levels of risk. The main concern is liquidity. In a crisis, these are not assets that you can sell in a hurry, so it is clearly vital that everyone buying has thought about the trade-off.
Having a larger slice of global investments parked in private markets could even open up public markets to greater vulnerability, as they would feel the greater force of selling pressure in the next big shock.
The velocity of all the money in the private sector could potentially accelerate to produce long-term inflation. This is still a significant risk: structural inflation could create a turning point in interest rates. Alternatives can play a role in protecting investors' wealth amid such turbulence. Leaving cryptocurrency and other lesser-known strategies to one side, alternatives consist of hedge funds, non-investment grade debt, private credit, private equity, and real assets such as property and infrastructure. To varying degrees, all of these asset classes provide some diversification to mainstream markets and global economic growth, but combining them could be even more beneficial.
The changes are happening in the world of alternatives:
- In terms of fees, for a manager to keep no more than one-third of the return they deliver above the gains of the market as a whole being a good yardstick in the current climate;
- Weekly or daily liquidity is now available from funds that are very similar to hedge funds;
- Alternative credit, such as high-yield bonds, securitized credit, and emerging market debt offer some attractive diversification characteristics, usually with shorter duration than investment grade and government bond markets;
- Some rapid improvements are happening in ESG integration, however on the whole more investor engagement within alternatives is required.
Alternatives should be a key tenet within portfolios, helping to get investors on the right side of global mega-trends, reduce equity beta and economic sensitivity, and offer some inflation protection.
- Digital lenders to target unbanked, underserved, MSMEs
- Buy Now, Pay Later Coming to Food and Beverage Categories Despite Pushback
- BNPL Moves Into Trade Finance as Instalment Payments Suit up for Business Use
- Lending Platform Happy Money Valued at $1.1B
In the Philippines, digital banks will play a pivotal role in ensuring financial services are accessible to consumers and small businesses. The digital banks have the potential to boost financial inclusion in the country: operating digital banks, namely, the state-owned Overseas Filipino Bank and Tonik Digital Bank, Inc., both launched in 2021 and have already attracted more than 200,000 depositors in less than a year. There are four other online lenders that secured licenses and are expected to start their operations this year.
Digital banks, unlike other lenders, do not need to set up physical branches and are only required to maintain a head office, with services delivered purely through an online platform. Digital banks are expected to help the BSP (Philippine Central Bank) reach its goal to have 50% of all payments done digitally by 2023. It also wants 70% of Filipino adults to have accounts with financial institutions by the same year.
A number of consumer finance companies have been attempting to extend BNPL to the food and beverage space and offer the service to more purchasing occasions beyond retail. Many restaurants are already onboard with a vision of the future that involves the option to split meal payments into instalments.
The recent research which surveyed 765 business owners on Main Street U.S.A. found that while only 8% of food, entertainment and accommodation businesses currently offer BNPL, a full 25% plan to implement BNPL in the next year. At the same time, 65% of consumers who use or would use BNPL options say they are more likely to shop at stores that offer BNPL, and 21% of consumers are interested in using it to pay for groceries. The most obvious advantage of BNPL service is the ability to purchase items now and split the cost into interest-free instalments, which offers greater cash flow control.
BNPL has further adapted its concept as a trade financing solution for business-to-business (B2B) buyers and sellers. BNPL’s rise in the consumer space is partly driven by aversion to credit cards with high annual percentage rates, with BNPL giving consumers more buying power on manageable terms. The same flexibility and manageability that makes BNPL attractive to consumers are what makes it appealing to companies, too.
The same data-based credit decisioning applies with B2B, although B2B tends to be a bit more cautious, given that credit lines tend to be a lot larger. At present, the biggest wrinkle is around proving businesses are eligible for BNPL terms. With B2B use of BNPL being relatively new, unknowns remain, but these solutions have a use in financing B2B transactions and will continue to build momentum through 2022.
Happy Money, which provides unsecured lending in partnership with credit unions, announced the $50 million Series D-1. With the new valuation, Happy Money becomes a “unicorn,” a term for a private company valued at higher than $1 billion.
Happy Money urges customers to pay off credit card debt through existing debt consolidation. Unique focus on customers who want to eliminate debt and seamless user experience dramatically reduces risk profiles & delivers significant outperformance on charge off rates vs. competitors.
From inception in 2009, Happy Money has lent to 205,000 consumers and funded $3.7B in total — $18,000 per borrower.
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.