Europe 2018: Four key trends investors can benefit from in Alternative Lending

10/01/2018

This year promises to be a very exciting one for alternative lending, with new players gaining prominence, potential for consolidation growing and new partnerships emerging. Gabriella Kindert, Head of Alternative Credit at NN Investment Partners, explores the trends that are likely to impact the alternative lending landscape in 2018 and how investors can benefit from them.

Trend 1. Intensifying competition & Open Network Collaboration (ONC)

European banks have more capacity to put their balance sheets to work again. However, they are challenged by new regulatory requirements, margin compression and the question of how to capitalise on digital opportunities. With the European Union’s revised Payment Services Directive (PSD2) coming into force in January 2018, banks will need to open their data to third parties upon request. This will further drive disintermediation and will enable niche players to gain scale. These opportunities offer solutions, including more efficient payments, settlement and know-your-customer processes. “Plug-and-play” connected lending will become more common. Some call this trend “open banking”, but I believe the term “open network collaboration” describes it more adequately. Technologies such as blockchain will fundamentally change how banks analyse and manage risks and how they interact with each other.

Alternative lending/private debt fundraising reached a record in 2017 (Alcentra, ICG, HayFin, Bluebay) and needs to be invested (IPE, Deloitte 2017). Institutional investors are showing increasing interest in some of these platforms, especially since many Fintech platforms have reached the “investable” size.

For many fintech platforms, 2018 will be a watershed year.

Lending remains a value-driven, capital-intensive business, and it is hard to maintain competitive business models without scale and/or a clearly defined niche. In 2018, a multi-partner approach will dominate the market news, with various players entering multiple co-operations and investment forms, such as direct equity investments, investment programs and partnerships.

Investors should establish strong partnerships to secure deal flow and monitor/control their required criteria to ensure that the risk profile of their investments does not deteriorate. They should also review the opportunities to invest in high-quality digital platforms lending to SMEs and consumers, where significant opportunities still exist, although the risks should be assessed and monitored.

Graph 1. Key Trends in Alternative Lending 2018

Source: Gabriella Kindert

Trend 2. Consolidation and new emerging players in the financial services sector

Data-driven E-commerce companies from outside Europe and from outside the financial sector are gaining importance in financial services. Amazon, for example, has stepped into business lending in recent years.

The fact that some of these E-commerce companies will be buying E-commerce platforms in Europe as a base to provide financial services cannot be ignored. China’s role in the global (including European) financial system is growing. In recent years, both Alipay and WeChat have increased their presence in international markets.

In the last decade, the relative strength of European financial institutions has also decreased from 36% to 14% in the market cap of the top 50 financial institutions. This might offer opportunities for acquiring continental European players. Investors should also consider establishing partnerships beyond traditional financial services institutions.

Graph 2. Market Cap of Top 50 Financial Institutions 2007-2017

Source: Author based on Thomson Reuters Data

Trend 3. Increased data transparency and harmonisation requirements

A diverse financial services industry may bring forth several advantages for customers and investors by enhancing the resilience of the credit markets. It should, however, be tempered with an astute understanding of the counterparty risks, especially those related to players who operate outside the regulatory framework.

Today, assessing alternative lending platforms is hard work. Investors should be mindful of data transaprency and turn to external parties to validate and compare performance data.

Trend 4. Growth and disruption in shorter-term financing solutions

Returns on credit cards and short-term loans to households are areas where data can play a major difference in risk pricing, and where digital technologies and business models could change the status quo and offer more effective solutions. Disruption in these segments is long overdue. Numerous emerging fintech solutions are addressing this market opportunity. A recent example is the entrance of Barclays into online consumer lending.

Investors should bear in mind that the credit market has changed. The lending gap opportunity has become heterogeneous and some product areas are overheated.

But premiums are interesting with regard to short-term lending, consumer finance, trade finance, invoice discounting and receivable financing. Also, smaller businesses still suffer from a lack of funding due to low ratings and high acceptance costs. This is the sector where innovative direct lending and marketplace lending solutions can make a major difference via a technology-savvy setup.

Complex, illiquid investments such as commercial real estate and export credit agency loans or financing in the shipping sector still offer investors high premiums over liquid markets.

Graph 3. Markets still offers opportunities for efficiency

Source: Author based on ECB Data, European Data Warehouse

Conclusion

Alternative lending will undergo an exciting transition in 2018, with further disintermediation and new players gaining market share. The digital transformation, enabled by new technologies such as blockchain, allows new dimensions of interaction, risk transparency and client intimacy.

Simulataneously, the alternative lending market will become more mature and institutionalised. Predictive analytical skills will identify new lending opportunities and better risk pricing. The open architecture and open network collaboration will eventually provide better products and services to customers. The emerging players will offer financing options to many innovative companies and consumers that currently may not have access to competitive funding. Technology-driven lending solutions will become mainstream.

I foresee a dynamic market with tight deadlines – and with distinct opportunities for those with clear value offerings.

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About the author

Gabriella Kindert

Gabriella Kindert

Head of Alternative Credit

Experience since 1995

Business Experience

2016-to date Gabriella is Head of the Alternative Credit Boutique at NN Investment Partners

2013-2016 Partner, strategic advisor to large financial institutions (OTD, credit restructuring), Investfair BV

2009-2012 Managing Partner at Kerten Private Equity, responsible for global Private Equity and Debt investments.

2007-2011 Head of Global Loans , BNP Paribas IP (former Fortis Investments), responsible for a team managing credit loan portfolios for institutional investors. Member of Management team in Global Credit

2001-2006 Head of Portfolio and Risk Management, Acquisition & Leveraged Finance, responsible for a team of portfolio and risk managers at Fortis Bank (former MeesPierson)

1998-2001 International Management trainee and Credit analyst at Mees Pierson, responsible for credit analysis of leveraged finance and project finance transactions

1995-1997 Founding Partner, DBH Group. Leading PE form in CEE.

Qualifications

Ph.D. candidate, International School of Management, Paris
MBA in Accounting and Finance, Maastricht School of Management, 1998
MA in Economics, Corvinus University, Budapest,1997
MA in History, KLTE University Debrecen, 1995

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