Kilde’s Fountain of Finance #8 - 15 February

Greetings! We gathered captivating reports this time around: Delve into the latest trends in Private Credit, gain insights from BCG on Best Practices and Pitfalls in Capital Allocation, and explore the 2024 Outlook on Navigating the Post-Pandemic Economy from GS Investments.

We also covered important topics such as The Evolving Landscape of Private Credit, The Attraction of Top Talents from the Banking Sector to the Private Credit Industry, and The Dilemma of Quality vs Quantity for Private Market Investors.?

We hope you find the read enjoyable!

Kilde’s Industry Intel: Our Favorite Industry Report Roundups

Private Credit Market in Asia: Growing Opportunities and Key Trends in 2023

While this report may have a bit of age on it, the insights it holds are still of great value. Here are some of the key findings:

• The private credit market in Asia is experiencing significant growth, with a record fundraising of $11.2 billion across 27 funds in 2022, marking a 42% increase from 2021, according to research by the Global Private Capital Association.
• Regulatory changes in India may further boost private credit growth. The regulator now allows alternative investment funds to participate in credit default swaps, providing new hedging options.
• Cooling valuations in the tech sector will create venture debt opportunities across the region. GPCA has tracked 122 venture debt deals totaling $2.9 billion in 2021-2022, a significant increase from 61 deals for $508 million in 2019-2020.
• Environmental, Social, and Governance (ESG) considerations will become increasingly important. Investors are seeking managers with strong ESG integration.
• Due diligence will intensify with the rise in interest rates. Bottom-up underwriting and careful partnership selection will be key.
• Notable highlights in the consumer finance space in 2022 include Fasanara Capital providing $200 million in venture debt to Indian fintech StashFin, and Victory Park Capital financing Indonesian fintech Kredivo with $145 million.

There is a significant amount of capital available for investment in private credit in Asia, making it an attractive opportunity, especially for cross-border private credit managers.

Download the report here: https://www.globalprivatecapital.org/app/uploads/2024/01/GPCA_Private-Credit-in-Asia_Opportunities-and-Themes-for-2023_vF.pdf ?

Best Practices and Pitfalls in Capital Allocation: Insights from BCG

This excellent paper from BCG highlights best practices and common mistakes in capital allocation processes. Typical pitfalls include:

• Investing in projects vs. businesses. Failing to assess strategic fit leads to poor investments.
• Using IRR as the sole criterion. This biases decisions against long-term, risky projects.
• Ignoring risk. Optimism and groupthink skew assumptions. Conduct pre-mortems!
• Allowing biases. Anchoring, framing, and confirmation bias distort decisions.
• Lack of accountability. Incentives are disconnected from project outcomes.
• Lack of learning. Lack of audits and feedback loops hinders improvement.
• The best companies that allocate capital well have demonstrated higher ROA and growth. Getting it right pays dividends!

Download the report here: https://www.bcg.com/publications/2023/corporate-development-finance-function-excellence-art-of-capital-allocation

GS Investments Outlook 2024: Navigating the Post-Pandemic Economy

The disinflationary effect of the normalization in the product, labor markets, and housing costs is still unfolding. Core inflation is expected to fall back to 2-2.5% by the end of 2024 across major economies. This cooling provides room for central banks to deliver insurance cuts if growth slows.

With positive real income growth and fading policy drags, the risk of recession is limited (15% in the US) and GDP is expected to stay near trend in 2024. US growth is projected to outperform peers.

Most developed market central banks are nearly done hiking under our baseline, but gradual rate cuts are more likely in 2024 H2. Policy rates will likely remain above central bank estimates of "normal" when they settle.

The backdrop suggests better real returns across assets after the "Great Escape" from low inflation and yields. Bonds hedge recession risk, commodities hedge geopolitics, and equities have potential cuts. A mix of assets looks better than just cash.

Download the report here: https://www.goldmansachs.com/intelligence/pages/global-markets-outlook-2024-towards-a-better-balance.html

Kilde’s latest scoop on Investing

The Changing Landscape of Private Credit: Opportunities and Challenges

The growth of banks unloading assets to comply with regulations following the 2008 crisis is set to squeeze out mid-market private credit managers. While this presents challenges, there are opportunities for boutique firms to flourish in specialised areas such as distressed debt or infrastructure lending.?

At Kilde, we are capitalising on this trend by developing expertise in consumer and SME loans within emerging markets. The middle ground remains treacherous, as mid-sized generalist firms are likely to be overshadowed as the market continues to divide. The rising tide of private credit will not necessarily benefit all players.

Reference: https://www.ft.com/content/b8e151c7-7302-4464-bc49-5091df86ec40

Exploring the Thriving Private Credit Sector: A Haven for Top Banking Talent

The private credit sector is thriving and actively seeking top talent from the banking industry. Many private credit firms are recruiting professionals from banks and asset managers to strengthen their teams.?

Why is there such a high demand for talent? As one executive explained, "Private credit is the best house in the neighborhood." Let's explore some of the key factors that attract bankers to pursue careers in private credit:

• Competitive compensation packages: Private credit firms often offer salaries that are 30-50% higher than those in banks, along with larger bonus opportunities.
• Senior roles for junior talent: Private credit firms value banking expertise and provide opportunities for promising VPs and AVPs to take on MD and partner roles.
• Entrepreneurial environment: Many private credit firms have a start-up culture, offering greater autonomy and the chance to build something new compared to the bureaucracy of banks.
• Growth and stability: Private credit is experiencing rapid expansion in terms of assets under management (AUM) and hiring. These firms provide career growth in a thriving field that is less susceptible to market fluctuations.

Reference: https://citywire.com/global-private-banker/news/private-markets-firms-raid-asset-managers-and-banks-for-talent/a2431212?utm_source=substack&utm_medium=email

The Quality vs Quantity Conundrum for Private Market Investors?

We've gained valuable insights from an exceptional post by VC Charles Hudson.

As someone who frequently advises new investors in private markets, Charles is often asked for the one piece of advice that would maximise their chances of early success. While every firm and role is unique, his guidance can be distilled into one key principle - resist the temptation to take on too much too soon.

When starting, it's natural to want to prove yourself by sourcing numerous deals and bringing potential investments to your partners. However, this "Spray and Pray" approach often backfires. Unlike public markets, the feedback cycle in private investments is long and convoluted. So, while the activity may feel productive, it may not help you develop judgment and discretion.

Instead, we encourage new investors to embrace a more selective approach - only bring your very best ideas for consideration. This demonstrates your ability to identify quality amidst the noise and allows you to focus your time on refining your thesis and building meaningful relationships with the most promising founders and management teams.

Over time, as your network expands and your judgment sharpens, you can gradually increase the quality and quantity of deal flow. However, in the early stages, restraint and patience are key. As the saying goes, "quality over quantity" paves the way for long-term success in private markets. The firms and colleagues that impress the most are those who consistently uncover the diamonds in the rough.

About Kilde’s Fountain of Finance

Our editorial team at Kilde is curating valuable insights within the private credit space to keep you updated on all the exciting developments. Subscribe now for free and stay informed!

About Kilde

Kilde is an investment platform tailored for individuals and institutions, providing access to private credit deals supported by cash-generating assets. We offer up to 13.5% annual returns to our investors, surpassing similar risk investments yielding around 8%. We are licensed by the Monetary Authority of Singapore. Find out more: https://www.kilde.sg/