Private debt is growing rapidly and recent inflows have been huge, but Canada’s big banks are under pressure in the space
With the low rate, low yield environment expected to be a reality for many years, more investors are realizing the importance of alternative investment opportunities. Within alternative income, the private debt space is growing rapidly and recent inflows have been huge. AUM in the private debt world is close to $700 billion globally, most of which is accounted for in North American markets.
“The private debt space is constantly evolving because of the dynamics of what is happening in the banking world,” says Ramesh Kashyap, Senior Vice President, Alternative Income Group at Sprott Asset Management. “There are fundamental changes in who banks want to do business with and how they want to do business. Because of that, there is huge potential for the alternative fund managers or asset providers, particularly in the credit area.”
Kashyap identifies the rise of fintech as being the driving force behind why Canada’s big banks are rethinking how they do business in the credit space. Obtaining credit is easier than ever before and the need for bricks and mortar branches and offices is dwindling as more consumer business moves into the digital world.
Although some of the big banks don’t necessarily want to build the digital infrastructure themselves, they also don’t want to lose retail customers to fintech firms who have better software and hardware. As a result, the banks are doing deals with fintech firms in order to improve their capability. “A lot of that credit business could be easily taken away from the banks, so they’re scared and are trying to prevent that from happening,” Kashyap says. “The same thing is happening in the low end business loan world. Anywhere from $100,000 to $2 – 3 million loans are highly automated these days – you don’t need a bank or loan officer saying whether the consumer is qualified. A robust program can give you an answer in 10 minutes based on the information you provide.”
The banks’ main value proposition in the modern market is the relationships they’ve built over time. For some clients, banks offer a layer of security for bigger or more complicated transactions, but the reality is that many firms can now deliver funds at a lower cost than the banks. “Because of all of the change in the regulatory world and the bank risk-return portfolio management world, the banks don’t have the bandwidth to process many of the private credit products,” Kashyap says. “The banks are deleveraging and, because of that, they want to pick and choose the spots they play in – they can’t be everywhere for everybody.”
“That is going to leave a lot of people and businesses looking for money. They have to come to the private world and that is why it’s going to expand.”
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