Elkstone Alternatives May 2020
Unsurprisingly, new business in our alternative lending business slowed considerably in the last two months during the COVID-19 crisis. However, in spite of the difficult period, a number of our investments are progressing well and are very close to being repaid, giving excellent double digit returns to our clients, possibly as high as 30% IRR in one case. A new opportunity to lend to an existing borrower with whom we have a good track record has been launched this week and we will continue to offer new alternative lending opportunities to our clients over the coming months.
Pádraig Owens is a Director of the Alternatives team at Elkstone.
In the short-term, the impact of COVID-19 will continue to be very pronounced for early-stage and small to medium sized businesses. In the past, periods of recovery have offered great opportunities for alternative lenders, with excellent risk-reward potential. The primary reason is that recovery in the economy is not met with a concurrent recovery in bank lending to small businesses. This is particularly true in Ireland, where there is also a limited source of alternative lending and venture capital. While businesses have been able to achieve short term financing such as invoice discounting or merchant cash advances, long term funding has been difficult to source.
Also, during difficult times businesses are forced to shed cost and work more efficiently. Those that survive, often offer an improved lending risk.
A recently published article from Morgan Stanley points to four reasons why Alternative Lending is a compelling opportunity today.
1. Combination of attractive yield and short duration
2. Low correlation versus traditional asset classes
3. Attractive absolute and risk-adjusted returns
4. Diversification opportunities
Read the full Morgan Stanley article here.
AIP Alternative Lending Fund vs. Traditional Fixed Income: Gross Coupon and Duration (as of 3/31/2020) (Source: Morgan Stanley)