• Fasanara Capital

The Beauty of Alternative Cheeses




In This Newsletter:


  • ​​The growing allure of alternative investments

  • Want cheese on that loan fund? Why, yes

  • Three overlooked trends in Fintech

  • Fintech lenders could hold the keys to recession recovery

  • Failed promise of marketplace lending faces a new test

  • UK watchdog warns peer-to-peer lenders on compliance

  • Funding Circle investors face long wait for money.




The Growing Allure of Alternative Investments

High-net-worth investors and family offices are increasing their allocations to alternative assets.  Research shows more than a third of respondents are allocating 20 per cent or more of their investment portfolio to alternatives.

At a time when Brexit and international trade wars show no signs of calming, the logic for retaining heavy weightings to equities and bonds in portfolios is being questioned. The beauty of alternatives is their variety. By tapping into several different types of assets and sophisticated strategies, private capital can ensure sources of returns (and risk) are well spread.

Many alternatives have the advantage of being uncorrelated to mainstream market movements, allowing investment returns to be targeted even during times of market stress.

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Want Cheese on That Loan Fund? Why, Yes

Investors are scouring obscure corners of financial markets for plays that provide an alternative to richly valued stocks and bonds. For Amundi, Europe’s biggest asset manager, it means setting up a fund that will lend to makers of Italian cheeses and hams. This fund, which has €115 million ($126 million) invested and has so far hit its target of a gross yield of 6%, was created to capitalize on growing demand from Japan and Canada for Italian cheese and ham. The attraction of these Italian cheeses and hams as collateral for lending is that they increase in value as they mature. The fund lends to small, family-run companies in rural Italy that need things like new farm machinery but struggle to borrow from Italian banks that are still weighed down by bad loans.

Other venturesome investors are likewise searching for fresh sources of return in less-traveled regional markets that aren’t so linked to global financial flows. A unit of Swiss fund manager GAM, for example, has been investing in South African maize. One reason investors are going so far afield is the potential today for greater risk and diminished returns in mainstream markets. Average returns for European and U.S. corporate-bond fund managers were negative in 2018, according to Bfinance, an independent research firm.

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Three Overlooked Trends in Fintech

The approach of categorising fintech in just four verticals: lending, payments, insurance and investing overlooks some of the most undervalued corners of the industry.

The average consumer doesn't typically see the underbelly of the financial system, leaving it relatively misunderstood and exceptionally undervalued. Data for example is the lifeblood of finance and banking, but it is often an afterthought as it lies beneath the surface; financial infrastructure is also often ignored. However, the proliferation of fintech apps opens up a complex but massive opportunity to reinvent the foundation of the industry.  

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Fintech Lenders Could Hold the Keys to Recession Recovery

Economic experts forewarn of a potential recession, but no one can predict the timing or the severity. Born out of the last recession, fintech lenders have not yet been tested by a significant economic storm. In a downside market, two things are inevitable: uncertainty followed by a push to innovate. Digital lenders will tighten their credit, but this leads to innovation among those who survive and step in to fill the void. After the Great Recession many traditional banks backed away from small business lending.

Fintech lenders that stepped in to provide non-traditional financing solutions to entrepreneurs played a critical role in the country’s economic resurgence. marketplace model does have more flexibility (comparative to other models) to deal with adversity. Thanks to the granularity of the marketplace model, fintech lending could prove to be a safe harbour for weathering the ups and downs a recession may bring to the world of online lending.

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Failed Promise of Marketplace Lending Faces a New Test 

There are good borrowers that banks cannot serve well because of high overheads, clunky technology and rigid regulation, whereas a tech platform can connect those borrowers with investors starved of yield in a world of low interest rates. The platforms themselves are capital-light business, charging fees for originating and servicing loans while taking no direct credit risk — a formula for high returns. However, only a few marketplaces have achieved profitability. Of the biggest publicly traded marketplaces, Lending Club and Funding Circle are loss-making and at OnDeck and Greensky margins are thin. An industry turnaround will require overcoming three tricky hurdles, insiders say. Borrowers are too expensive to acquire; the platforms serve investors that have a significantly higher cost of capital than banks; and the stock market is sceptical about whether the companies can weather an economic downturn.

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UK watchdog warns peer-to-peer lenders on compliance.


Ahead of the introduction of tougher regulations this December to limit marketing and strengthen governance, the UK’s Financial Conduct Authority (FCA) warned P2P  lenders in a letter last week that it has already started a number of reviews of different platform failings and that it would “intervene strongly and rapidly where we see evidence of non-compliance”.  It mentioned particular concerns about property lending, where it is probing the quality of business on several different platforms. In May, Lendy, which provided property finance, collapsed after months of warnings about its poor underwriting and rising default levels, leaving retail investors likely to lose tens of millions of pounds. Its failure followed the closure in 2018 of Collateral, which had been operating without the correct FCA licence. 

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Funding Circle investors face long wait for money.

Funding Circle investors are having to wait more than 16 weeks to get their cash out, prompting an internal review at the P2P platform.  The lending service told The Times that it was “exploring a range of options” to tackle the logjam in its secondary market, which allows investors to sell their loans. The review has prompted concerns among some users that it may become even more difficult to withdraw cash from the platform, which has about 80,000 retail investors. Those wishing to sell out of their lending positions early have experienced increasingly long queues since the end of last year, with the waiting period having grown from less than a week in December 2018 to more than 100 days. The issues in its secondary market have been driven by supply and demand issues, as well as by a move made to protect investor returns.

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2019

 

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