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Emerging Opportunities in Direct Lending

Emerging markets offer favorable conditions for the growth of direct lending. Direct lending is not only profitable for investors, but it also supports communities by providing more affordable credit to job-creating small businesses.

The Demand from Small Businesses

Small businesses have long faced difficulties in obtaining loans from large financial institutions. The big banks approved only 54% of US small business loan applications in the first quarter of 2019. The Federal Reserve also found that small banks approved 85%, but that still left many businesses unable to obtain loans.

Many traditional financial institutions are continuing to apply strict lending requirements. For example, it can be difficult for growing small businesses to prove several years of sufficient revenue or meet capital requirements. Borrowers are looking for new options, and a Fed survey found that nearly all small business owners know about online direct lenders.


The Rise of Online Direct Lending

Online direct lending is now fairly widespread. According to the Fed, 24% of US small businesses have sought funding from online lenders. Online lenders can sometimes provide credit to small businesses that banks reject. They also usually require less paperwork, approve loans quickly, and disperse funds promptly.

Although many small businesses deal with online lenders, a Federal Reserve report estimated their loans totaled only $12 billion in 2017. However, S&P Global Market Intelligence predicted that online direct lending to small and medium-sized enterprises would grow substantially. They forecast a compound aggregate growth rate of 21.5% in the five years leading up to 2022.


The Case for Emerging Markets

Online direct lenders may be able to grow even faster in developing economies. Firstly, the emerging markets are at a more favorable point in the economic cycle. The strength of the US dollar put considerable strain on many emerging economies. Brazil experienced a significant recession, while even fast-growing India had to deal with a credit crunch. Many of the worst credit risks have already failed in the developing world, and interest rates for small businesses are relatively high. 

Non-bank lending also plays a substantial and growing role in emerging economies. According to the Bank for International Settlements, debt to non-bank lenders accounts for 23% of private non-financial sector debt. Furthermore, private debt in the emerging markets grew an average of 4.5% per year during the past decade.

Finally, financial technology has achieved far higher rates of adoption in some emerging economies, which helps online direct lenders. China topped the EY 2019 SME Fintech Adoption Index at 61%, while it was just 23% in the US.


Investors Have Enjoyed Strong Returns

Private debt has worked well for investors, and they are optimistic about direct lending. 91% of investors surveyed by Preqin felt private debt equaled or surpassed their expectations in 2018. What is more, 43% believed that direct lending was among the best opportunities in private debt, higher than for any other category.

Pension funds are also planning to increase their private debt holdings. Their median current allocation was 2% or less of AUM, and their median target allocation was 5%.


Making a Difference

Small businesses create roughly half of all jobs, yet they face barriers to getting bank loans. The World Bank estimated that 70% of micro, small, and medium-sized enterprises in the emerging markets are unable to access credit. Direct loans to under-served markets can produce higher returns while helping to create jobs.

At Ashton Global, we know that making a difference is just as important as making a profit for some institutional investors. Direct lending can make a world of difference to small businesses and their communities.

Please contact us at +1 212 514 8953 or email to learn more.