Exaloan

Small is beautiful: How Digital SME Lending adds value to an investor's asset mix

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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 times series for Digital SME lending from interest rate data submitted by banks to the ECB.
  • Real loan data shows return potential in excess of approximated rates: examining real loan book data from the Creditshelf loan fund shows that curating a bespoke loan portfolio adds significant additional performance potential by capturing complexity premia of this 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. 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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