The rising importance of private debt as an asset class

Tags: , , , Published On: 02.08.2021

There is an academic and slightly boring way of lecturing about private debt as an asset class. It goes somewhat like this: yields are low, new investable assets are needed, and here is a few charts about a trendline showing that the year to year growth rates are climbing when it comes to private debt investments. Done.

Let’s take a slightly different approach today and go the practitioner’s way. First of all, private debt investments today are not a new trend, but more somewhat like electric cars – they are already rather omnipresent and if you buy a Diesel today, well, good luck with selling it again in a few years. Most professional investors have their private debt investments as part of the mix already – in the US even more so.

One of the common concerns about private debt is the wide area of expertise that is required to invest, especially if you consider that private debt can be anything from a large direct project finance loan to a short-running invoice factoring deal, a standard SME loan, mortgages or consumer loans.

Private debt investments do require specialist knowledge, and the knowledge required is different for each of the various forms of private debt. For example, if you directly invest into a 100 million dollar project loan, you will want to understand the project itself, which is a bespoke process. On the other hand, if you invest in a portfolio of consumer loans, the approach will be more driven by data- and statistics. However, the requirement for this specialist knowledge should not be seen as a stumbling block, because there is a real opportunity hidden in the complexity.

When we talk about the evolving trend of private debt investments, we’re talking about a very specific segment of the market. While investments of large loans are either hyper-standardised and low-yielding (e.g. municipal loans), or specialised and mid-yielding (e.g. project finance), there is a sector that spans from short-duration invoices over consumer loans to SME and mortgage loans that is available through a rather technology-driven approach.

Here’s where the story becomes interesting.

In Europe we have more than 700 alternative lending platforms, as well as large and small banks that are seeking to sell parts of their loan origination. While many established banks still use non-digital workflows for their origination, most lending platforms are close to having their assets in a digital form. Additionally, more and more banks are transforming their loan origination businesses into digital workflows, which helps them compete with the platforms on the digital end. As a necessity, the backend processes are also being digitized. This means that the trend to mobilize loans is up and running, and this is good news for investors.

This trend will result in a continuous increase of investable assets. The investments can be done either directly, through technology providers like CrossLend, or through asset management and fund structures that handle the deployment of funds in a well-diversified universe of origination opportunities.

In any case, this symbiotic connection of lending and asset-mobilization technology will gain importance very quickly in the mainstream investment strategies. And while the early adopters and quick followers have already established their strategies, the current maturity phase yields many good entry points. However, like in any other quality asset class, the ramp-up of the demand triggers a shortage of available assets, and from our practical experience at CrossLend, we know that funding partnerships between originators and investors tend to be long-term in nature.

Therefore now is the perfect time to secure the newly evolving connections.

Oliver Schimek
Oliver SchimekCEO & Founder

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