Print:

SME Lending – A responsible approach

Stéphane Blanchoz, Head of the SME Alternative Financing team

LinkedIn profiel

Please note that this article may contain technical language. For this reason, it is not recommended to readers without professional investment experience.

The traditional revenue sources (i.e. stocks and bonds) have helped institutional investors facilitate consistent, steady returns for decades now, but they are facing a number of negative headwinds, a result of continued low interest rates and erratic equity market movements, which could become even more volatile amid the risk of worsening trade tariffs and punitive trade wars between various major powers and regional blocs.

 

A number of institutions – such as pension schemes – are in the red as the diminutive returns being generated by their current portfolio investments means it is harder for them to meet liabilities, a problem made worse by the growing pool of retirees, whose average life expectancy is also increasing. Government-led reforms in The Netherlands to shoehorn defined benefit (DB) pensions into defined contribution (DC) structures are warranted, but they are not sufficient on their own to remedy the negative cash flows for a number of these schemes.

Instead, a wholesale re-evaluation of the existing investment process needs to be undertaken for institutions, with capital being redeployed out of equities and bonds into asset classes and instruments such as small to medium sized enterprise (SME) lending funds providing an illiquidity premium and environmental, social, and corporate governance (ESG) focus. SME lending funds provide investors with predictable, diversified, stable and long-term cash-flows. These revenues are often uncorrelated to traditional equity and fixed income market movements, making illiquids an ideal investment destination for investors looking to rein in their liability mismatches.

New entrants move into lending

SME funding has been eroded as Basel III capital requirements make it uneconomical and balance sheet intensive for banks to provide financing to riskier borrowers. While new entrants in the form of P2P (peer to peer) lenders and crowdfunding platforms have emerged, their ticket sizes are fairly meagre and most of their loan activity is directed towards seeding micro-businesses or small start-ups.

Asset managers – namely private equity and hedge funds – have also established lending operations for return diversification purposes, although most of their loans are being allotted to mid-tier enterprises and not SMEs. Given the plethora of buy-side activity in the loan space, it is critical for institutional investors to exert diligence and identify SME lending funds offering a differentiated product during the selection process.

At BNP Paribas Asset Management (BNPP AM) we believe there is an underserved segment of the SME marketplace in need of funding, namely, enterprises sandwiched between the micro-businesses/seed deals attracting the P2P/crowdfunded loans, and larger borrowers who have fairly unimpeded access to bank lending facilities and capital markets.

Such SMEs, which usually have turnovers of between €2 million and €50 million and headcount of less than 250, are very diverse offering a number of niche products and services. It is these types of companies which our experts will analyse and research, providing senior, unsecured loans, totalling anywhere between €500,000 and €5 million per transaction.

Responsible business

At BNPP AM we believe lending activities must be intertwined with our ESG criteria. We believe that adherence to ESG principles enhances the quality of the loan for the investor, thus reducing risk. All loan recipients are required to meet this criteria. An example could be the late filing of accounts by an SME, this could prevent us from lending in the first place or initiate action as it sends us an early warning signal that there could be future financial problems.

While we will price rates according to the risk undertaken, we strive to ensure such rates are fair and suitable for the borrower. Lending to companies at excessive rates is detrimental and can undermine investments as it makes it harder for enterprises to turn a profit. As such, we aim to strike a firm balance between being rewarded for incurring risk and ensuring SME borrowers acquire sustainable rates. We acknowledge that we have a responsible duty to the borrowers as well as to our clients.

We believe one of our key differentiators is that, unlike other lenders, it is critical for companies to retain control of their businesses, and that lenders avoid falling into the trap of trying to unduly influence management on strategic matters. This helps build up trust between lenders and the companies in their underlying portfolios, which ultimately augments performance.

In conclusion

Macroeconomic headwinds are denting investor returns, and this will force investors to consider allocating into new illiquid asset classes such as SME lending funds. The upside  being that by choosing a firm with responsible lending practices, such as BNPP AM, we will play a positive role alongside you in helping to finance the real economy.

Read more about the SME Debt expertise on Investors’ Corner by BNP Paribas Asset Management

Written 10 August 2018

Disclaimer

BNP PARIBAS ASSET MANAGEMENT UK Limited, “the investment company”, is authorised and regulated by the Financial Conduct Authority. Registered in England No: 02474627, registered office: 5 Aldermanbury Square, London, England, EC2V 7BP, United Kingdom. This material is produced for information purposes only and does not constitute:
1. an offer to buy nor a solicitation to sell, nor shall it form the basis of or be relied upon in connection with any contract or commitment whatsoever or
2. investment advice.
This material is issued and has been prepared by the investment management company. It contains opinions and statistical data that are considered lawful and correct on the day of their publication according to the economic and financial environment at the time. This document does not constitute investment advice or form part of an offer or invitation to subscribe for or to purchase any financial instrument(s) nor shall it or any part of it form the basis of any contract or commitment whatsoever. This document is provided without knowledge of an investors’ situation. Prior to any subscription, investors should verify in which countries the financial instruments referred to in this document refers are registered and authorised for public sale. In particular financial instruments cannot be offered or sold publicly in the United States. Investors considering subscriptions should read carefully the most recent prospectus and Key Investor Information Document (KIID) agreed by the regulatory authority, available on the website. Investors are invited to consult the most recent financial reports, which are also available on the website. Investors should consult their own legal and tax advisors prior to investing. Given the economic and market risks, there can be no assurance that the financial instrument(s) will achieve its investment objectives. Their value can decrease as well as increase. In particular, changes in currency exchange rates may affect the value of an investment. Performance is shown net of management fees and is calculated using global returns with time factored in, with net dividends and reinvested interest, and does not include subscription-redemption fees, exchange rate fees or tax. Past performance is not a guarantee of future results. This document is directed only at person(s) who have professional experience in matters relating to investments (“relevant persons”). Any investment or investment activity to which this document relates is available only to and will be engaged in only with Professional Clients as defined in the rules of the Financial Conduct Authority. Any person who is not a relevant person should not act or rely on this document or any of its contents. All information referred to in the present document is available on www.bnpparibas-am.com

 

Alternative Lending | IIR

More information?

Please insert your email address in order to download the Alternative Lending brochure

Wij gebruiken cookies om IIR.nl gemakkelijk te maken. Bezoekt u onze website, dan gaat u akkoord met deze cookies meer informatie

De cookie-instellingen op deze website zijn ingesteld op 'toestaan cookies "om u de beste surfervaring mogelijk. Als u doorgaat met deze website te gebruiken zonder het wijzigen van uw cookie-instellingen of u klikt op "Accepteren" hieronder dan bent u akkoord met deze instellingen.

Sluiten