What trends will shape the future of alternative credit? (Alternative Credit Round Table – part 3)

May 22, 2025

What does the future hold for investors in Alternative Credit? How will ESG regulations and the rise of AI influence this asset class? In part 3 of this Round Table series, six experts shared their expectations.

By Hans Amesz

This is part 3 of the report. Part 1 can found here, part 2 can be found here.

Much of the regulation on sustainability focuses on corporate credit and term loans, but much less on securitised consumer loans. How do you deal with this in your sub-strategies?

Patel: ‘I agree. ESG regulation is focused on corporate credit. It is not easily applicable to specialty finance and asset-based lending. But you can, of course, apply the same principles. Our focus is mainly on the S (social) and the G (governance). Yes, we apply environmental exclusions, such as no coal financing. But the real impact lies in how you grant loans to consumers or small businesses. Financial inclusion is an important theme in our portfolio. There are groups of people who find it difficult to access credit at reasonable rates. We have a portfolio company that focuses on loans to Latin American residents in the United States, who often did not receive fair interest rates. Because the lender knows this target group well, they can better assess the risk and therefore also price fairly. From a governance perspective, as with corporate loans, we look at how the company is organised. How do they treat their staff and customers? What procedures do they have in place? One major problem is that if you have a fund with hundreds of thousands of loans, it is almost impossible to report at loan level as required for Article 8. And that stands in the way of promoting strategies such as sustainability.’

Are you in contact with regulators about this?

Patel: ‘We are discussing this with regulators. They understand the problem, but little action has been taken because asset-based finance was still relatively small. But that is changing: our sector is growing rapidly and can no longer be ignored. Once investors themselves demand clear rules, regulation will follow. Demand comes before action.’

Medema: ‘In asset-based finance – whether you look at residential mortgages, consumer credit, aircraft leasing or equipment finance – you see that each sub-strategy has its own ESG nuances. So you can't use a universal framework. We therefore work closely with our portfolio managers, both in ESG and private credit, to determine which ESG factors are relevant for each sub-strategy.’

What is the role of technology and AI in the development and risk management of the sub-strategies?

Ferreras Astorqui: ‘We are still thinking about ways in which AI can help us more. It is currently mainly used for data analysis and KPI monitoring. There is often no real central database, so you first have to collect all the data and use AI for analysis and identification of trends. Apart from data, we are seeing a lot of technological progress in climate risk analysis. More and more platforms and datasets are emerging that provide insight into the climate risks of specific locations or companies. Many of these also use AI.’

Henriot: ‘At RCF and NAV, we only have twenty to thirty loans in a portfolio. AI is not really relevant there yet, because the database is limited and the information is largely private. It does become more interesting in trade finance. Think of supply chain finance or factoring. The number of debtors is often limited, but the underlying invoices are numerous. Here you see technological improvement platforms emerging that can automatically process some of the documentation, which can be particularly useful for banks. We are also seeing platforms emerging that can offer forms of trade finance to smaller companies, where banks are less present.’

Simons: ‘AI and data analytics are also valuable for smaller players, such as my consultancy firm with forty people. For example, we offer benchmarks for Dutch mortgage investments based on loan-level data. In the past, you needed a whole team of quants for that. Now we can do it much more efficiently and therefore also more cheaply.’

What is your outlook for the various sub-strategies? Is their importance growing? What trends are you seeing?

Patel: ‘Demand from LPs has grown strongly. We are now at the point where we can actually absorb that capital. If you were to build a new private credit portfolio today, you would probably not start with direct lending, but rather with asset-based finance. The United States has been leading this market for some time. Europe is now really starting to follow, partly due to regulatory pressure. Even banks are now selling ‘super prime’ consumer loans to private parties.’

Medema: ‘The market for specialty finance is huge, around twenty trillion dollars. When we talk to clients, we emphasise four things: 1. diversification, 2. complementarity with existing allocations, 3. hard assets as collateral, 4. low correlation with broader market risks. As private credit portfolios grow, this becomes a logical next step.’

Ferreras Astorqui: ‘For blended finance, cooperation between the public and private sectors is crucial. There are concerns about cuts in government support budgets, particularly in the United States, but the conclusion is clear: we need to create strategies that attract institutional capital to finance emerging markets, especially when it comes to climate change. We cannot solve the climate crisis, which affects us all, by focusing solely on Europe or North America. Interest is growing, including from insurers and pension funds. And despite political uncertainty, many investors remain committed to their sustainability goals and are exploring ways to achieve them, including blended finance.’

Henriot: ‘There is a lot of competition in the mid- to large-cap direct lending market. Margins have fallen sharply, from 5% to 3.5% in two years at the long end of the market – Broadly Syndicated Loans to TLB. This means that there is a lot of interest in diversification and differentiated origination. We are also seeing a continuing shift on the supply side. Banks are still looking to proactively manage their balance sheets due to regulation, capital pressure and the mismatch between deposits and long-term accounts.’

Simons: ‘From a Dutch perspective, the pension system reform means that the old system with risk premiums will disappear. In the new system, many asset classes will become more accessible, including direct lending and sub-strategies such as this one. But the transition will take another two to three years. In the meantime, we need to work on knowledge sharing.’

Brooks: ‘Outside the banking world, the characteristics of the trade finance asset class as an investment are only just beginning to be recognised. We believe we are at the beginning of a journey to unlock a huge market. As investors continue to seek diversification and low volatility, demand for these assets will continue to grow. We have seen a huge increase in interest over the past twelve months and have no reason to believe that this will change. The current market volatility will only benefit this growth.’