Alternative Credit Investor November 2023 by Alternative Credit Investor

WHAT BECAME OF DIRECT LENDING TRUSTS?

>> 6

Discounts persist

TACKLING THE SME FUNDING CRISIS

>> 10

Exclusive with NACFB’s Norman Chambers

CapitalRise’s Uma Rajah on property and IFISAs >> 16

ISSUE 87 | NOVEMBER 2023

Future of the IFISA in doubt THE INNOVATIVE Finance ISA (IFISA) could be abolished and amalgamated into a streamlined investment ISA, as part of sweeping reforms of the tax wrapper later this month. Chancellor Jeremy Hunt is expected to make significant changes to the ISA market in his Autumn Statement on 22 November. Treasury sources, cited in recent media reports, have outlined ministers’ ambitions to simplify the market and encourage more people to save in ISAs. Proposals include the creation of a single ISA, the abolition of less popular ISAs including the Lifetime ISA and the IFISA, and an increase to the ISA limit which currently stands at £20,000 a year. Sarah Coles, personal finance analyst at Hargreaves Lansdown, supports the idea of streamlining the ISA market. “One reason IFISAs

were set up as separate to the stocks and shares ISA was because you can’t have more than one ISA of each type per tax year,” she said. “It meant you could use the IFISA for a small peer-to-peer investment and get a separate stocks and shares ISA for the rest of your ISA allowance. By changing the rules to mean you could pay into more than one ISA of each type in any tax year – as long as you stay within the overall allowance – you could roll IFISAs into stocks and shares ISAs and streamline the range.” However, other

stakeholders are concerned about the impact of such a change on the P2P sector, with one warning that it is “damaging to have that uncertainty hanging over the industry”. Alternative Credit Investor understands that the UK Crowdfunding Association has been lobbying the Treasury in defence of the IFISA, and has been in discussions over the future of the P2P lending tax wrapper. “I think that the chancellor will be finding the idea of amalgamating all ISAs seductive,” said

Neil Faulkner of P2P research firm 4th Way. “It's pretty common that subtle impacts of new policies are initially missed by the Treasury, especially in the politicised environment of Budgets and Autumn Statement. This could lead to some temporary turbulence and uncertainty about the future of IFISAs. “In particular, I would point out that all the ISAs other than stocks and shares ISAs and cash ISAs make up a much smaller part of the market, with correspondingly fewer powerful voices having the chancellor's ear. He might therefore initially make a bit of a mess when it comes to the other ISAs, including IFISAs.” Faulkner has predicted that the chancellor could make modifications to policy changes in the weeks following the announcement, subject to the reaction. “With IFISAs specifically, he'll realise >> 4 that it's not so

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EDITOR’S LETTER

124 City Road, London, EC1V 2NX info@royalcrescentpublishing.co.uk EDITORIAL Suzie Neuwirth Editor-in-Chief suzie@alternativecreditinvestor.com Kathryn Gaw Contributing Editor kathryn@alternativecreditinvestor.com Marc Shoffman Senior Reporter marc@alternativecreditinvestor.com PRODUCTION Tim Parker Art Director COMMERCIAL Tehmeena Khan Sales and Marketing Manager tehmeena@alternativecreditinvestor.com SUBSCRIPTIONS AND DISTRIBUTION tehmeena@alternativecreditinvestor.com Find our website at www.alternativecreditinvestor.com Printed by 4-Print Limited ©No part of this publication may be reproduced without written permission from the publishers. 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.

he Innovative Finance ISA (IFISA) was introduced, to great fanfare, by then-Chancellor George Osborne back in 2015, enabling individuals to enjoy tax-free earnings from their peerto-peer investments. The product showed strong growth in its first few years, with volumes nearing the £1bn mark at their peak. The regulatory environment has changed substantially since then, leading to industry consolidation and a greater focus on high-networth and institutional investors. This has had a direct impact on the IFISA, as the ISA is a retailfriendly product marketed at everyday investors. With the investor demographic of the P2P sector changing, it makes sense that this would feed through to the tax wrapper. However, I think it would be a real shame to see the IFISA go. P2P is the only way that everyday investors can access the lucrative world of private debt, at a time when the sector is booming. With institutions tapping into this $1.5trn (£1.2trn) market, why shouldn’t individuals have access as well, with the added benefit of tax-free earnings? IFISA volumes may be relatively small, but the product has a greater relevance which should not be ignored.

SUZIE NEUWIRTH EDITOR-IN-CHIEF

NEWS

cont. from page 1 easy to abolish them completely and just expect that suddenly those investments will be incorporated into some new kind of multi-asset ISA,” Faulkner added. “Once the chaos subsides, there are also potential advantages if it means that investors will ultimately find it quicker and easier to diversify across lots of P2P lending and alternative lending, alongside their other savings and investments.” P2P lending platforms have spoken out in defence of the IFISA, arguing that the product has a special place in the market with farreaching benefits. “We can only see the positives in the IFISA product,” said a spokesperson from Invest & Fund. “One factor potentially overlooked

in a debate focused on the complexity of retail consumer choices is that IFISA investments help to fund UK businesses and enhance innovation on a grassroots level. “The IFISA product allows investors to contribute directly to the success of the UK

economy and support UK businesses, two goals wholly aligned with the government's own objectives. These key factors will be taken into consideration when decisions are made.” Rishi Zaveri, chief executive of Lendwise, said he understood why

NACFB’s Chambers heralds innovation in P2P sector THE PEER-TO-PEER lending industry has seen a significant improvement in technical innovations, according to Norman Chambers, managing director of the National Association of Commercial Finance Brokers (NACFB).

“I can see how the industry has evolved over the last twelve months,” he told Alternative Credit Investor. “It is well recognised as being innovative and looking at new ways to be able to support clients. “I think some of the

technical innovations across a number of platforms have improved significantly over the last three to five years.” The broker trade body is an industry partner for this year’s Peer2Peer Finance Awards, which takes place at London’s Hurlingham Club on

the government was reviewing the ISA market but said he hopes they do not abolish the IFISA, as “it’s definitely helpful for those investors who want to do something a bit more targeted with their money (such as education finance).” A Treasury spokesperson said: “The Treasury is receptive to ideas of how we can make ISAs more attractive to encourage people to develop a savings habit and to invest in a way that works for them”. HMRC data showed that £144m was put into IFISAs in the 2021/22 tax year, up from £92m the previous year. However, it should be noted that IFISA volumes are substantially down from their 2019/20 peak, when £995m was invested into the product. Tuesday 12 December. “We’re delighted to be part of the event,” Chambers added. Read the full interview with Chambers on page 10. There are just a few tables still available for the Peer2Peer Finance Awards. Contact sales and marketing manager Tehmeena Khan at tehmeena@ alternativecreditinvestor. com for more information.

NEWS ANALYSIS

More distress for real estate debt could be on the horizon THE MACROECONOMIC environment has been tough on the real estate market, and while there is still demand for debt, lenders are continuing to be cautious. CapitalStackers chief executive Steve Robson said they are busy with new inquiries, which he attributes to “the fact that senior lenders are offering less and we’re a bit of a niche product in the junior debt space”. Despite the inquiries, he said the deal flow is slower and they are becoming more cautious when

looking at new deals. “We always adopted longer build periods and longer sales tales than the borrower would do,” he added. Across the board property deals are down, industry insiders say, which is not surprising considering the cost of borrowing has gone up with higher interest rates. Proplend chief executive Brian Bartaby said he has been seeing more refinancing deals than actual purchases, as these are taking longer with more negotiations due to interest rate rises. He hopes that the

rate rises will now start stabilizing and help bring back transactions. Real estate transactions have dropped by 61 per cent in Europe yearon-year, according to the Bayes European Commercial Real Estate Lending report published in October, with the €2trn (£1.7trn)

debt market running at a sluggish pace for loan refinancings. It has become increasingly difficult for borrowers to secure financing for mid-size assets, in secondary cities or locations and development projects, according to the lead author Dr Nicole Lux. “The European debt market is seeing its most difficult year post the Global Financial Crisis in 2008/09, and we expect that more distress is yet to come due to the longerterm debt maturities in the European market,” Lux said.

Venture debt sweet spot may be short-lived VENTURE debt lenders are currently in a sweet spot, with higher rates potentially increasing returns and lower valuations in the equity market pushing founders to seek capital in the credit markets, but it may be short-lived. Demand for venture debt has increased over the last year as founders have looked for alternative financing instead of raising a down round. With many banks pulling out of lending to venture-backed companies, as well as the failure of Silicon Valley Bank – one of the largest lenders in the space – a

gap has been created in the market that debt funds could take advantage of. According to Mark Solovy, managing director and co-head of technology finance at Monroe Capital, when Silicon Valley Bank had its problems and was eventually bought, there was a massive disruption in the marketplace as it was the largest provider of venture debt. Although the need is still there, banks have pulled back, creating an opportunity for groups like Monroe Capital to take over some of the market share. Since 2020, 54 venture debt funds have raised

$6.2bn (£5bn) globally, according to PitchBook data, and they are ready to deploy their capital. But if the markets improve and valuations rise, that opportunity will recede, according to Lorna Robertson, head of funds at Connection Capital. “As soon as the equity market comes back, this is going to be less attractive and it’s quite restrictive if you’re tied into a loan for five to seven years,” she said. And although for some it may be attractive, there are pressure points investors should be mindful of, she said, which is what has

kept her from investing in venture debt funds so far. For Solovy though the idea that venture debt means taking on a relatively higher level of risk is more perceived than actual. “Because these companies are traditionally losing money it means they need to continue to raise money,” he said. “We believe that the companies we back can raise venture capital but they don’t want to raise at a lower valuation. The valuation they raise venture capital at does not impact our ability to have our loan to them repaid.”

NEWS ANALYSIS

Direct lending trusts slowly disappear as discounts persist DIRECT lending-focused investment trusts are leaving the sector one by one as deep discounts persist and the current market conditions have investors looking elsewhere for yield. Direct lending trusts are trading on an average 25.7 per cent discount, with GCP Asset Backed Income having the largest, at 38.18 per cent and Riverstone Credit Opportunities Income the smallest with 16.08 per cent, according to the Association of Investment Companies. Pollen Street Capital, which posted a return of -16.98 per cent over the last year, is set to leave the sector by the first quarter of 2024. The change in sector comes at a time when

Pollen Street is looking to broaden its investment activities and become a holding company sitting above Pollen Street and the asset manager. VPC Specialty Lending Investments’ shareholders have also recently approved the wind-down of the company. The board expects to start distributions by early 2024 and to have a substantial proportion of the portfolio realised within the next three years. Meanwhile, RM Infrastructure and GCP Asset Backed Income agreed to merge in August, although the plans were later scrapped as the trusts failed to get shareholder support. Now RM Infrastructure Income is seeking to wind down. Direct lending trusts

came into existence at a time when traditional fixed income investments were yielding very low amounts through the era of very low interest rates. Meanwhile, major commercial banks retreated from lending to certain sectors and businesses, so that gap was filled with direct lenders and investment trusts were an easy way for retail investors to access the opportunity. But for Ben Conway, head of fund management at Hawksmoor Investment Management, the direct lending funds do not look as attractive today as traditional fixed income investments such as corporate bonds. “There are very skillfully and actively managed corporate bond

funds that aren’t taking that much credit risk and are yielding a healthy amount,” he said. “The world has changed. And on top of that, the way you access direct lending trusts is through listed investment trusts and the liquidity of those are just not there. On the one hand it would be a shame if these types of trusts went out of existence, in terms of the diversity of the investment company sector, but we can’t have a situation where discounts are allowed to persist.” He believes that ultimately there is a need for what he calls “creative destruction” in the investment company sector but says that it cannot happen through mergers. With the demand for investment companies falling, the supply needs to shrink to narrow the discounts, he commented.

Share price total return (%) Company

Total assets

Discount/ Premium (%)

1 year

5 years

Ongoing charges ex performance fee

Dividend yield

BioPharma Credit

£1.3bn

-18.06

3.25

21.79

1.14

8.31

GCP Asset Backed Income

£400m

-38.18

-19.75

-23.12

1.2

10.87

Pollen Street

£847m

-34.46

-16.98

-19.28

10.81

Riverstone Credit Opportunities Income

£97m

-16.08

20.45

N/A

3.24

8.89

RM Infrastructure Income

£126m

-21.32

-9.68

1.18

1.86

9.09

VPC Specialty Lending Investments

£257m

-26.51

1.17

45.02

1.99

11.76

Source: Association of Investment Companies

JOINT VENTURE

Why HNWIs should consider diversifying with P2P lending

NCREASINGLY, HIGH NET worth individuals (HNWIs) are turning to peer-to-peer lending as a way to diversify and grow their investment portfolios, and it is seen as particularly attractive during the current economic instability. With fluctuating stock market returns and savings rates again struggling to get near the rate of inflation, P2P loans can offer competitive returns at a fixed rate each month, secured against property and - in some cases with a degree of liquidity if the platform has an active secondary market. Investors can even choose to invest via P2P lending platforms which are committed to making a positive impact. Folk2Folk is one of these platforms. Its investors can help small businesses across regional UK start, grow and diversify while continuing to earn returns from 8.75 per cent per annum. Folk2Folk’s managing director Roy Warren believes it is this combination which attracts HNWIs to P2P. “P2P lending platforms offer relatively attractive interest rates compared to traditional fixed-income instruments, providing a potential for higher yield,” says Warren. “Undeniably, our fixed and inflation-beating interest rates provide an attractive monthly income, particularly as economic uncertainty continues. “However, I think the attraction of P2P also lies in its simplicity

and direct impact. There is a clear line of sight from the investor to the borrower and this inherent transparency demystifies the investment process, giving investors a sense of fulfilment to see the impact of their capital.“ Folk2Folk investors choose what to invest in and all loans are backed by security in the form of UK land or property. This reduces the risk of a loss of capital, as it means that in a worst-case scenario there is an asset which can be sold to recoup investor funds. To date, no investor has lost capital via a Folk2Folk loan. "All our loan investments are secured with a first charge over UK property, and we maintain a conservative lending approach, typically capping loans at 60 per cent of the property's value,” Warren explains. “Additionally, we have a history of being able to provide a level of liquidity for our investors through our secondary market,

although it's important to note that P2P investments are inherently illiquid products, and so liquidity cannot be guaranteed." Folk2Folk has a £20,000 minimum investment threshold, which clearly indicates the platform is targeting HNWI retail investors. Investors also have the option to invest via Folk2Folk’s Innovative Finance ISA, enabling them to earn their interest tax free. To date, the platform has funded more than £646m in loans, while investors can earn returns starting from 8.75 per cent per annum with some investments attracting an interest rate of double figures. “P2P lending offers sophisticated investors the opportunity to expand their horizons beyond traditional asset classes,” says Warren. “It can also act as a useful stabilising factor within an investment portfolio, particularly in the current economic climate where traditional bonds and equities might be experiencing heightened volatility. “By allocating a portion of their portfolio to P2P, high net worth investors can benefit from a degree of insulation against market shocks, as returns are generated from individual loan repayments rather than broader market movements.” With economic instability set to continue, savvy HNWIs are searching for a new home for their money and P2P may be one of the most desirable considerations for HNWIs seeking to diversify their investments in 2023.

The Peer2Peer Fin The Peer2Peer Finance Awards take place on Tuesday 12 December 2023, at the Hurlingham Club in London. This glittering event will celebrate the best and brightest players in the peer-to-peer lending industry and the stakeholders who support them. Attendees can enjoy a sparkling drinks reception and gala dinner. This year we are delighted to announce a Hollywood theme for the event, as well as a live band for attendees wishing to celebrate (or commiserate) after the awards ceremony! There is limited space at this event, with many tables already sold. For table sales and sponsorship enquiries, please email sales and marketing manager Tehmeena Khan at tehmeena@ alternativecreditinvestor.com for more information.

Photo from last year's awards event

nance Awards 2023 Peer2Peer Finance Awards shortlist announced! Business Advisory Firm of the Year Kroll RSM BDO Evelyn Partners Deloitte Debt Advisory Firm of the Year EY KPMG RSM Deloitte Evelyn Partners Restructuring Firm of the Year Kroll Quantuma Moorfields BTG Advisory CG&Co Open Banking Provider of the Year Yapily ClearScore TrueLayer

Business Lender of the Year HNW Lending Qardus Folk2Folk Rebuildingsociety Property Development Lender of the Year Relendex easyMoney Property Bridges CrowdProperty Invest & Fund Kuflink CapitalRise Bridging Lender of the Year easyMoney Kuflink Shojin CrowdProperty Blend

P2P Software Provider of the Year Crosslend White Label Crowdfunding Lenderkit

Property Lender of the Year easyMoney CrowdProperty Folk2Folk Kuflink Shojin Simple Crowdfunding

P2P Institutional Partner of the Year Crosslend Fasanara British Business Investments Fintex Capital

Commercial Property Lender of the Year Proplend CrowdProperty Kuflink Relendex

Law Firm of the Year Shearman and Sterling Gunnercooke Hogan Lovells RW Blears Pinsent Masons MSB Solicitors

Residential Property Lender of the Year Relendex easyMoney CrowdProperty Kuflink Sourced

Property Law Firm of the Year Gunnercooke VWV Stephensons Solicitors Farrer Freeths Ashfords Consumer Lender of the Year Lendwise Elfin Market The Money Platform Unbolted

Ethical lender of the Year Lendwise Folk2Folk Abundance Qardus Lendahand The Money Platform Rising Star Lande Nester Qardus

Financial Inclusion Award Lande Loanpad Plend Elfin The Money Platform Innovative Lender of the Year Qardus Shojin AxiaFunder CrowdProperty CEO of the Year Roy Warren, Folk2Folk Jason Ferrando, easyMoney Narinder Khattoare, Kuflink Uma Rajah, CapitalRise Jatin Ondhia, Shojin Mike Bristow, CrowdProperty IFISA Provider of the Year easyMoney Kuflink CrowdProperty Invest & Fund Abundance P2P Lending Platform of the Year Relendex easyMoney Folk2Folk Kuflink CrowdProperty SaveLend Bridging Broker of the Year Fluent Money Propp Clifton Private Finance Capricorn Commercial Tapton Capital Connect for Intermediaries Development Broker of the Year Finspace Group Aureum Finance Pure Structured Finance Positive Commercial Finance Sirius Property Finance Commercial Broker of the Year Capricorn Commercial SPF Private Clients Propp Watts Commercial Synergy Commercial Finance Investor’s Choice Winner to be announced on the night

PROFILE

At the coalface: Exclusive interview with NACFB’s Norman Chambers Norman Chambers, managing director of the National Association of Commercial Finance Brokers (NACFB), tells Kathryn Gaw what is happening at the coalface of the lending crisis…

MALL- AND MEDIUM-sized enterprises (SMEs) are in the midst of a funding crisis, and no one understands this challenge more than Norman Chambers, (pictured) managing director of the National Association of Commercial Finance Brokers (NACFB). The NACFB plays a vital role in bringing together lenders and businesses in need of funding, using its vast network of brokers to match SME borrowers with lenders, including alternative lenders such as peer-to-peer platforms. He tells us what the NACFB is doing to solve the ongoing SME funding crisis, and what alternative lenders can do to help. Kathryn Gaw (KG): What does a standard day look like for you? Norman Chambers (NC): I start by touching base with the team leads from across the business, so compliance, membership, communications, events and finance. After that, it varies considerably. There are always calls and meetings with member brokers, lenders and partners, and I speak to those that are looking to join the association, be it a high street or challenger bank, a specialist funder or a P2P platform. There are always emails and queries from our member brokers that need my attention

and I have lots of interactions with other trade associations and government bodies. KG: Can you tell us a bit about the NACFB’s work over the last year or so? NC: Where do I begin? Over the last year we've done a huge amount of work with the Business Finance Council, with the Treasury, and with the British Business Bank to convey what's happening at the coalface in terms of SMEs wanting finance. As a trade body we are in a unique position, as the link between commercial lender and business borrower. We can comment quite confidently on the various appetites of lenders in the market, which sectors they favour, as well as the challenges faced by some SMEs who struggle to access the finance they need. We can also comment on service levels from funders, valuers and lawyers. KG: How does one become a patron of the NACFB? NC: NACFB patronage is open only to commercial lenders offering finance to UK-based SMEs. To become a patron, they must go through our application process and if they meet our requirements, the cost is currently £6,000 per annum. This gives them full access to our members, of which we currently have around 2,300 individual brokers

across some 1,070 firms. The vast majority – 96 per cent – of these brokers are authorised and regulated by the Financial Conduct Authority (FCA). Members also go through our assurance process to ensure that they can provide the right service and comply with our code of practice. In addition to direct access to our members, patrons get to display the NACFB logo, which has long been highly regarded throughout the industry – we’ve been going since 1992, we’re fully independent and a not-for-profit organisation. The rela-

PROFILE

tionship between our members and patrons is symbiotic – brokers need lenders, and lenders need brokers. KG: To what extent do you work with P2P platforms and other alternative credit providers? NC: We have over 160 patrons, and a few are P2P lenders, probably around five per cent. We know that many of our members work with P2P platforms who are not NACFB patrons. Obviously, we would welcome any that wished to apply. KG: What can P2P lenders do to increase their visibility within the NACFB networks? NC: Become a patron! Any P2P platform can apply to join the NACFB. The first step would be to go onto our website nacfb.org and submit an application. To establish if the funder will be a good fit for our members and SMEs, we will then ask questions around who sits behind the company, the structure of the organisation, what type of products are offered, the minimum and maximum loan amounts, where their funding comes from, in what parts of the country they lend, and so on. It's a very transparent process and we welcome applicants from across the commercial lending community. KG: What is keeping UK brokers up at night? NC: More than anything, I think it's the ever-changing world of regulation. Regulation does not have a reverse gear. Whilst our members are very good at embracing changes which improve the industry and safeguard those within it, they are concerned about the often-unintended consequences that regulation can bring. For example, the interpretation of rules can differ quite

substantially, not just from broker to broker but also from lender to lender. I think, a lot of the time, people – whether at a lender or a brokerage – just want more clarity about how the rules affect them and their business. KG: What regulatory changes have been most challenging? NC: Probably the introduction of the FCA’s Consumer Duty principle, especially how the rules have been interpreted by the various parties. I can see the value of protecting the consumer a lot more, but we all need to be following the guidelines in the same way and this is not happening at the moment. KG: How can the alternative credit market help to solve the ongoing SME funding crisis? NC: We’d like to see alternative credit providers working more closely with intermediaries, including NACFB members, to ensure that SMEs have access to a wider array of funding solutions. Brokers have replaced the bank managers of yore and their remit is bigger. The opportunity for alternative credit providers is obvious and it’s a win-win-win situation for lenders, brokers and borrowers. I think that's the key. KG: What do brokers need from their lenders in the current climate? NC: Brokers only really require transparency. They want to know what products are available, the criteria, the rates, the terms and whether a deal is likely to be sanctioned from the outset. Unfortunately, many lenders are not clear enough at the start and whilst I appreciate there are many moving parts, those who can’t clearly articulate their proposition could miss out. KG: What key trends are you

seeing in the commercial finance sector at the moment? NC: There has been a bit of a slowdown in the market with less activity than before but there is still good appetite from people wanting to grow their business. I think some of the loan sizes are probably slightly bigger than what they were before. There's also a new cohort of SME that is likely to be borrowing for the first time. They are recognising how difficult it can be to engage with their long-standing high street bank. Often these new entrants believe that they need a loan or overdraft and are unaware of the many, many other options available to them – and to which they might be better suited. Intermediaries can be the key to unlocking those opportunities. KG: Finally, if you were Prime Minister for a day, what would be on the top of your to do list? NC: Top of my list would be to get all commercial finance lenders to recognise the importance of the intermediary community and achieve greater collaboration between the two. Lenders and brokers need to work more closely together to create solutions which provide access to finance for all SMEs to ultimately achieve good outcomes. There is a home for every deal, for every SME looking for finance, regardless of their credit history or sector. But only if we educate all parties and collaborate. If this doesn’t happen, then it will slow down economic growth. The NACFB is an industry partner of this year’s Peer2Peer Finance Awards, which take place on 12 December at London’s Hurlingham Club. For information on tables, please email sales and marketing manager Tehmeena Khan at tehmeena@alternativecreditinvestor. com.

PRIVATE DEBT FUNDS

Wealth whispers Private debt funds are opening up to high net worth individuals for the first time. Kathryn Gaw looks at the opportunities and the risks involved…

RIVATE DEBT FUNDS HAVE long been the domain of institutional investors only, providing essential diversification with the promise of double-digit returns. But lately, the investor demographic has been changing. Over the past year, a number of private debt funds have been launched specifically for high net worth individuals (HNWIs) and the ‘mass affluent’, with mixed results. According to calculations by Apollo Global Management, there is $187 trillion (£154 trillion) of high-net wealth globally, compared with $102 trillion of institutional money. This represents a huge market that private debt fund managers can tap into. What’s more, following several years of economic instability, these HNWIs are actively seeking new homes for their money. Private debt is viewed as an attractive sector due to its lack of correlation with mainstream equity markets, and the promise of inflation-beating fixed returns. “It’s a big market,” says Claire Madden, managing partner at Connection Capital. “We’re only really scratching the surface. Everyone is seeing that interest rates maybe have peaked so they will have to start thinking again about diversification in the longer term by looking at alternatives. “Investors have held off on longer-term alternative investing and now they’re looking to build up their portfolio again.”

Across the board it seems that private debt funds are getting a lot more attention, from investors and intermediaries alike. Research from the iCapital Financial Advisor Survey 2023 has indicated that private bankers have begun to recommend that their clients either keep the allocation to private debt funds in their portfolio constant, or possibly even increase the allocation in the future. With this in mind, it is no surprise that so many large asset management firms have begun to delve into the HNWI private debt market. In early 2023, Blackstone launched a direct lending fund in the US – called BCRED – and followed this up with an ‘ECRED’ fund aimed at European investors. Approximately $12bn had been raised through the BCRED fund at the time of writing. However, the ECRED fund has struggled by comparison. Within the first six months of the fund’s launch, just $261m had been invested in the product, reflecting the difficulty of navigating the regulatory and tax issues within the European private debt market. “The HNWI market in the US is very sophisticated – more so than Europe,” explains Madden. “There is no regulatory consistency across the European countries. It is not easy collating private money.” BlackRock debuted a retail private debt fund of its own in June of 2023, named BDEBT. Around

the same time, the asset manager acquired private debt manager Kreos Capital, with a view to capturing a greater share of the growing private credit investment market. “Private debt investing has become an increasingly important component of investors’ portfolios,” said Stephan Caron, head of EMEA private debt at BlackRock, at the time of the acquisition. “Current market dynamics have made private credit an attractive asset class as investors focus on its income generation, low volatility, portfolio diversification and its low defaults versus public markets.”

PRIVATE DEBT FUNDS

“ Investors have held off on longer-term

alternative investing and now they’re looking to build up their portfolio again

”

HNWI-focused private debt funds have also been launched by Blue Owl Capital, Fidelity Investments, Ares Management, and Apollo Global Management over the past year, while Goldman Sachs and Arcmont Asset Management are set to debut their own private debt offerings for HNWIs in due course. There are clear benefits for

investors who are interested in allocating their funds into private debt vehicles. The most obvious benefit is the returns. On average, these funds will return 10 per cent or more to investors per year, regardless of stock market and economic volatility. Private debt funds also offer diversity in mature investment portfolios.

“For far too long private investors have been locked out of institutionalgrade products and asset classes so there is an argument to look at how we can actually allow our clients to access the full range of products that institutional investors would have access to,” says Madden. However, she adds the caveat that these opportunities are only actually accessible to a subset of clients. They must know what they are doing, understand the risk, and be able to withstand the liquidity. “Any fund that goes out and says they are investing in longerterm assets but offer liquidity

PRIVATE DEBT FUNDS

suggests that there is a liquidity mismatch and it will only end in tears for the investor,” she adds. Liquidity is the major drawback for HNWIs who are interested in private debt funds. While a small number of private debt funds offer quarterly liquidity, the majority will only allow investors to make withdrawals after a year or more, depending on the term time of the fund. As a general rule, once your money is in a private debt fund, it is locked in until the end of the term. “The nature of the private debt market makes it inherently less liquid than the public bond market,” explains Dean Frankle, managing director and partner at BCG and leader of BCG’s asset and wealth management business in Western Europe, South America, and Africa. “The lower liquidity levels are reflected in the lock-in periods, forcing investors to make more long-term asset allocation decisions.” In response to this liquidity concern, some platforms have started to roll out private credit secondaries. Last month, Pantheon filed to register a “first-of-itskind fund for the US private wealth market, focused on private credit secondaries”, the AMG Pantheon Credit Solutions Fund. However, Frankle adds that the recent success of private market platforms among HNWIs indicates that wealthy individuals are happy to sacrifice some liquidity in their portfolio in favour of higher returns, diversification, and lower interest rate risk. And then there is the question of taxation. “The product landscape for private retail investments is still developing, making the taxing of private debt an individual matter for most HNWIs, which will most likely be subject

“ The nature of the private debt market

makes it inherently less liquid than the public bond market

”

to change with the introduction of new product wrappers and possible regulatory action,” says Frankle. Issues of liquidity, taxation and regulation are already impacting the roll-out of HNWI-focused private

debt funds. Several private debt fund insiders told Alternative Credit Investor that the gulf in tax law and regulation from country to country has made it harder to roll out new funds on a global scale, which

PRIVATE DEBT FUNDS

may make them less attractive for multi-national asset managers. “Besides the inherent risks of debt investments, such as counterparty risk, there are further potential risks concerning transparency as well as changes posed by future regulatory action, given that the uptake of private debt is a relatively recent trend in wealth management,” says Frankle. “However, some advantages of the private debt risk profile over

fixed income are floating rates, which offer better protection against interest rate risks and comparatively lower volatility, similar to the relationship between private equity and public equities. “Periods of economic growth are sometimes also accompanied by increases in lending, making private debt an attractive alternative to fixed income, while the lock-in periods of private markets have the tendency to make private

debt assets stickier overall.” UK-based alternative lenders are all too familiar with these limitations. Increasingly strict regulation by the Financial Conduct Authority has made it harder for alternative lenders such as peer-topeer lending platforms to market to and onboard retail investors. This has led some of the larger platforms to raise their minimum investment threshold, effectively pricing their products at a rate that only HNWIs could afford. “The really interesting market is in private closed-ended vehicles,” Madden adds. “These funds are structured in particular way which makes it very difficult for retail investors to get into them. There is a lot of regulation and very high minimum entry thresholds.” Connection Capital has a minimum threshold of £25,000 for HNWIs, which is considerably lower than the £1m+ which is required by some private debt funds. These HNWIs are considered to be more sophisticated investors, who may have a background in private equity, hedge funds, investment banking, or professional services, says Madden. This means that they are more likely to understand risks such as the lack of liquidity, and the variable nature of crossborder regulation and taxation. The private debt fund market may be slowly tilting towards HNWIs, but unless you have eight figures in the bank and a background in finance, these investments are likely to remain out of reach for the vast majority of retail investors. But for the asset managers and alternative lenders who are eyeing this space, there is more than enough HNWI money to make it worth their while.

PROFILE

Prime position

CapitalRise chief executive Uma Rajah talks to Marc Shoffman about choosing the right loans and building trust among investors

HE PROPERTY MARKET may be slowing but that hasn’t stopped CapitalRise from attracting new customers to its development lending platform. Co-founder and chief executive Uma Rajah explains how a focus on prime central London and the home counties has helped navigate uncertain times for bricks and mortar and why this sort of proposition is so important for investors. Marc Shoffman (MS): What trends are you seeing among CapitalRise investors and borrowers? Uma Rajah (UR): Business is going very well – our loan book and investor base continues to grow. Rapidly increasing interest rates mean we have had to adjust our pricing on both sides. That extra revenue has been passed on to investors, which has helped us adapt to the current rising interest rate environment. The fact that we continue to grow our business on the investor and borrower side is testament to the attractiveness of the product. One of the things that makes us different to other lending platforms is the quality of real estate and the part of the market we focus on. We focus on prime residential real estate. The majority has always been in prime central London (PCL), so most of our loans are around Chelsea, Belgravia and Knightsbridge. The rest is spread

across prime outer London and also the home counties which is growing significantly. Because we focus on this part of the market, it is a unique and different dynamic to the rest of the market. PCL is resilient and is a solid investment proposition. The average loan to value is still around 63 per cent. We are very comfortable with lending at those

sorts of levels. PCL has been in decline since end of 2014, yet we have been happily lending and redeeming loans, we have been doing a relatively good job of finding the right loans to back in a period of decline. MS: Have you changed your approach? UR: We have always been

PROFILE

conservative and picky about our loans. We focus on intense due diligence. Certain things have been adjusted, maybe the level of focus we give on certain criteria, we look carefully at build costs and the contingency put into facilities so there are healthy buffers if things go wrong. It’s not that we are doing anything different but there are areas where we are more laser focused. Only one per cent of applications get all the way through to our pipeline. MS: You were involved in National Savings Week during September, why is that important to you? UR: It is important to highlight that we are an investment platform so capital is at risk. But what is important, and what we are seeing, is that people are looking for places to get attractive risk-adjusted returns. Even though interest rates on savings are hugely attractive compared with 24 months ago, they are still way below inflation. If you really want to grow your money, a lot of people are looking to invest. Our products are popular. In the current environment there are things that appeal, we are able to offer attractive risk-adjusted returns and the underlying investments are secured against real estate that we consider high quality. In a worstcase scenario, we have ability to step in and force the sale of an asset. An asset-backed investment with physical security is appealing at times like these. We have not had any losses on any projects, and we are very happy with that. Development finance isn’t a walk in the park. You have to manage loans very proactively.

We hire independent third-party professionals to help with that and we have project managers to get early visibility on any issues. In addition, my team will go out on site on a monthly basis. There is an extra layer of diligence that comes with the way we monitor our loans that has stood us in good stead. We have done around £300m of lending now. We are proud of this as we had to survive Covid which was a difficult time for developers. They have all redeemed in full. It is important to have tight monitoring processes and work closely with our borrowers. It is in both our best interests for the loan to perform so we take a collaborative approach. MS: Who are your typical investors? UR: We have a broad range of investors on the platform. We fall under speculative illiquid securities regulation rather than peer-to-peer lending so our clients are high-net-worth, sophisticated investors. We do not market to everyday retail investors. Our minimum investment amount is £1,000, some will put that into a range of loans, while larger, more institutional-style investors will allocate greater volumes of funds. Because we have a deal-by-deal model, investors can pick their own loans and create a portfolio that suits their preferences and risk appetite. MS: How important is the Innovative Finance ISA (IFISA) to your platform? UR: We were one of the early adopters of the IFISA and launched in February 2017. It has always been an attractive product for people that enables them to invest in a tax-efficient way.

Our ISA volumes continue to grow. This year to date, we had a 115 per cent increase in the number of ISA accounts opened compared with the same period the previous year. That is quite a good indication of the increased appetite and interest in our proposition. We see a relatively good proportion of ISAs transferred from other providers. These are people who are active investors keeping an eye out and they will move their ISAs around if they feel they are not getting what they want. MS: What is driving the increased IFISA interest? UR: We are unique in that we provide investment opportunities in certain postcodes that aren’t available anywhere else. The fact that we have delivered so well to investors means we now have a track record that encourages people to build trust and then tell other people and invest more of their portfolio. That growing track record and confidence that is being built among our investor base helps create the increase in numbers. MS: Is there enough awareness of IFISAs? UR: There is a lack of knowledge, which is understandable. As an industry, we should do better by talking about it as much as we can. If someone onboards with us we can then talk about the product range. I hope the IFISA will grow. It is a relatively new and nascent product in what is a small sector. It is a niche within a niche so its natural that it will take time for awareness to grow. Hopefully our investors talking to people they know will help.