August 2021: Private Debt and Digital Lending Digest
by Aleksandra Yurchenko
Welcome to the monthly digest about Private Debt and investing in Digital Lending providers. We have hand-picked thought pieces and new information relevant to the topic from the past month. Please, feel free to reach out in case of questions or feedback.
1. Future Returns: Families Fill a Niche in Private Debt Markets
2. Alternative Finance to Prepare for Growth as UK SMEs Struggle to Secure Funding from Traditional Lenders
3. JPMorgan Asset Management expands private credit platform
4. Credit managers turn to Europe for growing opportunity set
5. Muzinich: Asia Private Debt – Accessing Opportunities
6. Report: Alternative finance volumes grew 24% in 2020
7. Consultants see continued drive towards ‘alternative’ private debt, including regulatory capital and direct lending strategies
One way families have found to earn extra yield in a low-interest rate environment is by lending to private companies. Families that lend directly can demand a premium interest rate to banks because they can act quickly, and the terms they provide can be more flexible than those offered by conventional lenders or private debt funds.
Following an uphill battle for businesses across all industries over the last 18 months, the UK is now poised for economic growth in the post-pandemic boom.
JPMorgan is expanding their exposure to private credit with Global Performing Credit group. The group will initially target opportunities in the direct lending segment, with plans to expand into other private credit strategies in the future. The new group will benefit from the scale and resources of JPMorgan’s USD168 billion Global Alternatives platform and its 50-plus year track record.
Private credit managers see opportunities in Europe leading to ever-larger funds. Overall, the average European private credit fund is 52% larger in 2021 as of July 30 than in 2020, according to Preqin data.
The APAC region has 150M SMEs but only 20% of banking lending is directed to them creating a $2 trillion funding gap to SMEs. This is where private debt from alternative lenders comes in to fill the lending gap, with the ability to provide term financing in the 2-5 year tenor range to help these companies reach their growth potential. As the lending landscape is still in its early stages of development when compared to the US and Europe, a less competitive environment offers direct lenders the opportunity to take advantage of a fragmented and underserved market.
The coronavirus pandemic failed to knock the growth of non-bank lending and capital raising off course. Global alternative finance volumes grew by 24 per cent in 2020, despite the pandemic disruption, according to new research from academics at Cambridge University's Judge Business School. Additionally, the soaring success of institutional capital within the alternative finance market. Non bank lenders now have on average more than two-thirds of their total finance provided by institutional investors.
Research from data provider Preqin showed that the total allocation to private debt is predicted to increase 11.4% annually to $1.46 trillion by the end of 2025, up from $848 billion at the end of 2020. institutional investors are increasing their allocation to private debt from 3% to 5% of their portfolio. Industry insiders project that demand will shift toward ‘alternative credit’ in the future, as investors look to diversify toward uncorrelated credit strategies such as hard asset lending, real estate related lending, and specialty finance.
1. Affirm shares soar on news of Amazon partnership for buy now, pay later
2. The Need for Agility and Consistent Innovation in Lending
3. Why the Big Banks are Failing SMEs in the Post-COVID Recovery
4. A Digital Lending Platform: 3 Markers You Should Have it on Board
5. Facebook, Xiaomi eye $1 trillion mkt as they plan digital loans
The e-commerce giant Amazon is teaming up with Affirm for its first partnership with an installment payment player. The partnership will let Amazon customers split purchases of $50 or more into smaller, monthly installments. As younger consumers move towards the alternative lines of credit, installment lending space is booming. Earlier in August, Square jumped into the space with a $29 billion deal to buy Australian fintech Afterpay. PayPal, Klarna, Mastercard and Fiserv, American Express, Citi and J.P. Morgan Chase are all offering similar loan products. Apple is planning to launch installment lending in a partnership with Goldman Sachs, Bloomberg reported last month.
Globally, 40% of surveyed consumers believe that non-bank lenders can better facilitate their needs, and 30% of consumers are open to trying online banking. Online loan origination has become one of the biggest differentiators for financial institutions, and digital platforms are now making it possible to connect loan origination with deposit account openings, providing a consistent user experience and better access to data. As consumers turn to alternative lenders, financial institutions are missing out on the opportunity to expand share of wallet through lending products. More than 50% of banking executives view non-traditional players as a threat.
The COVID-19 pandemic has forced SMEs around the world to scramble in order to stay afloat. In the beginning, larger banks with stronger capital and liquidity levels, were urged to offer generous lending to assist with the crisis. Soon enough the pre-pandemic policies were back in the game, which included stricter lending rules for SMEs and limited access to Tier 1 banking services, particularly, in emerging markets. Banks’ legacy IT systems and outdated processes were not equipped to deal with the swell in demand for their services. The solution is to work with specialist fintech organizations that can combine speedy online services with actual consultancy and advice to ensure the best products are purchased and delivered.
In 2019, the value of the global market of digital lending platforms was estimated at $5.58 billion. Digital platforms have significant advantages over legacy processes, and are expected to grow at a CAGR of 16.7% in 2020-2027. There are 3 markers that indicate that financial institution should adopt a digital lending platform:
- Customers aren’t satisfied with their lending experience
- Financial institution struggles when lending conditions change
- Risk management capabilities are lacking.
Several big tech firms are now focusing on digital loans alongside digital payments in India as online transactions surged during the pandemic. “The payment business hardly makes any money, but lending makes a lot of money,” said Saurabh Tripathi, managing director and senior partner at BCG’s financial institutions practice. Facebook is rolling out a small business loan program offering loans via a partner to firms that advertise on its platform, while Xiaomi plans to offer loans, credit cards and insurance products in partnership with some of the nation’s biggest banks and startup digital lenders. While the opportunity is significant, so too are the risks. Bad loan ratio, NPL collection practices and lack of regulation in online lending space are some of the challenges the local regulators must tackle to enable sustainable growth.