By Rezaah Ahmad, CEO WiseAlpha Technologies
We have never been in more exciting times in the financial industry. The surge in new firms using financial technology to provide more efficient and transparent alternatives to banking and asset management models will bring dramatic changes to the debt capital markets.
WiseAlpha was born with the idea of bringing an online marketplace to the corporate debt markets and giving equality of access to investors of all sizes but crucially doing so in a transparent and responsible manner. Having started my career in banking, structuring corporate loans and then moving on to invest in the loans themselves, it always amazed me at how archaic the functioning of the loan market is in comparison to other financial markets. What if the credit markets were as liquid and transparent as the equity markets – would that have prevented some of the practices that led to the last financial crisis?
Although we have just launched, the mood in our office is one of anticipation and optimism as we strive to emulate the success of FinTech firms in other niches.
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WiseAlpha is an online investment platform offering its members access to senior secured loan investments in large, established companies. Although from a glance many mistake us for a P2P lender our model is very different. We do not solicit, structure or issue loans on behalf of companies looking to borrow but instead we allow our members to invest in loans that have already been made by major international banks to corporate borrowers.
WiseAlpha takes the first step in selecting which loans are listed on the platform but importantly we then allow our members to assess and choose which companies they want to invest in and manage their own exposure. We want our members to feel the satisfaction of making individual investments and to have the option of avoiding the numerous middlemen that can be involved in the traditional investment chain.
Over time we aim to foster a liquid “secondary market” for members to buy and sell from each other.
The rationale for senior secured loans
In light of stock market volatility, high bond valuations and low savings account rates wiseAlpha is looking to bring senior secured corporate loans into the mainstream and offer investors an alternative asset that can provide them with income and re-investment opportunities.
For those new to senior secured loans they have the following features:
- First ranking security over the assets of the borrowing company which offers a degree of capital and structural protection for investors
- Floating rate coupons (LIBOR plus a fixed margin) provide a potential hedge against long duration and inflation. In a rising interest rate environment loans should perform well versus fixed income bonds with low coupons and extended maturities
- Typically low price volatility versus the equity and bond markets which are more closely correlated to changes in the macroeconomic and interest rate outlook. As an example during August while the stock markets swung wildly the Credit Suisse Western European Leveraged Loan Index saw a drop of only 0.17%1
- Loans are generally callable at par and can be refinanced at any time meaning that the price of the loan tends to stay relatively close to par unless there is a negative credit event reinforcing price stability
Independent studies2 show that the senior secured asset class also compares favourably on a risk-adjusted return basis versus alternative asset classes such as high yield bonds and equities.
Symbiotic relationship with Banks
New Fintech platforms have been viewed with some trepidation by banks who see these platforms as a threat to the traditional banking model. Here at wiseAlpha we see FinTech platforms like ourselves forming a co-operative approach with banks. With global investment banks now focussed on arranging and syndicating their loan exposure therein lies a symbiotic relationship with wiseAlpha’s model. Specifically we see the following benefits:
- Arranging banks free up more capital to increase their lending by being able to syndicate their loan exposure into a wider investment base but in a responsible manner
- A wider spread of risk assets to potentially longer-term income driven investors less focussed on using leverage to bolster their returns thereby reducing leverage in the banking system and the ‘shadow’ banking system3 Greater liquidity and demand in the asset class should stimulate issuance benefiting corporate issuers
Technology is at our heart
wiseAlpha is fundamentally a technology company servicing the investor and banking community.
At the corporate level the senior secured loan asset class has remained the happy hunting ground for banks and funds in a relationship driven market. This combined with the long procedures for transfer and settlement tend to put off many investors.
By running an online platform we seek to create a wider investment audience for the asset class and replace the substantial costs and complexity of investing in the product with a simpler, faster and more cost effective way to invest.
As some of my peers in the FinTech world have stated technology has successfully disrupted many industries to the benefit of society at large but to the detriment of incumbents.However it has also created opportunities for those incumbents who see the benefit of cross collaboration in creating a bigger market.
Equality of access
Today investors both small and large are prevented from accessing the asset class due to the ‘club’ nature of the asset class, high minimum denominations for specialist loan funds or because of the complexity of setting up loan investment vehicles.In addition high upfront fees, long lock-ins and opaque fund structures have also inhibited investors.
I believe wiseAlpha has the potential to profoundly improve access for investors to attractive asset classes such as senior secured loans over the coming years and as we grow to pass on the benefits of scale to investors.
Our mission of transforming the wider investment industry and the capital markets is audacious but we firmly believe it is possible.
1Credit Suisse Leveraged Finance Strategy Monthly 03 September 2015
2Credit Suisse Leveraged Finance Strategy Weekly Report 10 January 2014, Credit Suisse Leveraged Finance Strategy Monthly 03 September 2015
3The term ‘shadow banking’ was coined in 2007 by Paul McCulley, PIMCO’s former chief economist referring to the “the whole alphabet soup of levered up non-bank investment conduits, vehicles, and structures” that contributed to the lending boom from 2005-2007.