What is the Heli-Pad?
Helicap CIO Quentin Vanoekel introduces The Heli-Pad
Welcome to the first issue of The Heli-Pad, your go-to resource on all things private debt and FinTech lending in Asia.
The Heli-Pad is a monthly newsletter assembled by Helicap’s investment and marketing analysts. We aim to contribute to readers’ knowledge on the alternative lending space and the growing role of technology and digital analytics in managing risks and returns for this asset class. This first issue of The Heli-Pad will introduce the concept of alternative lending, followed by an exclusive one-on-one interview with Endowus Chairman and CIO Sam Rhee. At the end, you will find our selected Top Reads.
What can readers expect to see here?
We plan to have consistent sections in our newsletter that include:
- A theme for every issue that we introduce in the Intro section
- A Spotlight section where we deep dive into a particular ‘hot topic’ under the main theme. While we have skipped this section in this inaugural issue, you can look forward to exclusive pieces in future newsletters on topics like the impact of Covid-19 on alternative debt industry, the Buy Now Pay Later model, and an evaluation of the Peer-to-Peer (P2P) lending model in Southeast Asia.
- A One-on-One quick interview/Q&A with a special guest or an industry leader
- And finally, a Top Reads section with select reports and press picks to help our readers keep abreast of all key news and trends for the month.
Our team is very welcoming of comments and suggestions on content and format, so please feel free to share your ideas with us at [email protected]
And let’s get started!
In this first issue of The Heli-Pad, we introduce private debt/alternative lending to our readers and we focus on the growth journey this asset class is undergoing in Southeast Asia in particular. We hope to build a wide common understanding that we can further build on in future issues, so we will start from the basics.
Concisely, alternative lending refers to any lending practice that happens outside a traditional banking institution. It can take many forms, including traditional alternative lenders such as microfinance institutions, leasing companies and finance companies, as well as a growing number of FinTech/digital lenders such as Peer-to-Peer (P2P) lending platforms and technology-driven lenders providing loans directly from their balance sheet.
Alternative lenders serve MSMEs, individuals and micro-entrepreneurs who are under-served by traditional banks and lack access to credit. While alternative lenders provide loans for a wide range of purposes, Helicap’s focus is on alternative lenders supporting borrowers who require financing to improve their livelihoods and use loan proceeds for productive purposes (e.g. to provide a service/product that contributes to their economy, or to obtain better living standards). There are various segments of alternative lending that are directly bridging the need for such productive loans, including education finance, vehicle and equipment leasing, MSME finance, microfinance, agriculture finance, and consumer financing (especially for essential items, healthcare, and housing).
Southeast Asia presents a particularly large opportunity for alternative lending. According to the 2017 report titled “MSME Finance Gap” by the International Finance Corporation, the MSME funding gap in SEA is estimated at $500 billion.
Talking Portfolio Diversification with Sam Rhee
To get a better idea on how investors should approach alternative lending from a portfolio management point of view, we chat with Sam Rhee, Chairman and CIO of Endowus, and Former CEO & CIO of Morgan Stanley Investment Management in Asia. Sam also serves as Helicap Senior Advisor and Investor.
1. Helicap: When equity markets seem to be eternally bullish and low interest rates are prevalent, why should investors consider allocating a portion of their portfolio to fixed income and alternative assets?
SR: Returns are commensurate with risk. They are highly correlated. So greater returns, even when they sound like sure shots, are in fact fraught with risk. You may be able to ride a rapidly rising market or stock but it can easily come back down as quickly. All historical data shows that asset allocation represent the bulk of the long term attribution for returns. Which means where you allocate your money in terms of asset class and geography, etc is the biggest driver of long term returns. You may allocate a 100% to bitcoin on one extreme or allocate 100% on fixed deposits. The fixed deposits are safe but will give you nothing in return and negative returns over the long run, while Bitcoin can give you exponential returns but also comes with the risk that it can also make you lose a lot of money.
The fixed income and alternative debt space is a relatively stable and lower volatility space in general and is an important asset class to achieve the benefits of diversification. I would not recommend a 100% fixed income or alternative debt allocation unless you are closing in on retirement and have enough money saved up for a comfortable retirement. But you can always allocate a decent amount to this asset class. Alternative debt clearly has done well in the past several years and have proven their mettle as a legitimate asset class within fixed income and allocating some of your overall asset allocation to generate an attractive level of return above that of traditional fixed income investments seems reasonable.
2. Helicap: Despite the challenges of 2020, the private credit market continues to develop in Asia and is expected to grow at a rapid pace (Preqin predicts the global private debt asset class will be the second fastest-growing alternative, with 73% growth between 2020 and 2025 hitting $1.46tn in 2025). What are the key trends and unique opportunities in this sector?
SR: There is a burgeoning private credit market or alternative debt market, and the growth in non-traditional lending is a reason behind the supply. There is a much greater diversity in the investable universe with alternative lending through funds to digital P2P lending platforms, distressed/special situations/private debt, ESG and impact focused debt including Green bonds, and even venture debt. I think the market will grow fast and eventually be much bigger than people currently think.
3. Helicap: What are the key considerations taken by investors when making allocations into private debt?
SR: When a sector or asset class is growing rapidly, it is important to always sieve through the quality of the fund manager or the quality of the investable securities or funds. The reason is because some may not maintain a high level of compliance or governance given they are relatively young entities. The short history also means that we do not know the true risk management capabilities and investment acumen of the teams over the long term, especially through cycles (up as well as down). That is why there has to be a high level of due diligence and effort made to really understand the underlying drivers of risk and returns for the exposure of private debt.
4. Helicap: How can investors access this asset class and best capture these investment opportunities?
SR: There are so far limited good access to good funds or investment opportunities. Helicap is one of the few companies that have moved towards institutional frameworks of investing, risk management, regulatory and governance oversight. There is an increasing number of digital and wealth platforms which may be able to give access to investors to this asset class, but I would caution that not all private debt is the same and so the investor must beware and make sure they know what they are investing in. Also it is important understand the impact of cost to the investment returns so making sure that the cost is reasonable and the investment returns are well above the embedded cost and also the compensated risk.
5. Helicap: How much are impact and ESG parameters affecting capital allocation decisions for institutional investors and family offices?
SR: I believe institutional investors have an increasing commitment and pressure to be focusing on implementing the long term sustainable criteria for investing responsibly through ESG parameters. The level of allocation will be highest with institutional investors followed as a distant second by family offices, with retail investors even further behind. However, I do feel that sustainable and impact investing will become increasingly more important especially in a post-covid world as sustainable and responsible companies will fare better, mitigate risk better, and generate long term value better. This is why a certain asset allocation towards ESG and sustainable investing opportunities will only increase over time and like many things where demand outstrips supply, there will be a resulting asset inflation in those companies and investment opportunities where there will be sustainable value creation.
For this first issue of The Heli-Pad, we have curated a selection of recent press picks to keep you updated on the latest fundraising deals and developments in Asia’s alternative lending space. Also, in line with the theme of this issue, we provide several sources from the past year that serve as good primers on alternative lending, private debt investment opportunities, and the role of FinTech players in this sector. Happy Reading!
Further Resources on Our Theme: