Private Debt as an Attractive Asset Class
Apr 24, 2020
Low bond yields and negative interest rates put pressure on investors. It is no longer even a question of earning something, but rather of not losing any money. What could be more natural than to invest in Swiss SMEs via private debt as an alternative and thus keep an attractive addition to the portfolio from a risk/return perspective?
Private debt is not new and, in simple terms, refers to the financing of a project by several people. The construction of the Statue of Liberty in 1885 is considered the world’s first crowdfunding project. Originally, the statue was intended as a gift from France, but the base and the construction were to be financed by the United States.
As the money was missing, the American editor Josef Pulitzer started a fundraising campaign in his newspaper “The New York World”. Every donor was to be mentioned by name in the newspaper. Within a few months, about 100,000 dollars were collected from 120,000 donors. Private debt or peer-to-peer investments (P2P) is a relatively new investment segment in Switzerland. P2P is a form of crowdlending, which refers to the intermediation of debt capital between lenders and borrowers via the Internet.
The oldest P2P platform is Zopa, founded in England in 2005. It was followed by US companies such as Prosper and Lending Club. There are now more than 321 platforms in Europe including the UK that enable alternative forms of financing (including factoring and equity financing). In Switzerland, there were fifteen platforms at the end of 2018.
How private debt works
P2P Platforms do all work on the same principle. A potential borrower (private individual or company) fills in the information on his or her credit request on the platform. This includes personal details as well as the amount and duration of the credit request. The data is needed for the credit check, which can be done automatically or manually. Most platforms have their own credit analysts and a credit rating system. According to this system, borrowers are assigned to a rating class depending on their creditworthiness. The lower the rating, the higher the interest you can expect. After the credit check has been prepared, the borrower is informed of the rating and the conditions. As soon as the borrower has given his consent, the credit project will be published. The lender on the other side must register and identify himself on the platform (like a bank account). The open credit projects are visible on the platform and the lender can invest in the desired credit projects. As soon as a credit project is 100% financed, the borrower and the lenders will be informed accordingly. The lenders must then transfer the promised money. Usually, they are paid monthly with interest and the loans will be amortized with a constant monthly rate.
What are the advantages of Private Debt Investments?
Compared to standard bonds, the return on P2P investments is significantly higher. The higher risk and the low liquidity for P2P loans are often cited to be the reason for the higher interest rate. Although, when it comes down to risk P2P platforms are very transparent. According to CreditGate24, the historical default rate is 0.29%. Lend.ch indicates this with 1.5%. When comparing internationally, P2P loans prove to be much safer than, for example, high-yield bonds, which are very popular with institutional investors.
Furthermore, there is a liquidity premium, which should explain the higher return on P2P investments. Most P2P platforms now also offer a secondary market, which certainly increases the liquidity of P2P investments. But compared to the bond sector there are still significant differences in market liquidity. A study by lend.ch shows that their loans with an A+ rating are roughly equivalent to a BBB rating in terms of risk profile. According to Andreas Dietrich – he is a Professor in Banking and Finance as well as Head of the Institute for Financial Services at the Lucerne University of Applied Sciences and Arts and co-author of the “Crowdlending Survey 2019” – investors can invest their money via crowdlending and achieve respectable returns. According to his data, SME loans across all risk classes generated a return of 4.46% in 2017 and 5.64% in 2018.
How can private debt be invested in this country?
P2P investments are an attractive solution from both a risk and return perspective. As an investor, there are many opportunities to become involved in the P2P sector. One option is direct investment. For this purpose, an account can be opened with a P2P platform. After a successful opening, the investor can then decide for himself which loans he wants to finance. Some platforms also offer the possibility of investing according to defined criteria utilizing Robo Advisory. In the last two years, however, products (notes, bonds, funds) have also become established in the Swiss market. They are allowing investors to operate cost-effectively and efficiently in the P2P market without any significant administrative effort, driven by the client’s need to find alternatives to the unfavorable risk/return ratio in CHF corporate bonds. In terms of diversification, Stableton’s platform can help, where an optimal allocation can be achieved with a relatively small investment sum.
We’re on a mission to provide investors with unique investment opportunities, and the tools to access them efficiently. By enabling low investment minimums, the diversification that is essential for such investments is much easier to accomplish.
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*Disclaimer: The above article is for educational purposes only and does neither constitute investment advice nor should it be considered to be an invitation or recommendation to buy securities or any other investment products. Please consult your financial advisor about the risks and opportunities prior to making investment decisions. By clicking on that link you confirm that you are a resident of Switzerland and a Qualified Investor according to the new Swiss legislation on collective investment schemes (CISA and CISO).
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