(Bloomberg) -- A small but rising number of hedge funds are being established to help finance the boom in online and peer-to-peer lending across Southeast Asia.
Pilgrim Asia Consumer Finance Fund, founded by Brian Yonghui Tan and Paul Sheng, aims to raise up to $20 million in its first year and generate a return for investors of around 8% per annum. It will charge a 2% management fee.
Companies that provide short-term consumer loans at high interest rates are on the increase in countries like Indonesia and the Philippines as many people struggle to get advances through traditional channels such as banks. A flood of operators from China has also come into the market, having been squeezed out of the mainland by Beijing’s campaign to root out fraud and improve lending standards. Now, regulators in Southeast Asia are also considering stricter rules for the industry.
Pilgrim gauges a loan provider’s success, in part, by tracking its advances and keeping a tab on the percentage of loans that aren’t repaid within 30 days of their due date. It estimates the industry average for nonperforming loans in Indonesia is about 11% to 17% and it will only invest between $1 million and $2 million in each company to spread risk.
“It’s still a very fragmented market so the process of due diligence is quite intense,” Tan said, adding that Pilgrim prefers to back established companies that are publicly listed. “But the demand is so overwhelming from the consumer side because it’s a real societal need.”
Indonesia had 95 million “un-banked” adults, while just 34% of adults in the Philippines had a bank account as of 2017, World Bank data show. With unemployment around just 5% in both nations, there’s an enormous opportunity to provide small loans to people who’ll likely never have a credit card.
Shop Around
Eurekahedge analyst Mohammad Hassan said that while there’s an increasing number of hedge funds dedicated to funding consumer loans, growth hasn’t been explosive, yet. The five funds that invest in the space and provide Eurekahedge with their results have generated annualized returns of 6.74% since December 2014, with none suffering a down round.
“The question on investors minds will be how much due diligence they have to perform on these funds and also on some of their underlying assets,” Hassan said. “People who are really familiar in this space will want to go in, but for some other investors, they’ll probably shop around.”
Research firm Preqin Ltd. tracks five hedge funds with exposure to P2P loans, two of which are in the Asia-Pacific region -- Hong Kong-based Silverhorn Asian Lending Squared Fund and Australia’s Aura High Yield SME Fund. They’ve generated annualized returns of 7.2% and 11.1% respectively since inception.
Atome, an affiliate of Singapore-based Advance.AI, is one such provider of loans in Indonesia, the Philippines, Vietnam and India. Chief Commercial Officer Bernard Chan said small businesses are starved of financing -- Atome has lent more than $400 million since late 2017 and is doling out between 10,000 to 15,000 short-duration loans every day.
Lending Risk
The company has set up a Cayman Islands-registered mutual fund that delivers returns to investors in the mid-teens, Chan said. Those investors run the gamut from family offices to hedge funds. He said he’s spoken with at least two new hedge funds that have raised money to invest in the region’s P2P and online lending platforms.
“They’re a little limited in the check sizes they can write and they themselves have fund sizes in the tens of millions of dollars,” he said. “In this type of environment when we’re talking about reducing interest rates, it’s quite attractive,” he added, referring to the returns being offered to lenders in the space.
Short-term consumer lending can come with substantial risk, however.
Aside from the chance of not being paid back, a number of loan providers have used strong-arm collection tactics. It’s particularly problematic in Indonesia, where blackmail and threats of releasing compromising photos have been employed. That’s led to thousands of complainants who rally around internet hashtags like #korbanfintech, which roughly translates into victims of fintech. It’s also forced the regulator to implement a licensing regime and shutter scores of companies.
Pilgrim’s Tan says he’s heartened by such efforts because it will increase the amount of capital available to survivors.
“Crackdowns are good if you’re doing a proper business,” he said.
©2019 Bloomberg L.P.
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