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Trouble in paradise - Why transparency is paramount for investors in the alt-finance sector




By Pietro Nicholls on 1st December 2017


Non-bank lending is booming but with a widening opportunity set risks also increase. 

 

 

The release of the Paradise Papers, heralded by the media as a second Panama Papers, provided the media with considerable column inches despite revealing very little illegal activity. However, it has had the effect of shifting the spotlight yet again to a lack of transparency and disclosure provided by corporations to their stakeholders.

 

This certainly isn't a new issue, if we cast our minds back over the years, it's a recurring theme.

 

As far back as 1992, the Cadbury report by the late Sir Adrian Cadbury following a string of bankruptcies and frauds, ushered in a wave of corporate governance changes. In the early 2000s the focus was shifted to Wall Street, with the SEC imposing significant fines upon many of the large investment banks for conflicts of interests relating to research and IPOs.  The global financial crisis too resulted in root and branch reform on almost every aspect of disclosure, transparency, conflicts of interest and governance.

 

All of these reforms were preceded by a recession and inevitably caused a dent (to put it mildly) in investor confidence.

 

However it seems as if markets no longer respond negatively at increased attempts at transparency and regulation. In fact, it is being actively encouraged. In the emerging “alternatives” asset class, we have the opportunity to learn from the lessons of the past and to be more proactive in avoiding history repeating itself.

 

Alternatives as a separate asset class is still in its infancy, with many investments such as peer-to-peer, renewables and PRS yet to experience a whole economic cycle. Therefore investors have every right to be cautious and ask questions. The sector is also very diverse and what constitutes “alternative finance” has changed as lending has evolved. Compared to now, when there are a number of established alternative direct lenders, two years ago an investor might have read alternative as peer-to-peer.

 

It is therefore the responsibility of the managers to be as transparent as possible. This was something that we felt very strongly about when we listed RM Secured Direct Lending in 2016. Any loss or gain in our investments is recorded monthly, independently verified and communicated to our stakeholders. However there are very few that do this. Others might argue that a monthly valuation is unnecessary but there can be no doubt that managers ought to ensure that investors are as well informed as possible at all times. Investors too ought to be asking the right questions: what due diligence is there, how are the deals structured and what is the leverage?

 

Data from the London Stock Exchange shows that Alternatives have raised over £4.30bn in the listed space alone over the last year, in response to the growing demand from investors and the companies they lend to. As our asset class continues to grow, we are all responsible for its reputation and greater transparency will drive industry standards and improve the standing of the asset class overall.

 

 

Pietro Nicholls, is the Co-Manager of RM Secured Direct Lending PLC, a listed investment trust which specialises in asset backed lending.

 

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