$400 billion and growing. This is the size of Southeast Asia and India’s credit market, according to Kilde.
As an investment platform for private debt, the start-up may only be a year old, but it has big plans to tap into what it considers an under-penetrated resource – the private debt markets.
“The opportunity comes from Southeast Asia having never fully adopted the credit card business model seen in other Western nations. Credit limits, grace periods and moving instalments have made this inherently complicated,” Radek Jezbera, co-founder and CEO of Kilde told FinanceAsia.
This, Jezbera says, while not explicitly obvious in its correlation, has driven growth in ‘Buy Now, Pay Later’ (BNPL) companies. Other non-banking lenders such as Netherlands-based, Home Credit, have sprouted up across Southeast Asia, serving young consumers without a credit history, as well as the larger unbanked and underserved communities.
Home Credit has observed that BNPL is often the first product that many consumers in developing countries will use when it comes to banking.
“We’ve seen that customers globally want short-term engagement, and this has driven the popularity of platforms like ours, where they can get a zero percent or interest-free loan quickly and conveniently,” said Frederic Tardy, chief strategy and customer officer at the firm, which has 144 million customers globally and is growing its market share in Indonesia, the Philippines and Vietnam.
BNPL is essentially a service providing short-term loans to consumers, allowing them to make smaller ticket item purchases immediately, with the offer of paying in full at a later date.
With e-commerce experiencing strong growth during the pandemic, popularity in BNPL platforms has emerged as an alternative to credit cards. Perhaps a testament of the growth prospects in the sector, Jack Dorsey’s Square acquired Australian BNPL start-up AfterPay in August 2021, closing with a total implied value of $29 billion.
Increasing access to alternative investments
This coincides with an interesting time in the global markets where there is continued uncertainty about the state of the world economy, bond yields remain low, and inflation is rising. With unprecedented volatility and diminished returns, many investors are increasingly turning to private markets.
As an asset class, private debt has tripled in size since the 2008 global financial crisis. According to the IFC, private credit assets under management grew from $271 billion in 2009 to over $800 billion in 2019. Falling within the category of alternative assets, Preqin reported the asset class to have $13.32 trillion in assets under management (AUM) globally, at the end of 2021.
Kilde is hoping to change the paradigm of making alternative investments more accessible and mainstream. Its main alternative asset classes are income alternative investments namely private debt, venture debt and recurring revenue financing. Essentially, the start-up turns the investments into digital securities, and it is starting first with betting on BNPL debt as the new high yield, low risk offering.
“From the BNPL firms’ perspective, the product is a high yield, small ticket, and short duration, used by people who would normally not have taken a loan. However, they do so because of the convenience and unique value proposition. From the investors’ perspective, BNPL loans represent income-generating assets with attractive yield and low volatility,” added Jezbera.
Regulatory spotlight on BNPL platforms
However, one concern that is causing the segment to lose some shine is regulation.
“The biggest challenge for BNPL is going to be the potential regulations that will come down the line in 2022. When you’re operating in a regulatory arbitrage or regulatory vacuum, your returns are always going to be higher,” said Zennon Kapron, director of Kapronasia, a consultancy firm that focuses on the changing landscape of Asia’s financial industry.
Kapron is not bullish on BNPL in Southeast Asia, as his view is that many of these platforms take advantage of regulatory loopholes, and they are not regulated in the same way as traditional consumer credit offerings.
However, Kilde’s Jezbera believes these concerns to be misunderstood. Compared to student loans, the average ticket size on BNPL payments is around $200, and simply not as high as the thousands of dollars spent by consumers using credit cards.
With this in view, he considers BNPL debt as relatively low risk. Calculating delinquencies as the loan amount owed by the consumer, Kilde finds delinquency rates in most major markets to be less than four per cent. Even with more proliferation of BNPL products and customers who are less creditworthy, he posits that this figure would remain less than the typically encountered 8 to 12 per cent rate of unsecured consumer loan products.
Originating new opportunities
Norwegian for source, Kilde is living up to its name by working to source new opportunities with digital lenders like Home Credit, to issue private bonds.
Home Credit’s Tardy considers this approach a complementary route to access the market. The fintech also works with traditional players, but views Kilde’s platform as a diversification strategy in its effort to secure more funding solutions.
Before a digital lender can issue any bonds, Kilde conducts a thorough credit-risk assessment. Next, it arranges the bond issuance to open it up to investors. This is all regulated, as Kilde operates under a securities licence from the Monetary Authority of Singapore (MAS).
The firm closely monitors an issuer’s debt performance, as well as the covenants of the bonds until they are repaid. The platform sets restrictions on certain conditions, such as when cash flow starts dropping to a certain threshold, and if or when breached, Kilde starts accelerating payment.
But this is just one side of the platform’s coin. The other sees Kilde pair suggested issuances with institutional investors and high net worth individuals (HNWI), to save product origination effort and time.
Kilde has almost 130 investors and counting, a factor the firm hopes to further increase as it expands its focus to individual investors. In its first year of business, the average yield on its private debt investments was 10.5 per cent.
While the company started out with just a few hundred thousand dollars for investment, it made a big push towards the end of the year, and now has $3.4 million invested in private debt assets. Last month, Kilde agreed on $3.7 million of fresh consumer loans financing.
For 2022, Jezbera hopes to have at least $25 million invested.
When it comes to investing in its own future, Kilde has raised $835,000 over the past two years. It is targeting at least $1.5 million in a seed round this June, but Kilde is strategic about who gets to invest in the company. So far, the money raised has come from angel investors, as Jezbera not only wants to raise money, but wants to do so smartly. And it is through this smart sense that the Kilde team hopes to succeed in shifting the paradigm of alternative investment.
