September 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. Due diligence the key to wringing ESG returns from private debt
2. Private debt and affordable housing: a good match?
3. Asia private debt market surges
4. A Selective Approach to Private Credit Opportunities
5. SEC Committee Recommends Expanded Access to Private Investments
69% of Asian institutions surveyed by Preqin are considering, or planning to invest in private debt over the next 12 months. Investors are increasingly turning to private debt in their hunt for ESG Alpha. ESG integration focuses on evaluating companies through extensive pre-investment due diligence and active monitoring during the holding period. The lack of transparency attributable to private companies, adds a layer of complexity to such investments. For investors to have greater ability to engage in ESG: private companies need to improve their ESG credentials, while investors need to engage and support companies in their transition towards sustainability.
With the average house prices constantly rising, and bank lending to construction firms trending down for several years, the under-supply of housing in England became a massive issue in the past decade. Affordable housing falls under ESG and is a high-impact investment, which offers growth and scalable strategies for short-term and long-term private debt strategies. Private debt capital could help reduce the backlog in affordable housing construction, while benefiting from this promising investment opportunity.
The region is still a backwater as far as global private debt is concerned, with North America and Europe accounting for 91% of AUM, but increasingly more fund managers are entering the region's relatively nascent market for private credit. As reliance on banks will be gradually reducing, leading alternative investors with more flexible capital like Ares SSG, which closed a US$1.6bn private credit fund in August, will continue to grow. Other private debt managers are also ramping up fundraising across a range of strategies in Asia, amongst which Barings, Tanarra Credit Partners, AustralianSuper (Australia’s largest pension fund), Muzinich & Co (backed by DBS Group Holdings) etc. There has been a deepening of liquidity in the APAC private debt market, but now the question is whether there will be enough supply of quality credits for all the players to invest in.
These are uncertain times,with conventional asset classes either offering next-to-no yield (bonds) or priced close to perfection (equities), the search for yield remains the main challenge for investors. Investors appreciate the yield that private debt can offer, its illiquidity premium relative to public debt and the speed with which a deal can close relative to the longer timeframe to secure bank financing. Private debt has seen a strong increase in deal flow, driven primarily by the large amount of dry powder at private-equity firms. The best way for investors to protect themselves from risks is to lend money to high-quality companies and to diversify their private debt portfolio. Investors are increasingly turning towards unitranche strategies, which is a hybrid loan structure that combines senior and subordinated debt, which they see as a more efficient investment.
The U.S. Securities and Exchange Commission’s (SEC) Asset Management Advisory has unanimously approved a recommendation to expand retail investor access to private investments, including private equity, private debt and real estate. As it stands, private investments are generally limited to wealthy investors deemed accredited investors or qualified investors by the SEC. This means that at a time when demand for such investments is growing, retail investors have only very limited access to private investments via open-ended or closed-end funds. Subject to (1) private investments providing similar to better returns than comparable public market investments, and (2) sufficient investor protection, SEC will consider wider access to such investments.
1. ADIB and Spotii roll out a virtual buy-now-pay-later prepaid card
2. Goldman Sachs is acquiring buy now, pay later fintech GreenSky for $2.2 billion
3. Buy Now, Pay Later: The “New” Payments Trend Generating $100 Billion In Sales
4. Lending Platforms' Digital Makeovers Turn Paper-Pushing Into Profits
5. Universal Credit: The online lending revolution
Abu Dhabi Islamic Bank (ADIB) rolls out the UAE’s first virtual BNPL prepaid card. The largest Shari’ah-compliant lender in Abu Dhabi has partnered with Spotii to bring the BNPL product to market. The partnership ties into the Bank's digitization effort, while pushing Spotii forward in the rapidly-growing MENA BNPL space. UAE is a key market driving BNPL evolution in the region, and the partnership is at the forefront of this enablement.
Goldman Sachs spent $2.2bn (£1.6bn ) last week to acquire GreenSky, a BNPL fintech focused on spreading the cost of home improvement loans. This deal marks yet another purchase of BNPL fintech by the large regulated players we have observed in the last few months, such as PayPal's acquisition of the Japanese BNPL Paidy, and Square's purchase of Australian Clearpay. BNPL resonates with a large cohort of consumers, and the surge in demand for BNPL has been diverting income from other revenue streams such as credit cards and traditional loans. BNPL players are partnering up with the largest e-commerce platforms and retailers, and steadily building scale with the aim of becoming shopping and banking “super apps”. With the market becoming more saturated, the regulators are on the lookout and we can expect more regulatory constraints introduced in the future.
Consumers in the US will make nearly $100 billion in retail purchases using BNPL programs in 2021 (4 times more than in 2020). BNPL or installment payments have been around for ages but shifting its place in the customer journey from checkout to earlier, and thus, affecting consumers’ choices of products and providers, has made all the difference. Payments have become an important element of the selling proposition, but, in order to maximize the value of BNPL, it must be integrated with the other elements of the marketing mix (product, place, price, and promotion) and become the 5th P of marketing strategies.
The future of lending is increasingly digital as platforms replace the manual processes. The platform model, by nature of its extensibility, can conceivably expand access to retail investors or institutional investors who have not traditionally played in the credit space. Speed has become a hallmark, and the cost of capital is cheaper for borrowers. The access to the granular data has enabled the platforms to extend loans to borrowers, who live paycheck to paycheck, and elsewhere might have been considered credit risky and would have been unable to tap into loans or credit products.
Institutional investors have their own high-tech credit models or use specialist platforms to run those models, present attractive borrowers, and price loans. There’s a ton of space for innovation both in terms of the types of assets that are offered on the platforms as well as integrating the features and functions that investors are looking for.
Some experts are concerned that the online lending revolution could potentially be damaging on a consumer level and result in a culture of debt and borrowing. Still, the majority of fintech experts support the new online lending revolution and see it as a positive force, and easy access to credit as an essential driver of innovation and growth.
- BNPL schemes, which have exploded in recent years, could lead to serious problems as they target younger generation spenders and propagate a culture of debt;
- aggressive marketing tactics lure people into making loans they might not necessarily need;
- marketers use the inherent “loss aversion” of consumers to entice them by removing the pain associated with the buying process and giving people the false sense that they have bought something for free.
- Fintechs are able to price loans much cheaper compared to traditional banks as they don’t have the “legacy effect of costs”;
- significantly reduced cycle times for a loan product at attractive repayment terms;
- online lending providers are giving consumers better transparency over what they owe, which is vital in these uncertain times;
- Fintechs appeal to the needs of consumers on a personalised and customised basis with better UI/UX and better customer satisfaction;
- the amount of regulation applied to online lending is strict enough to protect customers as well as lenders.
In any case, financial well-being of the customers shall be at the core of the strategy for all, traditional and fintech lenders. By implementing a customer-centric approach, which prioritises emotional engagement, the lenders will be able to develop financial tools that suit their customers’ needs, and crucially, that help them rather than hinder them.