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Frank Meijer is European Head of Alternative and Private Fixed Income at Aegon Asset Management. He was a member of the investor panel discussion at the Alternative Lending Event on the 7th of November 2018. It was a great opportunity to speak with him about the position of Aegon in the Alternative Lending market.
First of all we see that traditional fixed income is hardly profitable, partly due to the purchase policy of the ECB. You can only receive returns on what the ECB does not purchases. Like loans.
The second reason to engage in direct lending is the diversification of the portfolio, since traditional fixed income mostly consists of government and corporate bonds, direct lending offers the possibility to diversify by investing in loans to SMEs and consumers.
Indeed. And specifically as an asset manager I do have another reason. We see direct lending as an interesting possibility to add value. Accessing the asset class is not easy and analyzing loans requires a lot of specific knowledge. So as an asset manager we strive to be good in this niche, so that we, besides the resources of Aegon itself, also can invest on behalf of pension funds, insurances and other parties.
We have spoken to 120 different parties in total, especially in Europe and the US. We have done a very broad exploration. The disadvantage of some startups can be that they are too focused on growth and have deficient governance. However, the advantage is that they often are more malleable and are more open to our vision. Overall, the whole due diligence process takes quite some time.
This depends on a lot of different factors, including time. When we first started our focus was primarily on consumer loans. In the case of Dutch consumer loans you could easily get a 10% coupon. And losing 1,4%. Quite interesting in comparison with the other options in fixed income. In other markets there is usually more competition which results in lower return for investors. In Europe we now see that returns on consumer loans slightly drop due to increased competition, but they still add a lot of value compared to traditional and liquid fixed income markets like investment grade credit and high yield bonds. Another important factor for the risk and returns ratio is the duration. SME loans tend to have a lower expected duration, something that makes these loans extra interesting given the place in the credit cycle and expected tightening measures of central banks. Despite the high return (in USD) the US is currently less interesting for an euro-based investor because the hedging costs back to euros have increased.
Even though consumer loans are still quite attractive compared to traditional fixed income investments, we see more value in SME loans. The expected returns of these loans are between 6 – 10% (depending on the capital structure). We now have an impact investing fund that invests in Dutch SME loans with attractive gross returns and quite low expected losses. These expectations are difficult to surpass, even by consumer loans at this moment.
Within a platform we make a thorough data analysis of which part of the loans are most interesting for us, using big data analysis. The analysis of short-term loans vs. long term loans, strong borrowers with low coupons vs. weak borrowers with high coupons. As said, governance is also very important to us. Within FinTech’s a loan pool is sometimes only focused on growth which could come with a lot of risk. Often because a FinTech does not carry any risks themselves.
By being honest and transparent. I find a basis of trust very important. A good example is that a platform is transparent in availability and reliability of the information and criteria that are being used for checking any loan application. Then an investor can check if the criteria match their requirements. The risk analysis of those criteria for providing an SME and consumer loan is difficult, especially if you compare this type of analysis with the risk analysis of the mortgage market.
Two effects are contradictory here. On one hand this could mean that the issuance of ABS’s can be limited in time. A lot of mortgages in The Netherlands are already being sold via a fund.
However, it could also easily become more than it was before, because there are a lot of parties that participate in direct lending themselves and are going to secure those loans too. They do this in order to sell them as Triple A notes. Some banks are already doing this, an interesting development.
The 15th edition of the Securitisation Event gives you insight in what the market looks like in the new regulatory environment, and the kind of trends that will develop. Gain insight in the impact on the different asset classes, and what the future role of securitisation will be for funding and capital management. For more information visit the eventpage.
Geplaatst op: 26 november 2018
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