The direct lending market has grown at a remarkable rate over the last decade, writes Jack Rose, who argues investors have a number of options for accessing predictable, risk adjusted returns...
There is now a range of opportunities available for retail investors to put money in fund vehicles which lend to small and medium sized enterprises (‘SMEs'). The failure of the world's central banks to raise interest rates above the waterline for the past decade has been the cause of much angst among savers. The search for yield has long since taken investors to the furthest corners of the financial world.
Yet one avenue that has opened up is far closer to home. Not coincidentally it is also an area that, since the Financial Crisis, has largely been vacated by the high-street banks.
We are talking direct lending to SMEs, a field of expertise that, due to the high capital requirement regulations forced upon the banks in the wake of the crisis, suffered collateral damage with the key market participants exiting the space. As the banks vacated the field, a funding gap developed, a vacuum which those with the necessary experience and skill set moved into.
Of course, opinions regarding direct lending are often coloured by the banks' retreat from the area, a reverse that comes loaded with assumptions about the quality of the potential transactions left on the table.
But such worries can be easily dispelled. In reality, the transference in SME lending has been ongoing for a long time and the teams come with many years of experience of lending to this vital area of the UK economy. Your track record in direct lending is somewhat being akin to your calling card and is your most important credential.
It is the kind of deep market knowledge and expertise that might have previously only been at the disposal of institutional investors, but which now is on offer to the retail investor.
Securing the future of business
The direct lending we are involved in comes in three main forms; secured lending, leasing and short-term finance. The first comes with the security of being loaned against the business or cash flows of the borrower, the second comes with the potential to repossess the asset and the last usually supplements or replaces existing overdraft facilities.
It is exactly the type of ‘old-fashioned' lending that we all somehow imagine is put together by pinstriped and bowler-hatted bank managers working in local branches up and down the land. Except that those bank managers are no longer there, and increasingly neither are the branches.
Yet investors should not bemoan this particular piece of high-street transformation. Instead of the banks being in a position to hoover up the best investment opportunities and profit accordingly, it leaves the way open for retail investors to benefit from the fixed rates of interest that can be achieved as part of our lending strategy.
Jack Rose is strategic sales director at Triple Point
