Alternative Lending

Asset class characteristics

PwC

Introduction 

Allocation to alternative lending has experienced a significant increase among institutional investors. This significant growth has been driven in part by the attractive risk/seward characteristics of alternative lending and the stability of the cash flows it generates. In this white paper we aim to systematically evaluate these characteristics and compare them with other, similar assets.

Our first challenge was to select the appropriate investment indexes. At the time of publication, the non-confidential alternative lending index information available in Continental Europe was very limited. We therefore selected the Orchard US Consumer Online Lending Index as a proxy for the asset class. This index measures the performance of consumer loans originated and funded in the United States. It includes more than one million loans with an outstanding balance of over USD 11 billion.

Our analysis covers seven years of monthly return data ranging from January 2011 until September 2017. We used the following ETFs, taking into account dividends and splits, as a proxy for the following indexes:

  • IEF as a proxy for US 10-year Treasuries
  • HYG as a proxy for US high-yield corporate bonds
  • VCSH as a proxy for US investment grade corporate bonds
  • VTI as a proxy for US equities

Although our selection of indexes has limitations, we still believe our analysis sheds light on this new asset class. As further information and more indexes become available, we plan to update our research to deepen our insights.

Alternative lending has produced solid returns at a fraction of the volatility of other asset classes and at a shorter weighted average maturity, as shown in Table 1.

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