INCOME OPPORTUNITIES IN ALTERNATIVE CREDIT
HOSTED at Nabarro LLP, 125 London Wall, EC2Y 5AL
WEDNESDAY 8TH FEBRUARY 2017
WELCOME TO OUR TO OUR INCOME OPPORTUNITIES IN ALTERNATIVE CREDIT SEMINAR REVIEW
The scramble away from fixed income in recent years by institutional investors alongside the dis-intermediation of the banking system post-2008 has prompted the growth of a new asset class: Alternative Credit.
AltFi’s inaugural Alternative Credit Seminar provided, over the course of a morning, a thorough data-driven exploration and analysis into one of most interesting and fast growing areas of fund management. The budding universe of funds within the Alternative Credit universe includes areas of the market such as direct lending, asset leasing, mezzanine debt, peer-to-peer lending and SME loans.
The first of its kind in London, it brought together an audience circa 100+ comprised of wealth managers, family offices, hedge fund managers, funds-of-funds managers, portfolio managers and other professional fund selectors and financial advisers who were also joined by industry experts and alternative credit fund managers. Participants also benefited from Continuing Professional Development certification.
Introduction to Alternative Credit: Opportunities and risks
David Stevenson, Altfi
- AltFi’s executive director David Stevenson argued forcefully that debt securities are the most efficient method for recycling capital globally. “The world is addicted to debt,” he said.
- He said that the alternative credit asset class had risen to prominence due to depressed bond yields. Investors in alternative credit get a good jump over corporate bond yields, but that premium comes with illiquidity.
- The two big questions for investors at this stage are: how will the asset class fare through a downturn, and what is the investment capacity of the big players?
Session 1: Mapping out the Alternative Credit universe of funds
Josh Matthews, Maseco Private Wealth
Matthews laid out the types of investment channels that exist within the sector. These include closed and open ended funds, which can be listed or private, institutional or retail, and can also vary in terms of their size, fees (active or passive) and geographical focus.
- The sorts of strategies employed by these entities can vary based on capacity, who they’re lending to, duration, liquidity, exposure (secured vs. unsecured), type of credit risk, and so on.
- The asset class encompasses a diverse range of assets, from trade finance in Africa to student debt in the US.
- Direct lending is a lot bigger as a market than peer-to-peer lending, but with a lower investor to borrower ratio.
- “Investor appetite for alternative credit is booming at the moment.”
Session 2: Opportunities in the SME Lending market
Ken Hunniset, Head of Public Sector, Triple Point
- Hunniset stressed that alternative credit covers all the same products that are delivered by the banks.
- £85bn was lent by private credit funds last year – dwarfs the P2P sector.
- He said that Advancr/Triple Point and others, crucially, are technology enabled businesses, but finance businesses first and foremost.
- He further stressed that the alternative finance market is now a mature market with robust credit and internal processes, wondering aloud whether the time had come to dispense with the term “alternative”.
Session 3: P2P investing for wealth managers, a natural fit or a risky nascent market?
Rupert Taylor, Altfi Data
- Taylor argued that the traditional processes in credit application and underwriting with the banks have become a mess, and that technology can massively improve these processes.
- He said that he would hesitate to say that peer-to-peer lending is a wholly uncorrelated asset class, but that it is “certainly” a diversifier.
- He also said that the industry has now established an impressive track record of strong, independently verified net returns.
- He said that there is a classic agent/principal conflict at the heart of peer-to-peer lending, but that effective disclosure can resolve this by ensuring that investor suffering equals originator suffering.
Panel Discussion 1 : P2P and financial intermediaries
Ceri Williams (Ratesetter), Stuart Lunn (Lending Crowd), Brian Bartaby (Proplend), Jake Wombwell-Povey (Goji).
- Ceri Williams from RateSetter said that take-up on their bespoke IFA portal so far had been lukewarm. “I’m slightly unconvinced about how much money is in it for the advisor,” he said.
- Jake Wombwell-Povey of Goji said that he thinks advisors can make decent money out of P2P, but that the level of advice risk they’re taking on isn’t comparable to asset classes (for now).
- Stuart Lunn from Lending Crowd said that his platform had pivoted away from a self-selection model in order to suit the needs of advisors.
- Brian Bartaby of Proplend said that his strategy has been to discuss individual loans with advisors, in addition to having built them a bespoke portal, like RateSetter.
Session 4: Accessing the niche areas of non-bank lending through closed-ended funds
Monica Tepes, Cantor Fitzgerald
- Monica said that the alternative credit investment trusts yield between 6 and 10 per cent on average.
- She said that diversification – off multiple loan originators and geographies – was among the asset class’ most attractive features.
- There are 20 funds in the direct lending space as she sees it, with a market cap of approximately £6.2bn. Monica splits that into £4.6bn in the more traditional sector, and £1.6bn in fintech. The latter of these is a lot more dominated by consumer loans, with the former focused mostly on business loans.
Panel Discussion 2: Fund Managers in Alternative Credit
Monica Tepes (Cantor Fitzgerald), Sachin Patel (Funding Circle), Simon Champ (MW Eaglewood), Jeremiah Silkowski (SQN), Cormac Leech (Victory Park Capital).
- Sachin Patel of Funding Circle said that his firm created its own passive fund to give institutional investors a means of accessing the platform’s loans ‘pari-passu’ with direct to platform investors. It also provides a means of making the firm’s assets eligible for ISA and SIPP investment.
- On the sector’s maturation, Simon Champ said that MW Eaglewood saw only £8m of loans that fitted its criteria at launch. That number is now up to £300m a month.
- Cormac Leech said that Victory Park Capital had established a strong presence in a wide variety of niches, typically via top venture capital-backed origination partners. He also said that he “strongly believes” in the skin the game as the best aligner of interests.
- Jeremiah said that a key differentiator for SQN has been to lend against assets that are mission critical to a business borrower’s operations.