Published in: Institutional Money

Luxembourg, 08 September 2023 – Private debt and alternative means of financing are gaining popularity, particularly in the absence of a bank. “This is true for both borrowers and investors,” explains Daniel Knoblach, Board Member at Fair Alpha. “Tailor-made for private debt, securitisations are rapidly surpassing traditional funds.”

These lending structures, designed as Luxembourg compartments, provide companies with a flexible and quick financing option, or investors acquire the portfolios of other lenders. “For businesses, they fill a void left by the banks’ faster retreat from this type of business,” says Knoblach. It is a new asset class that has become increasingly attractive to investors in recent years due to its high returns and plainly manageable risks.

The securitisation administrators invest in directly negotiated loans. “These are typically designed for medium-sized businesses that have limited access to capital markets financing due to their size,” adds Knoblach. This is why they are willing to accept interest rates above the market rate, which is advantageous for investors. In addition, the banks’ function as middlemen is eliminated, so that both parties benefit equally from this margin.

In comparison to bank financing, there are a number of additional benefits for businesses, including analytical capacity, rapid decision-making and flexible terms and conditions. “Securitisation again showcases its advantages in terms of speed of market access and its straightforwardness,” says Knoblach. “And that includes full regulation.” History indicates that investors can achieve higher returns compared to the syndicated loan market, while the average risk profile of the target portfolio companies is lower.

For investors, the advantages are essentially that higher returns are possible with a similar risk structure. “No wonder then that, according to a BAI study, an increasing number of investors desire to enter this asset class,” Knoblach states. Investments in private debt or lending securitisations are ideal for diversification because, in addition to yield advantages, they have a very low correlation with equities.