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Alternative Market Briefing

Katch secures guaranteed income through private debt to SMEs

Wednesday, August 12, 2020

amb
Pascal Rohner
B. G., Opalesque Geneva:

Short-term lending to SMEs can be a good alternative to traditional fixed income, provided the risks are well under control. One fund that does just that is the Katch Global Lending Opportunities Fund, a multi-strategy investment vehicle dedicated to lending solutions for small- and mid-sized companies (SMEs). The Luxembourg-domiciled fund, launched at the end of 2018, is up 2.4% YTD (to June) and has been in positive territory each month so far this year.

The fund is managed by Katch Investment Group, an asset manager dedicated to investing in private debt with offices in London, the Isle of Man, Luxembourg, Panama, Brazil and Switzerland. The firm manages more than $800m in investment funds and mandates. The founding partners, CEO Stephane Prigent, chairman Laurent Jeanmart, and CIO Pascal Rohner - all CFA certified - have a combined experience of 56 years in asset allocation and private banking.

Pascal Rohner will be speaking at the Fixed Income Alternatives Strategies webinar on Wednesday 9th September, at 10 am EST.

"The Katch Global Lending Opportunities Fund invests in a very well diversified portfolio of short-term lending opportunities in the private debt segment," Rohner explains to Opalesque. "We only do senior lending with strong protection through guarantees, collaterals, and sometimes even insurances against default. Our main strategies are real estate bridge lending, opportunistic direct lending, factoring and trade finance. Currently, we have exposure to the UK, Germany, the US, the European Union, Switzerland, Canada, Brazil, and Asia. We source the majority of opportunities inhouse. The strategies are very conservative and uncorrelated to traditional asset classes, which explains the extremely low volatility. The fund has a target return of 8% in USD for institutional share classes."

Private debt is attractive on several counts, the firm says: it usually comes with protection; it is more liquid than private equity; it generates a positive performance most months; and it generates higher yields than bonds.

In May, Katch had another strong month in terms of inflows, he adds. The managers invested a large part of the cash at the end of the month, so on average they had around 20% of the fund's assets in cash, which resulted in a below-average, yet positive performance (+0.3%).

Current opportunities and risks

On 29th May, Katch completed a loan to a real estate developer for the acquisition of a piece of land in Belgium that has all necessary permissions for residential development. The loan is fully secured by a first lien on the property and is part of a larger syndicate. The project loan-to-value is 53%, based on an independent valuation by a large Dutch bank made in April 2020. So the value of the collateral is almost twice the value of the loan. This means that even if the value of the land fell close to 50%, there would be no impairment.

"This deal is an excellent example of new opportunities that are arising during economically complicated times," Rohner says. "Traditional lenders, such as banks, are not providing enough funding to small and medium-sized enterprises. Therefore, borrowers are willing to pay an attractive interest rate and to put even stronger collaterals to secure funding."

With the advent several regulations such as Basel III (2010), which requires higher capital reserve requirements from large financial institutions, the Dodd-Frank Act (2010), which has strongly increased compliance costs, and Volcker (2014), which prohibits banks from conducting certain investment activities with their own accounts, banks only limit their scope to large structures, leaving out SMEs. Private credit fills that gap, but SMEs are 'price takers' (i.e., they must accept paying a much higher yield).

The managers at Katch continue to manage the portfolio extremely conservatively. However, carefully selected new investments, such as the recently implemented deal in Belgium, should improve the performance in the near future.

Currently, many SMEs are suffering from pandemic-induced economic slowdown. But Katch manages these risks, and all other risks, with guarantees and collaterals. They have also shifted some exposures.

"During the crisis, we shifted a lot of exposure to real estate bridge lending and we reduced the loan-to-value ratio," Rohner says. "In the UK, which is our biggest exposure, we have an LTV of 59%. Also, residential real estate is relatively resilient in this crisis. Generally speaking, we always have protection, but at the same time, we increased diversification and shifted to more resilient sectors, such as real estate, healthcare, and food. Trade finance remains pretty safe. We also reduced the exposure to Brazil before the crisis but now we are seeing very good opportunities, though for the time being, we also focus on high-quality deals with real estate guarantees."


Upcoming webinar:

Fixed Income Alternatives Strategies: 5 strategies on one panel
Wednesday, Sep. 9th at 10 am EST
Details and (free) registration here: www.opalesque.com/webinar/

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