Credit funds and other non-bank lenders backed by
pension funds and insurance companies operate
where banks no longer can, and play a crucial role
in supporting the real economy…
Credit funds and other non-bank lenders backed by pension funds and insurance companies operate where banks no longer can, and play a crucial role in supporting the real economy…
The inability of banks to satisfy the demand for credit is a global and growing South African phenomenon. The structural inefficiency of the banking system was exacerbated by the credit crunch in 2008 and the consequent introduction of Basel III, which has required banks to hold more capital against their loan books and more efficiently match assets and liabilities. These changes have severely limited the ability of banks to grow their loan books and have increased pressure on banks to do shorter term, more expensive loans to fewer clients. As a result, many banks no longer offer the growth or acquisition finance solutions that they did a few years ago, because the associated cost of capital is too high. The general trends in banking are slower turnaround times, unpredictable and inconsistent credit decisions and increased pricing, all of which makes financial planning for a business very difficult. Most importantly, these regulations are here to stay and if anything, may in time become stricter.
So too, the global search for yield is unlikely to dissipate as interest rates remain low. Asset prices remain at overpriced levels and thus to many investors moving down the risk curve to invest in debt makes sense from a risk and yield perspective.
The growing opportunity in this asset class, combined with investors’ thirst for inflation-protected yield has since 2008 given rise to exponential growth in credit funds in the US, UK and Europe. Today credit funds and other non-bank lenders backed by pension funds and insurance companies operate where banks no longer can, and play a crucial role in supporting the real economy.
Key advantages of investing in Credit Funds include:
- A high yield compared to alternative options;
- A return which is positively correlated to interest rates and thus provides implied inflation protection;
- A return which is not correlated to listed fixed income or equity markets, and thus reduces portfolio volatility;
- Unlike banks which are 80% to 90% leveraged, Credit Funds typically use no leverage. The associated benefit is significantly lower risk of capital loss; and
- Access to carefully sourced investment opportunities which are not available to the average investor.