Research: How Digital SME Lending adds value to an investor's asset mix

Given the backdrop of record low interest rates, investors are increasingly hunting for yield in alternative credit segments. Digital SME Lending is emerging as a new asset class with interesting properties to enhance returns and diversify the asset mix. We quantify its benefits in a portfolio context and validate the results using real data from the creditshelf loan fund.
  • Digital loan spreads approximated from bank rates: We construct a loan spread & total return time series for Digital SME lending from interest rate data submitted by banks to the ECB.
  • Real loan data show return potential in excess of approximated rates: examining real loan book data from the creditshelf loan fund shows that curating a bespoke loan portfolios adds significant addional performance potential by capturing complexity premia of the asset class.
  • Investment performance with equity-like return potential: The annualized net return over a 10-year period is estimated at close to 4% for the SME lending proxy in our sample, while the net return of the loan fund is even higher at more than 6% p.a. and in line with stock returns.
  • Strong potential to enhance returns and add value to the asset mix: the correlation between Digital Lending and traditional asset classes is very low. Portfolios including digital loans show superior weight and risk diversification.
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Q4 2021