As tougher regulations have been imposed post-financial crisis, traditional banks and bank lending has been drastically cut back, providing the catalyst for the meteoric rise of alternative lending from private capital sources. The increased interest in allocating to this space has culminated in intense global competition and the time has come for firms to seek new pastures and foreign allocation. Cross border lending has thus provided exciting opportunities for sustaining these high returns whilst not having to compromise on the quality of the underlying collateral.
The global alternative lending market has grown exponentially in the last 10 years. The total volume of institutional assets under management allocated to private debt is estimated to be in excess of US$650bn globally.
So... why has alternative lending become so popular?
1. The banks are lending less
The Banks have reduced lending capacities, especially to smaller, private companies. In the EU this is due to regulatory capital requirements and deleveraging, thus limiting the sources of capital domestically. With a recovering global economy, this has driven considerable demand for companies to (re)finance loans to enable growth. Private lending has benefited, the growing demand for loans when banks aren't openly lending has presented a gap in the market. It didn't take long for private lenders to identify this and capitalize on the growing market opportunity.
2. Higher yield's
In an ultra-low interest world, investors are seeking ways in which to increase their yields, simple. In the absence of high fixed-income investments, investors are adjusting their risk appetite in search of these higher yields. On the other side of the transaction small to medium size businesses that have struggled to obtain loans from cautious banking institutions have lapped up the opportunity to receive financing albeit its higher costs of capital. However, these opportunities for lenders who have a narrow fishnet are dwindling due to the influx of lending capital in the space driving down yields and leading some managers to consider looser collateral in order to hit higher returns. Those who have expanded their catchment globally will be in a better position to diversify and secure their positions and still demand higher yields.
3. Time
Time is everyone's worst enemy - but in this case, mostly the banks. A small business loan in the US can take anywhere from 60-90 days. The lethargic processes in banking institutions and the red tape companies have to get through drags out a process that has been streamlined by private lenders. There are lenders out there that can lend in a matter of days (there is a premium to be paid for this) but most can usually fund within two to four weeks (sometimes the same day). Markedly quicker than their banking counterparts. This speed to market enables them to pip banks at the post even if they come to a transaction later on.
What to keep in mind
With the tightening of bank lending and the increase of debt-oriented funds globally, we are very much looking at a community of investors that are only going to compete for prime domestic lending opportunities. This increased competitiveness in the direct lending market has forced many to look offshore for income-generating investment opportunities in order to not succumb to weaker protections for lenders.
However, searching for higher yields and a quick turn around on investments should not be done so in disregard of the risk associated with cross border investments and currency swings. It is important to work with an FX specialist to help determine foreign currency exposure and ensure that these higher expected returns are not impacted and ultimately diminished by currency movements. Read more about what Lenders and investors should be considering when they are allocating capital cross borders.
Deaglo provides the next generation of banking and foreign exchange risk management advisory. If you are an investor or lender looking at cross border opportunities then you can talk with our team at Deaglo to discuss the best execution and our innovative strategies and ensure that you are protecting your returns.
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