Since 1989, banks and building societies in Britain have been shutting branches at a rate of approximately 300 per year, a trend which has dramatically accelerated in recent years as traditional lenders respond to pressure on cutting costs, according to a recent Reuters article.
Against a backdrop of fewer traditional lenders focusing of less commercial and industrial sectors, small businesses are finding it harder to access the finance they need, in an environment where many fixed costs are rising. As a result, alternative lenders have stepped in to fill this gap.
Asset Based Direct Lending is when a lender other than a bank finances corporate debt, often without the involvement of an intermediary such as a broker. The borrowers are usually small to medium sized businesses and the lenders are often asset managers who lend their investors’ capital through a dedicated loan fund.
It is no surprise the sector has seen large inflows and been a very popular theme for forward-looking investors. According to Preqin Research Group, credit strategies were among the most popular hedge / alternative based investment strategies taking in USD 3.6bn in 2015. According to the Asset Based Finance Association, the total amount of asset based lending and invoice finance secured by UK businesses reached a new record high of GBP 20.7bn by the end of 2016.
Prestige Funds, which has been one of the pioneers in the sector with a focus on the UK agriculture sector, has funded 50 of the approximate 540 UK biogas plants. ‘The UK farming is pretty easy to understand’ says Craig Reeves, Founder of Prestige Funds. Prestige raised about USD 250mn in 2017 from investors including several Middle Eastern sovereign wealth funds, a Spanish university endowment and a large Korean based, financial institution.
Asset Based Direct Lending (alternative fixed income) is an increasingly popular credit strategy because it can deliver absolute returns which are uncorrelated to the major asset classes and can offer a hedge against inflation. As it becomes less esoteric, even conservative investors such as pension funds are taking an interest.
As investors are sailing their ships through unchartered waters, direct lending seems to have tremendous potential in the coming years.