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  • user 7:35 pm on December 30, 2016 Permalink | Reply
    Tags: alternative lending, , , , , p2p   

    Europe 2017: Key Trends to Watch in Alternative Lending. Interdependence and collaboration. 


    Connectivity and interdependence have increased in most industries, including financial services in the last decade. In the wave of digital transformation, new business models are born.

    From the crisis of 2008 to date, EUR 19 billion has been invested in companies (CB Insight, 2016) with hundreds of them newly founded. Though this number may not seem very high in the context of the balance sheets of the entire financial sector (EUR 28 trillion) or the recent fines some needed to pay, there are many aspects that are clearly changing in the landscape of financial services. Customer expectations drive changes in business models. New partnerships as well as methods of connecting borrowers and lenders are born.

    Herein I provide my reflection on recent trends and highlight some key predictions for 2017 in the landscape in .

    1)    Banks will continue to shrink their Balance Sheets and will invest in new business models and partnerships

    Europe relies heavily on banks. Therefore, in order to assess the lending ecosystem, I always start with what is going on with the banks. Banks have been shrinking their balance sheets since the crisis. In 2008, the total assets of banks in the Euro region stood at EUR 33 trillion and declined to EUR 28 trillion by 2015 (ECB, 2016). Just to put this number into context, the decline is higher than the combined balanced sheet of five major banks (Rabobank, ING, ABNAMRO, Deutsche Bank and Unicredit) as of June 30, 2016.

    In terms of profitability, it did not really improve this year. Interest rates continued to be low, capital requirements became harder, compliance rules and penalties remain harsh.

    The first 6 months of financials in 2016 indicate declining trends in many aspects, including revenue and deposits. The net interest margin of the Top 10 listed banks in the sector further reduced to below 1.5%, which is structurally lower than in the US. Return on equity was 5.8%, which remains below the cost of capital, estimated to be around 9%. The prolonged low profitability is very challenging, especially as it coincided with a low equity base and increasing capital requirements.

    Regarding outlook, the quantitative easing program is being extended so any interest rate hike is pushed well into the future. This environment forces banks to be more efficient with all of their key resources: people, branch network, system and their balance sheet. In practice, this implies closing down branch offices, reduction of headcount, further consolidation and tighter balance sheet management. Since the peak of 2008 till 2016, more than 350,000 jobs disappeared. This seems high, but between 2000 and 2008, almost 1 million jobs had been added to the sector. In this context, there might be still potential for job cuts. (The figures are based on listed banks representing approximately 80% of the total assets of the European sector.)

    In order to create operational leverage of their business origination capacity, banks are likely to rely on future partnerships.

    Banks will further explore alternative lending avenues and strengthen cooperation with institutional investors and Fintech companies. This creates new attractive opportunities for investors or potential partners that may have limited business origination or risk management capabilities but offer balance sheet capacity or more efficient business execution.

     2)    Political support to alternative lending will strengthen

    The funding needs of the European economy remains larger than ever. The sentiment that Europe in terms of economic growth is lagging behind the USA seems more widespread than ever. The need for a more diversified funding source in Europe is more urgent than ever.

    I see strong evidence that the conviction among key decision and policy makers in Europe is leaning towards increased lending via alternative sources. Over-reliance on banks made us too vulnerable and constrained our economic development and we need to increase resilience via diversifying funding sources towards the European economy.

    This vulnerability of Europe is clearly illustrated by the Basel IV debate in recent months. The proposed legislations, which had been discussed in Santiago some weeks ago, favor a regime shift towards a less risk-based approach for credit risk. These would need to be aligned and inserted in capital requirements of European banks (Capital Directive) with very significant potential impact on the economy, including mortgage lending. Proposals to increase capital requirements for lower risk-weight portfolios, such as mortgage loans are disproportionately hitting European banks (Fitch, 2016).

    As the European banking system finances about 75% of the economy, the potential adverse impacts are a lot higher. In contrast, only 25% of the US economy is financed by banks. It is largely capital market-based and long-term residential property risks are covered by government agencies (Fannie Mae and Freddie Mac). This diversification enables the US banks to operate with lighter balance sheets and any new legislation has less impact. 

    European banks are more sensitive to any regime shift and could be forced to decrease their direct lending to corporations and households. More importantly, any of these adverse changes in lending capacity has a direct impact on the economy. They understandably issued a strong pushback on the proposal.

    This illustrates profound vulnerability. As Olivier Guersent, DG for Financial Stability, Financial Services and Capital Market Union at EU pointed out this month, “We have to set the rate of retention in securitization market to make sure that there is a market. Legislations are no use if there is no market anymore.”

    I believe our policy makers in Europe will become more articulate about the need for a diversification of funding sources.

    This implies a stronger push for support for developing alternative lending channels, securitization market and capital market union initiatives. There is also likely to be more scrutiny and consequently, regulation to ensure consistency and a more level playing field between risks of banks and non-banks and transparency to investors about risks they are taking.

    3)    Institutional investors will show increasing acceptance to alternative fixed income products (e.g. private debt)

    The search for yield remains a key theme in a low-return, volatile environment. Those who can deal with and accept the illiquid nature of the asset class will find a safe haven in private debt. These assets have limited liquidity and mark-to-market pricing; consequently, they “look and feel” stable.

    Institutional investors (insurance companies, pension funds, etc.) are inherently more suited to participate in funding the economy because they capture a large percentage of long-term savings. However, the infrastructure to facilitate this remains mostly at the banks and the investments need to be channeled via capital markets and partnerships. The growth of partnerships has been painstakingly slow. There needs to be significant education and convincing done also at supervisory board level at these institutions.

    Last but not least, investors seem to have high return expectations from private debt instruments that need to be managed. At the moment, a high percentage of investments are going to the highest risk basket in private debt (e.g., direct lending with return exceptions of 6-10%). The potential private debt universe is a lot larger than lending at 6-10% to sub-investment-grade companies. European banks have about 1.5% net interest margin and lend at an average interest rate of 2.5%. The bulk of the traditional banking products are safer assets and can be an excellent alternative to traditional fixed income products. Some of these new assets classes (like Dutch mortgages) has been favored by many institutional investors recently and a lot of similar product initiatives are likely to come.

    4)    Fintech: Getting more mature, more regulated with new collaborations

    Many companies were formed with a mission to implement a new business model in the financial services industry. 2017 is likely to be an important year for Fintech when many of these business models will be tested on their ability to scale and operate under increasing regulatory scrutiny. The market will understand the significant differences between certain sub-segments of Fintech companies. Payments and services are likely to cause the most disruption and we will see further diversification of deposits payments from retail clients.

    Some new companies will simply run out of money to support their business model. The market is likely to test the real value contribution of “smart algorithms”. With increased interdependence, potential defaults will have negative impact on others in the sector.  Fintech companies will further recognize the importance of operating in a regulated environment in order to build trust and scale their business model. Regulations above a certain size is inevitable and unfortunately, extremely costly (systems, KYC, compliance and risk management costs). In contrasts, risk management and compliance are core competencies of banks and the associated costs are already inherent.

    Rather than perceiving Fintech companies as competitors, financial services companies will be reviewing avenues to develop collaboration models for mutual benefit and assess to what extent they can incorporate innovative business ideas in their incumbent setup.

    Many financial services companies (e.g., BBVA, Santander, Goldman Sachs, JP Morgan) have established incubation centers, dedicated VC activities and M&A departments to capture on the most interesting opportunities.

    A recent survey conducted by Roland Berger confirms that over 85% of Fintech companies anticipate stronger cooperation with incumbents. The most important reason mentioned was the access to a stronger customer base.

    The power of this approach is to ensure that business or product innovation can be scaled up in a regulated environment, create a mode of comfort and eventually generate a critical mass.

    Companies on different sides (banks, investors, Fintech companies) will have to realize that a collaborative approach is a very powerful way not just to overcome the challenges they face but to thrive.

    is Head of Alternative Credit – NN Investment Partners and this article was originally published here.

  • user 7:36 am on June 14, 2016 Permalink | Reply
    Tags: , , , , p2p,   

    Marketplace Lending: Attractive, Stable Returns in a Zero Interest Rate World. 


    “Global yields lowest in 500 years of recorded history. $10 trillion of negative interest rate bonds. This is a supernova that will explode one day”    

    -Bill Gross, Co-founder of PIMCO

    Legendary bond investor Bill Gross doesn´t mince words here. The coming supernova will destroy the life savings of countless hard working people worldwide. Yet most investors continue sleepwalking toward an impoverished future. Not only is a very large percentage of private savings held in today´s radically overvalued government and corporate bonds, but most public and private pension savings as well are invested in these same markets.

    Why do savings continue to pour into government and corporate bonds despite very low or even negative yields and the potential for huge losses when interest rates normalize at some future time? Based on my twenty-five years of experience as an advisor, my guess would be simply momentum, along with a self-serving investment management industry that consistently puts the customer´s interest last. Asset management is a huge industry that continues to turn its wheels as it has for decades, investing a large share of the savings of its customers in government and corporate bonds. The fact that the endless quantitative-easing bond purchasing programs by leading central has distorted the fixed-income capital markets to a very dangerous extent is not sufficient to stop these wheels, especially while billions of dollars in fees and commissions depend on continuing to do “business as usual”. 

    What is an investor to do? The answer is surprisingly simple. The first step to get out of a hole is to stop digging. Accept Bill Gross´ wake-up call, and invest no further in traditional bonds or bond funds that hold overvalued, often negative yielding fixed income instruments. Rather, take some time, do some research, and educate oneself about the growing alternatives to traditional fixed income that do provide for steady, attractive returns without the risk of being burned in the supernova that Bill Gross predicts. In short, my recommendation is to turn to

    Marketplace lending, also known as marketplace finance, is where savers can secure attractive returns by lending funds to individuals and businesses directly without the intervention of banks or purchasing bonds on the public exchanges. These loans can be made directly through any number of online platforms, or through investment in specialized investment vehicles (mutual funds or unit investment trusts) that focus on marketplace finance. At this point, the track-record is sufficiently clear, and the new investment vehicles sufficiently developed for me to make this recommendation to any serious client who is willing to learn new ways of building their savings without accepting the risks of grossly overvalued bonds.

    A further advantage of this approach to achieving reasonable returns on savings is that marketplace finance largely focuses on short maturities (as short as 60 to 90 days, and almost never more than 3 years). These short maturities reflect the needs of business and individuals for loans (often secured by assets or insurance policies) for inventory acquisition, trade finance, small business expansion, aircraft leasing, consumer loans, factoring, discounting  invoices, or any of a myriad of alternatives that allow investors to earn returns from deploying their savings into the real economy of commerce and trade, rather than the quantitative easing bubble in the public bond markets created by central banks since the 2007 financial meltdown. An important advantage of these short maturities is that they permit “self liquidation”, allowing the investor to recover invested funds if necessary through maturity of the underlying loans, even if secondary markets are disrupted during a financial crisis. 

    Let´s look at the track-record now. For US investors, the Orchard US Consumer Marketplace Lending Index demonstrates a 6% return in the last twelve months, with notable stability and predictability that will allow even anxious investors to sleep at night. 


    In case one believes that the US experience is exceptional, let´s look at the UK market, where the Liberum Alfi Returns index tracks investor returns from the leading marketplace lending platforms in Great Britain. Once again, the twelve month lagging return is approximately 6%. It is noteworthy that this index demonstrates that even in the midst of the financial crisis of 2007-2008, investor returns never were lower than 5%.


    Finally, for investors who prefer to delegate to professional management rather than lend directly on platforms, I would recommend the pioneering and innovative Luxembourg SICAV-SIF,  Synthesis Market-Based Financing Fund.   Founder and CEO  Spyros Papadopoulos has built an attractive track record of over three years of positive returns month after month through employing a variety of lending strategies moving well beyond , with a particular expertise in trade finance. 


    As per the warning from Bill Gross, there is a clear and present danger in the bond markets today that could have catastrophic consequences for savers, as well as wiping out their public and private pension plans. The good news is that there are alternatives available for investors who are willing to face the facts and make the effort now to learn about the attractive and low volatility returns that marketplace finance can provide. 

    is Partner at Clearwater Private Investment and this post was originally published on linkedin.

  • user 8:41 pm on June 1, 2016 Permalink | Reply
    Tags: , , , p2p   

    Direct Lending: The Making of a Market 


    Eight years after the financial crisis there is no sign of returning to their all-dominant position in the economy. New capital markets have sprung up and are themselves now experiencing growing pains. How can one of them – the institutional ‘direct ‘ sector – now reach its potential and become a permanent option for Europe’s capital-hungry companies?  

    Crowd-funding and lending arrived on the financial scene with an almighty splash soon after the financial crisis. At the same time quieter but perhaps equally significant waters have been starting to flow deeper in the financial system. The ‘direct lending’ sector – where large savings institutions channel credit to companies via expert asset managers but without the involvement of banks – has grown steadily but significantly since 2008. Direct lending funds are now raising about $100bn per year globally from pension funds and insurance companies, about eight times the amount of only four years ago. Low interest rates have made the corporate debt funds being offered by these lenders an essential allocation for increasing numbers of institutional investors, despite their lack of liquidity. Regulators have embraced the emergence of the direct lending managers as an opportunity to shift some financing activity from a crisis-ridden and systemically threatening banking sector to patient pension funds. Some governments, including the UK, have even made seed money available to stimulate the launch of new direct lenders, such is the desire to nurture that elusive creature – a large and stable credit .    

    But still, the direct lending market hasn’t yet worked out as some of its participants and promoters hope it will. This is because only a fraction of the expert lending funds now raising capital from big savings institutions will lend direct to firms for growth or refinancing purposes – what’s known in the market as ‘sponsorless’ lending. The overwhelming majority of the $400-500bn in direct lending capital raised since the 2008 crisis has been lent to private equity firms – ‘sponsors’ – to carry out leveraged buyouts. While the sponsors point to evidence that they most often improve companies’ performance and create jobs, the sector understandably sticks to its favourite industries and is highly cyclical. Moreover, private equity sponsors will tend to use their financial firepower on larger deals, or to buy familiar firms being recycled through the market by their peers. Some of the larger European direct lending funds raised in the past year have been providing individual loans of over 100m per clip to private equity buyouts. The $100bn annual global private debt raised is so concentrated in buyouts that it is not registering as even the tiniest blip for the broad mass of small and medium-sized firms in Europe. Credit provision is still way down on pre-crisis levels and Europe is stumbling along with paltry growth.

    It is not that there haven’t been notable past successes to build on in ‘sponsorless’ lending. Asset management groups like Harbert Management in the USA and Mezzanine Management (MML) in Europe have been successfully running sponsorless lending funds for their investors since the early 2000s. However, these firms and their peers typically offer high-interest growth capital (known as variously as mezzanine) to entrepreneurs and family-owned business keen to keep their equity intact. This is a niche play therefore, suitable for certain types of borrowers and for certain types of investors looking to invest in niche funds for higher returns. These sponsorless mezzanine funds have also been far smaller than the multi-billion mega-funds now offering senior credit to the big buyout deals. Some of the most successful sponsorless lending funds have been set up in one country where the expert manager feels comfortable investing in niche sectors. These country funds are typically less than one twentieth of the size of the big debt funds now being raised.

    What is holding back the big new direct lending funds from now scaling up their sponsorless lending activity? Why are they not reaching out to the tens of thousands of middle market companies across Europe seeking financing options? Firstly there is the justifiable consideration of risk in the smaller, sponsorless deals. However industry analysts point to compelling data that shows sponsorless companies carrying less leveraged balance sheets than private equity-backed firms. Lenders are often able to negotiate more favourable terms – and higher returns – where a firm is independently owned and operating well. There is also an element of the ‘path of least resistance’ at play. A manager can deploy a 2 billion fund in 20 buyout debt deals at $100m each where a private equity firm has done the due diligence in each case and provided them with all the financial data in tidy packets. Otherwise the debt fund manager would need to do their own due diligence on large numbers of sponsorless borrowers where data is relatively scarce and financial sophistication is potentially low. Faced with these two alternatives for a similar level of fees to earn – between 1% and 1.5% per annum and a performance fee – it is hard to argue against the buyout option – as long as it is available. And this is a paramount question at this stage in the credit cycle. Participants in the sponsorless lending sector stress that they would rather not take the risk of being beholden to a highly competitive and cyclical M&A and LBO market. They also argue that the two options are not ‘apples to apples’: the higher return and lower leverage in the sponsorless sector outweigh the greater difficulty of accessing suitable borrowers as they build their asset management firms.

    From here I see four clear requirements for the direct lending market now to break out of the private equity trench and start to connect meaningfully with small and mid-sized companies. Some of these are indeed already in train and the prospects look fair. But without each of these four things happening the big, profitable and sustainable direct lending market that many have envisaged may never emerge.

    1. Become truly ‘investable’ for the large pension funds

    To attract the big allocators such as sovereign funds and state pensions, the sponsorless lending market firstly needs to offer bigger funds. Few funds making direct business loans have a final size target of more than 400m. This is the actual ticket size of some sovereign funds, which is why they have to allocate to the 2bn+private equity debt funds. What would be the attraction of such funds to these large allocators? Direct SME lenders point to several. The funds offer much-needed diversification for investors from their private equity commitments, which may be exposing them to the same underlying deals across several debt and equity funds. Furthermore, sponsorless fund investors can typically be shown higher returns than buyout debt funds, while portfolios are themselves more granular than in the debt mega-funds. But these positive investment attributes count for naught if they can’t invest for technical reasons because the fund is too small for their ticket size. To run bigger funds, asset managers will need to build out well-resourced, fully AIFM-compliant platforms, so strong backing will be required for new players and new teams. New asset managers-forming who are not blessed with large capital sources of their own to pay for teams and the costs of a large platform have to be prepared to share equity in their platform. Several talented new start-up direct lenders in Europe have done just that and shared what looked like large stakes in their management company with key investors and other backers. One or two have grown to 5bn or more under management in a few short years and bought out their original backers. For some asset managers independence is everything, but independence without options in a competitive market like this is can be a deadly trap.   

     2. Understand and serve the insurers better

    Despite complications associated with their Solvency II regulations, some of the most prominent insurance names in the UK, France, Germany and Scandinavia have begun to allocate small percentages of their vast asset books to illiquid debt funds to enhance yields. In most cases, however, insurance companies have been channelled to the senior debt of the private equity LBO market. To make the sponsorless lending market investable for insurers, three things are required. Firstly, asset managers need to originate primarily senior debt rather than mezzanine or growth capital in sponsorless situations. This means operating alongside banks in Europe and adding extra capital where needed to senior corporate debt transactions rather than being in subordinated positions to banks. Secondly, asset managers will need to establish credit platforms that insurance companies can be comfortable with. This may mean independent credit groups or even ratings assignment processes which insurers can become comfortable with. Finally, these funds will also need to be far bigger than the typical sponsorless offerings. Funds of less than 500m will not be able to take the ticket size of insurers, who do not have the capacity to analyse many different fund managers.

     3. Educate and help to ‘professionalise’ SMEs  

    The most common reason fund managers cite for not pushing more actively into direct business lending is the lack of professional processes when they deal with potential borrowers. A private equity-backed company will bend over backwards to make it easy for lenders to understand and get comfortable with a credit. In a true direct lending situation the lender may be working from scratch with limited financials and may be working with a management team who have never before worked with non-bank lenders. This provides a big opportunity for advisers to potential borrowers and the fund management community. By providing a professional advisory service to management teams, an advisor can play a useful role. Typically debt advisors have worked to place debt into the private equity community. As more capital comes in to the sponsorless sector, advisory boutiques can gear up to play a crucial role in arranging new deals. Simply modelling a companies past and projected cash flow in detail and providing a detailed professional offering memorandum will make the job much easier for the many direct lenders who have capital available.  

     4. Revive the funds of funds

    A crucial catalyst in the early development of the private equity and hedge fund sectors was the development of a large funds of funds market. For a large investor allocating for the first time to esoteric new asset classes an efficient way to get exposed was to park money with a fund of funds who would do the due diligence on a range of different funds. As those markets have matured investors have become less willing to pay the double layer of fees that a fund of funds involves. However, for a large pension investor to access the smaller sponsorless debt managers who are lending in one country where they have deep local presence, a fund of funds may be the right model. Funds of funds catering to the German market like Yielco Investments and Golding Capital Partners have successfully allocated to specialist debt managers on behalf of their own investor clients. Finnish direct lending and private equity expert Certior is advising clients on how to allocate into single country lending funds. Further development of this sector is required to further boost sponsorless lending.


    If these opportunities are grasped by market participants over the coming period there is a good chance that a permanent funnel from the savings system into SMEs will open up. Yes, asset managers will need to work to set up the right systems, advisors will have to retool some of their processes and investors themselves will need to take the time to understand different risks. The upside for investors will be greater diversification and more yield. Asset managers themselves will be able to develop new products and serve new clients. SME companies will be able to access patient and potentially more understanding capital pools. Collectively we will have laid at least one ground-stone for a more resilient, less cyclical credit system.  

    is Managing Partner at Arbour Partners and this post was originally published on linkedin.

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