Expanding Portfolio Diversity Through Fintech-Enabled Private Credit

The move to a higher-for-longer, interest rate environment has highlighted the growing attractiveness of private credit lending strategies. Institutional demand for private credit strategies has grown significantly over the past decade, and the outlook for private credit is very favorable given the regime shift to a higher interest rate & inflation environment.¹ Private lenders are playing an increasingly crucial role in providing credit to small and medium size businesses (SME’s) as banking sector stress and the attendant increased regulatory pressures have reduced the availability of bank credit (and increased the cost of borrowing).²

In particular, Fintech-enabled receivables and consumer lending strategies are a niche, new asset class within the broader private credit asset class ecosystem. The structure of these lending strategies allows for the avoidance of asset-liability mismatches and typically use only a small amount of leverage. Fintech credit strategies require highly specialised expertise and technology and, as a result, have high barriers to entry. Private credit lending strategies have withstood the test of time by successfully navigating through the extreme market regimes over the past decade.

Fintech credit funds have a different profile relative to typical private lending funds. Private lending funds typically run a concentrated strategy and therefore, take higher risk to try to generate higher returns. Fintech credit funds take a different approach, constructing more diversified portfolios which we believe may result in more stable returns with a lower risk profile. The key differentiators of Fintech lending funds relative to a typical private credit fund are having a multi-platform originator network, loan diversification, leading-edge credit risk management, large IT-oriented team, and an open-ended fund structure.

In summary, non-bank lenders have been taking the lead in providing capital to creditworthy borrowers who cannot access traditional financing, as financial technology has increased the efficiency of financial transactions for both businesses and consumers. Fintech credit funds, like Fasanara’s, are responding to the higher interest rate environment by attempting to price loan transactions at an additional premium to enhance returns. We believe that Fintech credit strategies are an attractive diversifier to typical private lending funds and they provide much needed support to small and medium-sized enterprises (SMEs) and consumers, which has a direct, positive impact on the real economy.

1 https://www.thestar.com.my/business/business-news/2023/06/06/private-credit-poised-for-multi-trillion-dollar-boom
2 https://fred.stlouisfed.org/series/DRTSCIS

Endnotes

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Important information on risk

Investing involves risk. The value of any investment and the income from such can go down as well as up, and you may not get back the full amount invested. Past performance is not a guarantee of future returns. Changes in the rate of exchange may also cause the value of overseas investments to go up or down. This information represents the views of Fasanara Capital Ltd and its investment specialists. It is not intended to be a forecast of future events and/or guarantee of any future result. Information was obtained from third party sources, which we believe to be reliable but are not guaranteed as to their accuracy or completeness. There is no assurance that an investment will provide positive performance over any period of time. This information does not constitute investment research as defined under MiFID.