5 investment strategies and drivers when selecting SMEs to finance

The term ‘sustainable investing’ is a major buzzword these days and spans across focus areas, from philanthropic investments to funding ESG initiatives. SME credit, an alternative asset class, is a less prominent but equally important segment under this sustainable investing theme. 

Covid-19 has ignited waves of upheaval across asset classes – market volatility can be exciting for those in the pursuit of gambling on high yield returns. However, when it comes to sustainably build, grow and maintain your investment portfolio, we tend to be reminded of the tale of the tortoise and the hare. As old as the story is today, it never rings more accurate than in recent times. There is a time to gamble and a time to appreciate that sometimes slow and steady wins the race. When you need a reliable and grounding anchor to your alternatives portfolio, SME credit is a sustainable form of investing that has established itself as a tried, tested, and proven asset class over the past few years. 

This article discusses the five investment strategies and drivers when selecting SMEs to finance, which are fundamental considerations when incorporating SME credit into an investment portfolio as a sustainable, long-term investment. 

DRIVER #1 Good repayment history

Good repayment history bears significance because it establishes a track record of repayment habits. There is actionable historical lending data to continuously serve as a basis for the lender to finance the SME. Validus’ credit algorithm and underwriting framework employ machine learning techniques to improve future underwriting based on these past repayments. Having a vast range of repayment history, whether prompt or not, means our decision to grant loans comes with a greater deal of predictive capability and informed decisioning. By focusing your portfolio on the SMEs you also have a significant track record of repayment from, you can concentrate on informed deployments which minimise the ‘cash drag’ in your account of capital not being put to work.

Learn more about the term ‘cash drag’ as previously explained by our Head of IR, Milena, here

DRIVER #2 The SME industry sector

Covid-19 has deeply impacted several sectors, and this is often significantly correlated with the locality under consideration, often including hospitality & tourism, entertainment, and food & beverage categories. 

However, many others have flourished, in particular those who operate in essential services (hospitals, utilities, and infrastructure) who will continue to experience non-elastic demand even in times of upheaval. Some SMEs even thrive during such occasions. 

One example is SMEs in the FMCG space, many of whom may be suppliers who are stocking goods to supermarkets in your neighbourhood – recall the lines at the supermarket whenever a lockdown or heightened alert was raised? Keeping wary of these nuances helps you to make informed decisions.

DRIVER #3 Portfolio Composition

SME credit is a good alternative to conventional investment instruments thanks to its low correlation with public markets. On the Validus platform, you can invest thematically into specific sectors, products that translate into risk grades and return profiles, or even liquidity profiles. 

However, maintaining a broader range of investments not only facilitates building a sustainable foundation to understand the asset class better if you’re just getting started, but it also allows you to create a balanced portfolio that spreads risk across a wide range of parameters in case anyone ever faces stress.

Learn more about how you can strategically diversify funds

DRIVER #4 Tenure and % returns

As every seasoned investor would know, the core purpose of investing has always been to deploy capital intelligently in search of positive risk-adjusted returns. 

Amidst market volatility, SME credit offers short tenures of up to 12 months with attractive returns, fixed on a monthly basis. Investors should consider the time horizon for their investment and whether they foresee requirements for near term liquidity and select investments accordingly.

DRIVER #5 Product type of facility

Not all investment instruments are created equal, and this holds even within SME credit itself. There are different types of products investors can choose from depending on their risk appetite and profile. 

Check out our guide to the various facility types on the Validus platform

SME lending as a sustainable form of asset class in the long run 

With the unpredictable nature of the current market conditions, snap judgments and fatigue in actively managing investments is becoming a real issue for investors. 

By incorporating SME credit into your investment portfolio, you can make an impactful contribution while anchoring your portfolio with a highly liquid and market-plus returns generating alternative to traditional fixed income products. With Validus’ digital platform and, most notably, our “auto-invest” capability, you can also set and forget your investment once you set your preferences.

Learn more about how Validus makes investing in SME credit sustainable and accessible and the various investment products to diversify your portfolio with this low-volatility investment; our IR team is just an email away: ir@validus.sg.

You can get real-time updates on your current investments and future opportunities via the Investor mobile app for current Validus investors. Download via App Store or Google Play today. 

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