What is driving investment interest in asset finance strategies?
Asset finance strategies are investment strategies based around lending to smaller companies and to projects that qualify for secured lending.
Many smaller firms now find it difficult to source loan finance from commercial banks which, due to regulatory constraints, have become less active in the areas of asset finance.
Investment funds are capable of implementing asset finance strategies through a variety of means. This could include owning a portfolio of asset finance companies, for example, or becoming specialists in lending to a particular sector such as farming or alternative energy.
Investor interest in asset finance strategies is partly driven by the fact that such funds are not correlated to public securities markets: asset finance by definition is based on high quality secured loans and yields regular interest payments. It is not dependent on the vagaries of equity or bond markets, for example.
Another attraction of asset finance strategies is that they are easier to understand. There is no ‘black box’ investment programme, or dependence on a single fund manager or indeed a portfolio management team that might decide to leave for another firm. Key person risk is far more diversified because the investment strategy is based on clear lending processes and policies.
Investors in asset finance strategies can easily see how returns are generated and that such returns are more predictable in many ways than public markets.
Certain asset finance strategies can also be viewed as ‘impact investments’ as they can play a valuable social and economic role, for example indirectly supporting farmers and their communities by helping them to finance clean energy power projects.
Governments also support some types of asset finance strategies, directly and indirectly, as they value the role such funds play in providing much-needed finance to small and medium enterprises (SMEs). This means that asset finance strategies can capitalise on possible subsidies or tax breaks. A good example would be guaranteed prices for energy generated from alternative sources, destined for economically important sectors, or those areas of the economy which might help governments to achieve medium term goals – clean energy targets, for example.
Asset finance strategies require teams of experienced commercial finance professionals with an understanding of the sectors and clients that they lend to. It is vital that credit finance teams have a clear understanding of the risks involved in a loan-driven approach, and that suitable regulatory and oversight provisions are in place to oversee asset finance strategies.