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We introduce private debt/alternative lending to our readers and we focus on the growth journey this asset class is undergoing in Southeast Asia in particular. We hope to build a wide common understanding that we can further build on in future issues, so we will start from the basics.
Concisely, alternative lending refers to any lending practice that happens outside a traditional banking institution. It can take many forms, including traditional alternative lenders such as microfinance institutions, leasing companies and finance companies, as well as a growing number of FinTech/digital lenders such as Peer-to-Peer (P2P) lending platforms and technology-driven lenders providing loans directly from their balance sheet.
Alternative lenders serve MSMEs, individuals and micro-entrepreneurs who are under-served by traditional banks and lack access to credit. While alternative lenders provide loans for a wide range of purposes, Helicap’s focus is on alternative lenders supporting borrowers who require financing to improve their livelihoods and use loan proceeds for productive purposes (e.g. to provide a service/product that contributes to their economy, or to obtain better living standards). There are various segments of alternative lending that are directly bridging the need for such productive loans, including education finance, vehicle and equipment leasing, MSME finance, microfinance, agriculture finance, and consumer financing (especially for essential items, healthcare, and housing).
Southeast Asia presents a particularly large opportunity for alternative lending. According to the 2017 report titled “MSME Finance Gap” by the International Finance Corporation, the MSME funding gap in SEA is estimated at $500 billion.
To get a better idea on how investors should approach alternative lending from a portfolio management point of view, we chat with Sam Rhee, Chairman and CIO of Endowus, and Former CEO & CIO of Morgan Stanley Investment Management in Asia. Sam also serves as Helicap Senior Advisor and Investor.
SR: Returns are commensurate with risk. They are highly correlated. So greater returns, even when they sound like sure shots, are in fact fraught with risk. You may be able to ride a rapidly rising market or stock but it can easily come back down as quickly. All historical data shows that asset allocation represent the bulk of the long term attribution for returns. Which means where you allocate your money in terms of asset class and geography, etc is the biggest driver of long term returns. You may allocate a 100% to bitcoin on one extreme or allocate 100% on fixed deposits. The fixed deposits are safe but will give you nothing in return and negative returns over the long run, while Bitcoin can give you exponential returns but also comes with the risk that it can also make you lose a lot of money.
The fixed income and alternative debt space is a relatively stable and lower volatility space in general and is an important asset class to achieve the benefits of diversification. I would not recommend a 100% fixed income or alternative debt allocation unless you are closing in on retirement and have enough money saved up for a comfortable retirement. But you can always allocate a decent amount to this asset class. Alternative debt clearly has done well in the past several years and have proven their mettle as a legitimate asset class within fixed income and allocating some of your overall asset allocation to generate an attractive level of return above that of traditional fixed income investments seems reasonable.
SR: There is a burgeoning private credit market or alternative debt market, and the growth in non-traditional lending is a reason behind the supply. There is a much greater diversity in the investable universe with alternative lending through funds to digital P2P lending platforms, distressed/special situations/private debt, ESG and impact focused debt including Green bonds, and even venture debt. I think the market will grow fast and eventually be much bigger than people currently think.
SR:When a sector or asset class is growing rapidly, it is important to always sieve through the quality of the fund manager or the quality of the investable securities or funds. The reason is because some may not maintain a high level of compliance or governance given they are relatively young entities. The short history also means that we do not know the true risk management capabilities and investment acumen of the teams over the long term, especially through cycles (up as well as down). That is why there has to be a high level of due diligence and effort made to really understand the underlying drivers of risk and returns for the exposure of private debt.
SR: There are so far limited good access to good funds or investment opportunities. Helicap is one of the few companies that have moved towards institutional frameworks of investing, risk management, regulatory and governance oversight. There is an increasing number of digital and wealth platforms which may be able to give access to investors to this asset class, but I would caution that not all private debt is the same and so the investor must beware and make sure they know what they are investing in. Also it is important understand the impact of cost to the investment returns so making sure that the cost is reasonable and the investment returns are well above the embedded cost and also the compensated risk.
SR: I believe institutional investors have an increasing commitment and pressure to be focusing on implementing the long term sustainable criteria for investing responsibly through ESG parameters. The level of allocation will be highest with institutional investors followed as a distant second by family offices, with retail investors even further behind. However, I do feel that sustainable and impact investing will become increasingly more important especially in a post-covid world as sustainable and responsible companies will fare better, mitigate risk better, and generate long term value better. This is why a certain asset allocation towards ESG and sustainable investing opportunities will only increase over time and like many things where demand outstrips supply, there will be a resulting asset inflation in those companies and investment opportunities where there will be sustainable value creation.
For this first issue of The Heli-Pad, we have curated a selection of recent press picks to keep you updated on the latest fundraising deals and developments in Asia’s alternative lending space. Also, in line with the theme of this issue, we provide several sources from the past year that serve as good primers on alternative lending, private debt investment opportunities, and the role of FinTech players in this sector. Happy Reading!
Grab’s fintech arm GFG raises US$300M Series A with an aim to ‘close the financial inclusion gap’ in SEA
CapBay bags US$20M Series A to scale its multi-bank supply chain finance, P2P financing platform
Indonesian P2P platforms optimistic about 2021 amid growing users, disbursement
Rely obtains S$100M in Goldbell financing for BNPL
Pintek closes US$21M from debt investor Accial to accelerate educational financing in Indonesia
Further Resources on Our Theme:
We plan to have consistent sections in our blog that include:
Our team is very welcoming of comments and suggestions on content and format, so please feel free to share your ideas with us at info@heli-cap.com
And let’s get started!
Investment involves risk. Past performance is not necessarily a guide to future performance or returns. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Rates of exchange may cause the value of investments to go up or down.
Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this material are subject to market influences and contingent upon matters outside the control of Helicap Pte. Ltd. (“Helicap”) and therefore may not be realised in the future. Further, any opinion or estimate is made on a general basis and subject to change without notice. In presenting the information above, none of Helicap, its affiliates, directors, employees, representatives or agents have given any consideration to, nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You may also wish to seek financial advice through a financial advisor or and independent legal, accounting, regulatory or tax advice, as appropriate.
