Alternative Credit Investor March 2024

Commercial real estate debt crisis looms as loans mature

THE COMMERCIAL real estate debt market is predicted to face a “reckoning” over the coming months as many loans reach maturity.

Heavy exposure to office buildings will cause problems in portfolios as losses start to be realised, according to Rich Byrne, president of Benefit Street Partners, which manages around $75bn (£59.3bn) of assets across a range of credit strategies.

“Banks tend to have at least 30 per cent of their commercial mortgage portfolios in offices,” he told Alternative Credit Investor. “There are a lot of office buildings that are going to be written down dramatically following the transition to working from home and hybrid working post-pandemic. That’s why banks have stopped lending; they’re managing liquidity.”

Byrne noted a lack of deals in the market and predicted that issues

will start to occur over the next few quarters.

“That office exposure is a real value destroyer for a lot of lenders and the reckoning hasn’t even occurred yet,” he added. “I think it’s a slow-moving problem that will rock a lot of institutions that have that exposure.

“Some of the suburban offices could be particularly impacted, which could lead to entire loan amounts being lost.”

Last month, it emerged that bad commercial real estate loans have

overtaken loss reserves at the largest US banks after a substantial rise in late payments linked to offices and shopping centres.

The average reserves at JP Morgan Chase, Citigroup, Goldman Sachs, Morgan Stanley, Bank of America and Wells Fargo, have fallen from $1.60 to 90 cents for every dollar of commercial real estate debt where the borrower is at least 30 days late, according to filings to the Federal Deposit Insurance Corporation.

The problems facing the commercial real estate sector are likely to materialise imminently due to the typical duration of these loans.

Most commercial real estate loans are ‘transitional loans’, a floating rate loan with a three-year maturity, rather than a 20- or 30-year loan with a fixed rate.

As a result, many of these transitional loans are maturing now.

“That’s really concerning because every time a public mortgage REIT reports results, the market is looking to see whether default rates have risen from office exposure,” said Benefit Street Partners’ Byrne.

He added that borrowers may struggle with rising rates, even if lenders are flexible after loans reach maturity.

“Lenders require borrowers to put in rate caps or hedges,” he said.

“This means that >> 4

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EDITORIAL

Suzie Neuwirth

Editor-in-Chief suzie@alternativecreditinvestor.com

Kathryn Gaw Contributing Editor kathryn@alternativecreditinvestor.com

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Alternative Credit Investor has been prepared solely for informational purposes, and is not a solicitation of an offer to buy or sell any peer-to-peer finance product, or any other security, product, service or investment. This publication does not purport to contain all relevant information which you may need to take into account before making a decision on any finance or investment matter. The opinions expressed in this publication do not constitute investment advice and independent advice should be sought where appropriate. Neither the information in this publication, nor any opinion contained in this publication constitutes a solicitation or offer to provide any investment advice or service.

It seems like barely a week goes by without news of an asset manager launching a private credit fund aimed at the wealth market.

Goldman Sachs and Carlyle are just two of the big names that have unveiled their own vehicles recently, as firms look to expand their sources of funding.

Apollo Global Management has been particularly explicit in its ambitions, targeting $50bn (£39.8bn) from the wealth market for its private capital products by 2026.

I’m really interested to see how this trend develops, as highnet-worths bridge the gap between institutions investing in private debt funds and everyday individuals investing in peerto-peer lending platforms.

Does private debt work for this demographic? Wealth managers and private bankers tell me that tax issues and prohibitively high minimum investment thresholds make private credit relatively unappealing for their clients.

Yet the flurry of new funds aimed at this market suggests that these firms have created a more enticing proposition for the world’s wealthy.

We’ll have to wait and see if private credit’s wealth market push can reach its full potential.

SUZIE NEUWIRTH EDITOR-IN-CHIEF

cont. from page 1

the lender is getting additional income because rates are higher, but the borrower has not had to pay more as it has been hedged.

“However, these rate hedges don’t last forever, usually just until the maturity of the loan. With many of these loans maturing over the next six quarters, even if a lender is willing to amend and extend, borrowers will be facing higher rates.”

The European commercial property market is also facing headwinds, which were worsened by the collapse of Austrian property group Signa at the end of last year.

Ratings agency Morningstar DBRS said that news of the insolvency came at “already-challenging times for the CRE market, which is under pressure from higher borrowing costs and shifts in

demand fundamentals, especially in the office and retail sectors.”

However, some industry stakeholders have suggested that there are still opportunities within commercial real estate debt.

Neil Odom-Haslett, head of private credit at investment firm Abrdn, said in a recent update that “with the exception of offices, the rebasing of real estate sector valuations has stabilised,

leading to an attractive entry point – particularly for senior lenders.”

Abrdn has a negative outlook on both prime office and regional office spaces but is positive on industrial and logistics assets.

It said it has a “polarised approach” on retail, with supermarkets and well-let retail parks performing well, while secondary shopping centres and high street retail are expected to continue to struggle.

IFISA returns outperform cash and stocks

CASH ISA returns have outperformed the returns from stocks and shares ISAs over the past year, but the Innovative Finance ISA (IFISA) continues to come out top.

According to the latest data from Moneyfacts, the average cash ISA returned 3.73 per cent between February 2023 and February 2024, up from 1.71 per cent the previous year.

By contrast, the average stocks and shares ISA fund saw just 2.8 per cent growth during the same 12-month period, after falling by 3.27 per cent between February 2022 and February 2023.

The relative success of the cash ISA is due to the higher base rate, which

has led banks to increase savings rates for customers.

Meanwhile, stock market volatility has led to losses for some investors.

However, IFISA returns have outpaced both, with some of the largest IFISA providers currently offering double-digit returns.

easyMoney – the largest IFISA provider in the UK – offers a range of IFISA accounts with returns of between 5.53 and 10 per cent.

And the largest peer-topeer lender in the country, Folk2Folk, hiked its IFISA returns last year from 6.5 per cent to 8.75 per cent.

Property lender Kuflink was offering target returns of 12.68 per cent at the time of writing, while

fellow property lender CrowdProperty has a number of active loans offering in excess of 10 per cent. All of these platforms maintain a track record of zero losses for investors.

Moneyfacts finance expert Rachel Springall predicted that more investors could opt for a stocks and shares ISA account this year in anticipation of rising returns.

“The savings market thrived during 2023, thanks to rising variable and fixed rates, and cash ISA rates received a boost,” said Springall.

“Those who are prepared to invest in the stock market may be pleased to see stocks and shares ISAs return growth over

the past 12 months, off the back of falls felt the year before. Savers sitting on the fence as to whether it’s time to invest may now feel more confident in the stock market.”

On 5 April 2024, new ISA rules will take effect which will extend the remit of the IFISA and may attract more investors to the tax-free wrapper.

“The most suitable ISA for any saver will depend on their own circumstances,” added Springall.

“The new ISA rules coming into effect from the new tax year could make these more desirable for savers who wish to subscribe to more than one ISA of each type per year.”

Boom in NAV financing set to continue

THE NET asset value (NAV) financing market is expected to go from $100bn (£79.3bn) as of 2023 to $600bn in six years’ time, as the asset class gains popularity among buyout funds.

NAV lending is essentially a loan taken on at portfolio level based on net asset value, rather than putting debt onto a single company.

Juliet Clemens, analyst at PitchBook, expects to see a steep rise in demand for NAV financing, according to conversations she is having with lenders.

“Typically they weren’t super popular, they were primarily used for very diversified secondaries and credit funds; sometimes real estate funds,” she said.

But she expects their rise to continue, not just in buyout but in places like infrastructure portfolios as well.

A Haynes Boone study published in February found that 37 per cent of NAV financings were implemented across buyouts and 23 per cent were in infrastructure. The same study found that tenors of NAV facilities have shortened, with 58 per cent over one to two years.

“The market is not new, it’s existed for a

number of decades,” said Pavol Popp, portfolio manager at Pemberton Asset Management.

“What we’re seeing right now is a structural shift. Some of that business is slowly moving away from banks to alternative providers.

“I don’t expect the supply demand mismatch will get any smaller any time soon. That mismatch will grow, that’s what’s creating this interesting market opportunity for us.

“There are around $2.5tn in assets in the buyout industry available for financing, and we estimate that only around 15 per cent is using NAV facilities.”

For Stephen Quinn, senior managing director at 17Capital, part of the rise in interest is due

to greater awareness, and part of it is because traditional lending sources have either contracted or closed.

“The other trend is the liquidity squeeze within private equity markets,” he said. “It’s quite circular. It affects everyone and it’s predominantly down to exits. Exits take longer and holding periods are probably north of six years, and that’s at historic highs.”

There is increasingly more dedicated capital being raised for NAV lending. Axa IM’s private capital unit is raising a new fund to provide NAV loans, according to Bloomberg, and AllianceBernstein set up a new NAV lending business at the end of 2023.

Despite criticisms around using NAV financing to return capital to investors, both Popp and Quinn said the majority of the transactions they are seeing are using to support growth, potentially through bolton acquisitions, buy-andbuild strategies and to support companies that are performing well.

It is only a minority that are using NAV financing to distributions.

‘Another big source of financing particularly over the last three to four years has been to help finance the PE firms themselves,” Quinn added. “Because they want to continue to grow, and promote their people, they want to invest into their new funds. Because of that liquidity squeeze, alternative sources of capital become important.”

The NAV loans are generally quite conservative, with a five to 15 per cent loan-tovalue, Quinn said, with managers also wanting to keep the risk very low.

‘Managers only want to take out these facilities when they have a good sense of where they need to make that investment,” he said. “They don’t want to create just a hopeful war chest. It has to be something purposeful.”

Basel IV set to benefit private credit

TOUGHER capital rules on banks are expected to propel the continued boom of the private credit market.

In the EU, Basel IV –also known as Basel 3.1 – began implementation on 1 January 2023, seeking to address new emerging risks facing the banking system. Banks have five years to comply with the updated rules.

And in the UK, the Prudential Regulation Authority (PRA) is set to publish its final Basel IV credit risk approach in the second quarter of this year. The package will be phased in from 1 July 2025 to 1 January 2030.

Analysts have predicted that the updated rules will benefit non-bank lenders.

“More stringent capital regulation imposed to banks in the wake of Basel IV has limited banks’ capacity to lend, particularly to the more leveraged borrowers, pushing them toward other financing sources,” said Guillaume LucienBaugas, VP – senior analyst at Moody’s Investors Service.

“The fact that private credit funds have lighter regulation (no capital rules, no heavy reporting duties, little risk management rules, little leverage constraints, little concentration

limits) made them a perfect offset for banks’ relative withdrawal.

“The more-leveraged less-standard borrowers, rebuffed by banks due to regulatory constraints, have also had difficulties to be funded in the public markets – broadly syndicated loans and high-yield bonds – therefore finding alternative in the private credit markets.

“Basel IV has increased banks’ capital requirements, thereby reducing their lending capacity. This, in turn, has favoured private credit.”

Nicolas Charnay and Richard Barnes, both senior directors in S&P Global Ratings’ Financial Services Ratings team, said that the main driver of the impact is the introduction of the output floor, which

sets a minimum for the risk-weighting (RW) of assets, to be phased in until the end of 2030.

“For exposures to unrated corporates in particular, the standardized approach under Basel sets the RWs at 100 per cent, which is potentially higher than what banks using their internal models would have set as RWs,” they added.

Charnay noted that in the EU, the regulator has assuaged the potential cliff-edge effect of this new rule by allowing a RW of 65 per cent for unrated, investment-grade companies until 2032.

“The segment of unrated non-investment grade corporate will therefore gradually become more capital intensive for larger banks which typically

use internal models and will become bound by the output floor over time, and therefore the competition from nonbank bank lenders could intensify,” he said.

Meanwhile, in the UK, the PRA’s consultation paper proposed two standardised approaches for unrated corporates: a risk-sensitive approach where firms can differentiate between investment grade (65 per cent) and noninvestment grade (135 per cent) exposures, and a risk-neutral approach where all unrated corporates are risk weighted at 100 per cent.

Barnes highlighted that the PRA proposed a consistent approach to the output floor, with no changes for the transition period, in contrast to its EU counterpart.

easyMoney investors earn more than £30m

EASYMONEY’S investors have earned more than £30m in interest payments since the platform launched in 2018.

This comes just months after it was revealed that investors in the property-backed peerto-peer lending platform were earning in excess of £1m per month.

Jason Ferrando, chief executive of easyMoney, says that this figure has grown since the monthly milestone was reached. He believes that compound interest and tax-free earnings are part of the reason for the platform’s growth.

“Our investors can use compound interest to make their money grow faster,” says Ferrando.

“Compounding can create a snowball effect, as the original investments plus the income earned from that investment grow together.

“Our investors at easyMoney have the option to compound their interest. We keep it simple for our investors, their interest is paid into their easyMoney wallet on the 15th of each month, and they have two options. Reinvest that interest (compound interest) or withdraw at no cost. We do our best for our investors

and want to see them maximise their returns, so we don’t take any fees from our investors.”

In simple terms, compound interest is interest that you earn on interest. Over time, this interest can grow exponentially and create a larger capital pool which can benefit from higher interest payments.

At easyMoney, investors are offered the opportunity to earn monthly interest, and to reinvest it automatically.

“For example, if you were to invest £10,000 at the start of the year with easyMoney at our current premium rate of 5.53 per cent, this would accrue £46.08 in month one,” Ferrando explains.

“By the end of the

year, you would have accumulated £567.23 in interest, versus £553 via annual compounding. That’s an additional £11.57 earned in interest and while it may not sound significant, it’s important to remember that on a long-term basis from small acorns mighty oaks grow.

“Of course, the more you initially invest, the more you can make through compound interest. For those investing their full taxfree ISA allowance of £20,000 at our premium plus rate of 6.52 per cent, compounding interest on a monthly basis can see them accrue £1,343.68. This is £39.68 more per year than the £1,304 accumulated via annually

accrued interest.”

easyMoney investors can also protect their earnings from taxation by shielding their money within an Innovative Finance ISA (IFISA).

Last year, easyMoney was named IFISA Provider of the Year at the Peer2Peer Finance Awards. To date, more than £73m of the £185m funds under management has been invested within the easyMoney IFISA, with zero defaults*.

By using tools such as compound interest and ISA wrappers, investors can super-charge their earnings over time. And while past performance is no guarantee of future success, easyMoney’s track record shows that it is possible to earn significant amounts of money by simply reinvesting and making smart decision with their P2P investments.

“We are looking forward to welcoming even more easyMoney investors in the new tax year and helping them realise the benefits of compound interest and tax-free investing with their IFISA,” adds Ferrando.

* A default rate of zero means so far easyMoney has never made a loss, but past performance does not guarantee future results.

State of distress

As a tsunami of distressed debt prepares to hit the market, Kathryn Gaw asks how private credit managers can take advantage of these new opportunities

DISTRESSED DEBT WILL soon be the hot topic of the alternative credit space. The volume of distressed debt on the market is expected to swell this year, as high interest rates put more borrowers into difficulty.

An estimated 40 per cent of the direct lending market is maturing in 2024-25, according to Bank of

America Global research, which will lay bare any financial distress among borrowers.

Furthermore, many Covid-era loans are among those set to reach maturity, and are expected to be a particular source of distressed debt.

By some estimates, $790bn of corporate debt will mature in 2024 and more than $1trn will mature

in 2025. These loans date back to a time when interest rates were on the floor, and governments encouraged business owners to use this cheap credit to survive the uncertainty of the pandemic. But since then, the lending environment has changed beyond recognition. In the UK, the base rate has risen from an all-time low of 0.1 per cent, to 5.25

per cent at the time of writing. Financing has also become harder to come by, especially for small- and medium-sized enterprises (SMEs).

Banks have reduced their lending activities, meaning that there is a mismatch between borrower demand for loans and the supply of cash. This has limited the refinancing options for business borrowers. Furthermore, any business that is able to successfully refinance a Covid loan will face much higher repayments. Amid an ongoing cost of living crisis

“ The trading environment for businesses in the UK remains pretty onerous”

and UK recession, these higher interest rates could convert formerly creditworthy borrowers into a distressed position.

Recent research from Evelyn Partners found that in 2023, the number of company insolvencies in the UK reached a 30-year high. Mark Ford, a partner in restructuring and recovery services at Evelyn Partners, said that this is “a stark reminder that, while in terms of interest rates and prices the general feeling might be that the worst is over, the trading environment for businesses in the UK remains pretty onerous.”

This suggests that the uptick in distressed debt is only just beginning. Private credit managers have already noted these opportunities, but they seem to be exercising caution in their allocation plans, at least initially. Several managers told Alternative Credit Investor that they are watching the segment with interest, and are keen to peruse the incoming cohort of Covid loans

with a view to exploiting any capital structure mispricing between the debt and equity of a company.

In expectation of this upcoming tsunami of distressed debt opportunities, many asset managers have already begun building out their distressed debt teams.

“We have observed that large private credit firms are increasingly taking more of a role in distressed debt markets,” confirms Luke Chan, a partner at HighVista Strategies, a Boston-based private investment firm that manages $10bn on behalf of sophisticated investors globally.

“Specifically, as their assets under management have grown, some of them have launched opportunistic credit strategies which are able to invest in distressed debt assets.”

Earlier this year, hedge fund Savin Investment Partners launched a new credit opportunities fund to capitalise on upcoming opportunities in distressed debt. The fund runs a relative value strategy that focuses on the relationship between equity,

DISTRESSED DEBT

option volatility and credit spread, by buying bonds and hedging default risk with longer-dated stock options covering maturity.

In October, special situations investment manager Ironshield announced the first close of its European distressed debt fund targeting €300m (£256m). Around the same time, it was announced that two former Deutsche Bank colleagues – Michael Sutton and Alex Mahler – had teamed up again at Mahler’s Alinor Capital Management to launch a distressed debt hedge fund, with assets under management of approximately $500m. The fund will focus on debt tied to troubled corporations.

These new fund launches hint at the underlying investor demand. Although it is risky, distressed debt has the potential to deliver double-digit returns, making it a useful diversification tool in larger portfolios.

“Investors typically increase allocations to distressed debt when there is ample economic turmoil or an economic downturn is expected,” says Chan.

“We believe that investors are increasingly grouping distressed debt within a broader ‘opportunistic credit’ allocation which includes classical distress as well as special situations, thematic stress and other idiosyncratic opportunities.

“This broader bucket can allow investors to benefit from numerous types of opportunities

“ We see hedge funds being involved in deals in this space”

as opposed to being dedicated to distressed debt and risking that the opportunity set does not materialize in any given vintage.”

But novice investors in distressed debt must also be aware of the risk of investing in these types of assets. While there will be plenty of profitable opportunities for savvy fund managers, there will also be a lot of bad debt reaching the market soon.

A recent Fitch Ratings report on the European leveraged loan

market predicted that loan defaults will continue to rise “due to the challenges that highly leveraged issuers in cyclical sectors face as growth slows and 2025 and 2026 maturities approach.”

“We expect defaults to be led by issuers undertaking A&E transactions that trigger our distressed debt exchange criteria, and issuers that will re-default after defaulting in 2022 or 2023,” Fitch added.

The ideal prospect for a distressed

debt investor is an overleveraged company which has a good prospect of being saved if it restructures. It is therefore vital that distressed debt fund managers are choosing to fill their portfolios with creditworthy businesses which can be converted into profitable investments.

“It is really a question of risk versus return,” says Adam Caines, banking and finance partner at Macfarlanes.

“Whilst we have seen more established funds competing for

“ Investors typically increase allocations to distressed debt when there is ample economic turmoil or an economic downturn is expected”

the good credits, that is not to say that weaker credits – though not necessarily distressed – are not being funded. But the dynamics are different and sponsor power is very much eroded in favour of credit fund lenders driving the deal.

“In terms of the lenders writing these deals, it often fits either into a special opportunities strategy of a larger manager or with a more specialised manager who focusses on special situations.”

Timing is also an important factor for distressed debt managers. A major risk for investors is that they deploy their distressed debt capital when the economy is not stressed.

“If the economy then goes into a downturn, the investments could take a leg down and possibly impair investor capital,” explains Chan.

“This should be intuitive as stressed assets prior to a downturn are already on shaky footing and the addition of cyclical headwinds could tip them over the edge.”

Unfortunately, UK distressed debt seems to meet this criteria, making it one of the least attractive markets for private credit managers seeking distressed opportunities.

In February 2024 it was confirmed that the UK economy had entered into a recession, but even before this fund managers were cooling on the UK private credit market, citing the higher risk of default. In January, KKR said that it is much more cautious on UK consumer risk than any other markets. This suggests that

the UK distressed debt market could be less appealing than European or North American distressed debt, at least among private credit managers.

”We see hedge funds being involved in deals in this space, alongside their core activist investor and/or debt trading strategies,” says Jat Bains, head of insolvency at Macfarlanes.

“Only in respect of certain distressed credits may there be an overlapping appetite,” counters Macfarlanes' Caines.

“More mainstream credit funds may well shy away from pure distressed opportunities where the risk is very high, however compensated, but there is a class of opportunistic credit fund that will compete with hedge funds.”

The full spectrum of distressed debt opportunities will reveal itself slowly over the next few years, and private credit managers will have to be able to spot the best deals quickly in order to deliver the market-beating returns that their investors crave.

This is not a market for the faint hearted, and unexpected economic volatility can upend even the most meticulously managed portfolios. The challenge for private credit fund managers will be to identify the best investments within the distressed space, at the best possible time, and to quickly offload underperforming cohorts. Investors should approach this market with educated caution, and an eye for an unmissable opportunity.

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Kuflink readies for property market recovery

AFTER A PROLONGED

dip, the UK property market is showing signs of new growth again, and property lenders such as Kuflink are well placed to take advantage of the new opportunities in this space.

According to recent data from Rightmove, agreed property sales were up by 16 per cent in the first six weeks of 2024, as stabilising interest rates encouraged more home buying. But Kuflink’s chief operating officer Paul Auger (pictured) has noticed a few other key signs of a property market recovery.

“We are seeing more interest on enquiries for development loans,” says Auger.

“The market is very buoyant at the moment. The expectation is for interest rates to reduce over the coming months and years, and this is driving the market even more than usual.”

Another indicator of recovery is demand for land purchases. Auger says that Kuflink has seen an increase in enquiries from developers seeking to buy land lately, which suggests that they are planning new builds. However, as a business Kuflink does not have much appetite to fund land purchases at the moment.

Instead, Kuflink is focused on sourcing the most attractive property loans through its network of trusted finance brokers, and giving its investors more choice than ever before in anticipation

of a property market recovery.

“Activity from brokers is very strong, as with residential mortgages, customers using a broker to source their funding requirements are given far more choice than just approaching numerous lenders themselves,” says Auger.

“Furthermore, property prices seem to be holding steady. It was anticipated there could be a drop in property prices, but this has not really happened. Although we have seen a softening in property prices, we have not

seen a drop as some predicted.

“As always, the market is driven by the lack of supply.”

There is certainly demand for more housebuilding activity, but the challenge for property developers is accessing the funding that they need to start new projects. Fortunately, Kuflink has many engaged retail investors who are seeking to beat inflation and achieve higher investment returns compared to traditional savings products, by financing property loans across the UK.

Auger believes the property market will only grow as the year progresses, and Kuflink is ready to meet this demand and help its investors benefit from the opportunities in UK property.

“My personal view is that we will not see massive property price increases this year, but we will see confidence in the market strengthening and consolidating, giving everyone more confidence in the market,” predicts Auger.

“In a market where interest rates are dropping or the expectation is that they will, this encourages more activity, giving our borrowers more options to repay their loan with us, either via sale or refinance.”

To date Kuflink has invested more than £315m in UKbased property developers, with zero investor losses. Whatever the property market has in store, Kuflink is ready and able to play its role as an active, risk-aware lender.

Private credit fund managers prepare for stricter EU rules

PRIVATE credit fund managers in the EU are preparing for tougher regulations that have been described as a “shift change in approach”.

On 7 February, the European Parliament voted to update the Alternative Investment Fund Managers Directive (AIFMD) to add new requirements for managers of alternative investments, including loan origination funds.

The text of the Directive was then voted on by the European Council on 21 February.

Some of the key changes include limits on leverage, ensuring ‘skin in the game’, and new measures to limit exposure to a single borrower.

Private credit managers are already subject to certain rules and data reporting requirements, particularly if they are targeting retail investors. However, the new EU rules will implement higher standards for funds aimed at professional investors.

Under the new rules, the leverage of closedended loan-originating alternative investment funds (AIFs) will be

capped at 300 per cent of their net asset value, while open-ended ones will be capped at 175 per cent.

Additionally, the EU has introduced a 20 per cent concentration limit on loans to a single borrower, if the borrower is a financial institution. This is intended to limit the risk of interconnectedness among loan-originating AIFs and other financial market participants.

The rules also require funds to retain five per cent of the value of each loan they originate.

And fund managers are prohibited from managing AIFs with an "originate-todistribute strategy," with the sole purpose of transferring those loans to third parties.

“The AIFMD was not conceived as a productregulating directive and the inclusion of a loan origination framework represents a shift change in approach,” law firm Linklaters said in a recent report.

“However, there is a lot that still needs to be clarified either via regulatory technical standards (RTS) to be

prepared by the European Securities and Markets Authority (ESMA) and then adopted by the Commission, or in member state implementation and guidance, and so the picture for loan originating AIFs is still a developing one.”

Open or closed?

All loan-originating AIFs are encouraged to be closed-ended, but they can be open-ended if the manager is able to demonstrate to the regulator that the fund’s demonstrate to its home regulator that the AIF’s liquidity management system is compatible with its investment strategy and redemption policy.

ESMA is required to develop draft regulatory technical standards within 12 months, after the new Directive is introduced. These will determine the requirements that a loan-originating AIF must comply with, in order to maintain an open-ended structure.

These requirements will include a robust liquidity management system, the availability of liquid assets and stress testing,

as well as an appropriate redemption policy given the liquidity profile of the loan originating AIF, and take due account of the underlying loan exposures, the average repayment time of the loans and the overall granularity and composition of the portfolios.

Investor disclosures Funds will now need to make a full list of fees, charges and expenses available to investors before they invest.

Additionally, fund managers will need to periodically report to investors on the composition of the loan portfolio.

They will also need to report annually to investors on any fees and charges, and on any parent company or subsidiary utilised in relation to an AIF’s investments by or on behalf of the fund manager.

ESMA is going to produce a report within 18 months of the new Directive coming into force, to assess the costs charged by fund managers to their investors.

This process aligns with the wider regulatory examination of the fair treatment of customers within the retail investment sector in both the UK and EU.

Timeline

The new rules are expected to enter the EU’s official journal by April and be adopted in national laws within two years, according to EU officials cited by Bloomberg.

Funds would then have a further year to meet the additional data reporting requirements.

UK funds

The EU rule changes will not automatically impact UK fund managers. However, the Financial Conduct Authority (FCA) is consulting on amending

the UK AIFMD and is re-evaluating the rules for non-UCITS retail funds in 2024, and will review the regulatory reporting regime in 2025.

“The FCA would like to use a set of consistent rules across all managers of alternative funds,” Linklaters said. “Rather than having two different categories of manager (i.e. above and below an AuM threshold) and applying different rules to each, it is exploring ways to ensure the regime operates proportionately depending on the nature and scale of a firm’s business.

“The FCA will work with the Treasury to explore how to make regulation work better for ‘small registered’, ‘small authorised’, and

‘full scope’ managers.” Respondents to the FCA’s May 2023 discussion paper on updating the UK regime for asset management, highlighted that AIFMD prevents full-scope AIFMs from carrying out other activities within the same legal entity. The FCA is considering modifications in this area.

Rules and risks

The $1.7tn (£1.3tn) private credit industry is predicted to grow to $2.8tn by 2028, according to data provider Preqin.

The fast growth of the sector has prompted concerns from authorities worldwide about whether it presents a risk to financial stability, due to a lack of data transparency, the underlying illiquidity

of the assets and the impact of high interest rates on defaults.

Oliver Gajda, executive director of the European Crowdfunding Network, welcomed the new EU rules but called for them to go further to protect retail investors.

“As institutional investors increasingly dominate private credit markets, there's a risk of systemic fallout,” he said. “Tighter regulatory oversight is crucial for market stability. The entry of traditional investors into this space suggests a demand partly driven by regulatory arbitrage, with fund managers and institutional investors finding the risk profiles appealing.

“However, it's crucial to strike a balance in regulatory approaches to address challenges stemming from banks' retreat from the credit market. In this context, the EU proposal is a relevant step towards maintaining market integrity and mitigating systemic risks.

“Unclear are the motivations of European regulatory limitations excluding retail investors, notably through the Consumer Credit Directive, and the continued exclusion of consumer protection in direct private credit for retail investors by the European law makers.”

Q&A with the CEO of the year

LAST YEAR, ROY WARREN (pictured), managing director of Folk2Folk, won the coveted CEO of the Year award at the Peer2Peer Finance Awards. We sat down with Warren to learn more about his career to date and what it takes to be an awardwinning peer-to-peer leader.

Alternative Credit Investor (ACI): Where did you spend your career pre-Folk2Folk?

Roy Warren (RW): The entirety of my career has been spent in financial services. Prior to Folk2Folk, I spent 22 years at RBS as their head of structured asset finance. In 2008 during the financial crisis, I devised a strategy to sell down and optimise a book for £14bn which was quite a feat at the time and gave me the

opportunity to flex my strategic thinking and problem-solving skills. I have always been someone who is determined to find solutions –it’s in my nature. I believe there is an answer to every problem, it’s just a matter of finding it.

ACI: What strengths do you think you’ve brought to Folk2Folk?

RW: A very high sensitivity to risk. We continuously seek to stay ahead of the wave by keeping abreast of sector issues, property values and the wider performance of the economy, and we have an internal risk culture of ‘no surprises’ by maintaining regular dialogue with our borrowers. Keeping in touch with our borrowers is key to the monitoring and controlling of our portfolio, and acts as a form of early warning system.

ACI: Given your background in banking, what attracted you to P2P lending?

RW: When I left RBS I didn’t want to continue within the inflexibility of mainstream banking. It was the culture of Folk2Folk that intrigued me – integrity and honesty are values that are important to me and they were demonstrated very clearly within the company. But also, the fact P2P lending is a different way of doing things - it is, after all, alternative finance. Being a young industry, it presents a blank canvas, and I could see the exciting opportunity it presents to do something new and different.

ACI: What are you most proud of at Folk2Folk?

RW: I’m most proud of our team and think we have some great talents. They really care, and

without exception will always go the extra mile for our investors.

I’m also proud of the stability and profitability of our platform. We’re now into our fifth year of profitability and it’s a good thing for our customers and staff that we’re a robust platform that can weather storms.

ACI: What are your plans for the future of Folk2Folk?

RW: To grow the book. We’re always open to discussions about acquiring another loan book.

ACI: What opportunity do you think P2P lending offers retail investors?

RW: We’ve witnessed a mass exodus of P2P lenders from the retail investing space but we’re here to remain and genuinely feel retail investors would be missing out on a great opportunity if P2P investing wasn’t available to them any longer. By investing into local businesses via Folk2Folk, investors can contribute to their regional economy and help improve the British economic situation. By helping others, they also help themselves earn an attractive return on their capital and our investors recognise this as a win-win.

ACI: What are your views on the UK P2P market in 2024? Do you see any new opportunities emerging?

RW: I think the opportunity is within the retail investment space. The power that sits in the hands of retail investors is significant and there is huge opportunity for them to make a significant and positive impact to our economy.

Assetz Exchange is a property investment platform delivering long term stable income for investors, primarily through the purchase and leasing of housing for social good. Regulated by the FCA, it provides the opportunity for investors to create a diversified property portfolio and alternative funding options for the housing sector.

www.assetzexchange.co.uk

T: 03330 119830

E: info@assetzexchange.co.uk

easyMoney is a peer-to-peer property lending platform that is fully authorised by the Financial Conduct Authority #231680. It has £164m+ in investor funds currently deployed and £280m+ in total loans written to date. It has had no borrower defaults and no investor has ever made a loss. Among P2P firms surveyed by Alternative Credit Investor it has the largest active Innovative Finance ISA portfolio, with over £66m currently invested.

easyMoney.com

T: 0203 858 7269

E: contactus@easymoney.com

Folk2Folk is a profitable UK lending and investment platform. More than half a billion pounds has been invested via the platform with no investor losses to date. Loans are a maximum of five years, secured against land/property at a maximum 60 per cent LTV, with a fixed rate of between 7.5 and 9.5 per cent, per annum.

www.folk2folk.com

T: 01566 773296

E: enquiries@folk2folk.com

Invest & Fund is an established alternative finance platform that has deployed over £257m on clients' behalf and has repaid over £158m to lenders with zero per cent bad debts written off. Lenders can achieve a diversified, asset-backed portfolio with gross yields averaging from 6.75 per cent to 7.5 per cent per annum with an option to lend through an ISA or a SIPP for tax-free returns.

www.investandfund.com

T: 01424 717564

E: lending@investandfund.com

JustUs is an innovative peer-to-peer lender that provides a range of consumer and property-backed loans. It has lent out more than £25m and paid more than £1.7m in interest to lenders to date. Investors can enjoy returns of up to 10.98 per cent, with all products eligible to be held in an Innovative Finance ISA for tax-free earnings.

www.justus.co

T: 01625 750034

E: support@justus.co

Kuflink is an award-winning lender and online investment platform. With over £280m invested through the platform, investors can customise their own portfolio investing in specific loans or in a pool of loans diversified across a number of opportunities. Earn up to 9.73 per cent (compounded) per annum, with an IFISA available.

www.kuflink.com

T: 01474 33 44 88

E: hello@kuflink.com

LANDE is a crowdfunding platform that gives investors access to secured agricultural loans. It has created a unique scoring model, accessible infrastructure, and a variety of products so that farmers are able to access financing quickly and easily. With LANDE and its investors as partners, farmers can become more independent and sustainable, while improving their yield, efficiency and profitability. Projects offer interest rates of up to 14 per cent per annum.

https://lande.finance

T: +371 20381802

E: info@lande.finance

Lendwise is the UK’s only peer-to-peer lender that is dedicated to impact investing in education finance. Investors finance education for borrowers at universities and business schools across the UK and globally. Investors define their own risk appetite and use Lendwise’s AutoLend feature to diversify their strategy across a pool of loans, which can be invested in an IFISA wrapper earning average returns of up to nine per cent per annum.

www.lendwise.com

T: 0203 890 7270

E: lenders@lendwise.com

Lending for over eight years, Somo is a seasoned bridging lender specialising in providing short-term secured loans against UK property. Somo gives its lenders the opportunity to tailor their investments according to their risk tolerance, selecting interest rates and loan-to-value ratios that align with their preferences, with a minimum investment of £5,000.

W: www.somo.co.uk/how-it-works

T: 0161 312 5656

E: investors@somo.co.uk

SERVICE PROVIDERS AND INDUSTRY ORGANISATIONS

The European Crowdfunding Network (EuroCrowd) is an independent, professional business network promoting adequate transparency, regulation and governance in digital finance while offering a combined voice in policy discussion and public opinion building. It executes initiatives aimed at innovating, representing, promoting and protecting the European crowdfunding industry.

www.eurocrowd.org

E: info@eurocrowd.org

Q2 creates simple, smart, end-to-end lending experiences that make you an indispensable partner on your customers' financial journeys. Its modular platform gives you the ability to manage lending simply throughout the entire loan lifecycle, from application, onboarding, servicing to collections. The result is a better experience for both borrowers and lenders.

https://eu.q2.com

T: 020 3823 2300

E: info@Q2.com