Despite high-interest rates and challenging market conditions, the rush to invest in Micro, Small, and Medium Enterprise (MSME) finance and other private debt is expected to continue at pace in 2024. Indeed, a Private Debt Investor LP Perspectives 2024 study found that half of LPs intend to invest more in private debt in 2024 than they did last year. Private debt’s resistance to periods of volatility, as seen throughout the pandemic and recent economic instability, has made it into one of the most attractive segments in the alternatives sector.
Addressing the MSME finance gap remains a critical challenge. The International Finance Corporation (IFC) reports that 40% or 65 million MSMEs globally face an unmet financing need totalling $5.2 trillion. Therefore, improving access to private debt and working capital is crucial to finance MSMEs. To attract institutional investors, financial instruments that are typically illiquid in nature need to be packaged and credit enhanced. Reducing operational costs through automation is crucial for this process. Furthermore, establishing a specialised market infrastructure is essential for connecting sellers of MSME finance with potential investors.
Accelerating growth in MSM finance
The global private debt market has continued to grow since the turn of the century. Private debt assets rose 460% to more than US$1.4 trillion between 2010 and 2022, according to Preqin. Even after a slowdown in 2022, a BCG report predicts a rise of private debt global revenue of between 9% to 10% annually through 2028.
To accelerate the growth of MSME finance, the inherent lack of transparency and inefficiencies in deal sourcing within the sector must be tackled. Injecting liquidity into the market is crucial. This can be accomplished by converting granular pools of instruments into clearable and tradable securities. These securities will make the asset class accessible to a broad range of investors.
MSME finance requires repackaging
The rise of new technologies is revolutionising the private debt landscape. Tradeteq’s platform has an unparalleled level of transparency. It provides investors with a comprehensive market overview, presenting all available offers from sellers of MSME financing instruments to investors. This transparency extends to details regarding transactions and originators. It allows both investors and originators to thoroughly assess the other parties and make more informed decisions. It delivers a significant departure from the historically opaque nature of these markets.
Tradeteq’s platform also provides a standardised format for deal presentation. It streamlines the initial phases of deal sourcing and offers a more efficient approach to identifying and assessing investment opportunities. Furthermore, by repackaging MSME financing instruments into tradable securities with a CUSIP or ISIN number, it helps make the asset class accessible to a larger group of investors.
Tradeteq also provides sophisticated workflow automation, including but not limited to analytics, a rules engine, reconciliation and reporting. The latter generates automated reports tailored to various investor needs, from Net Asset Value (NAV) calculations to regulatory compliance and detailed performance metrics. This is particularly vital for asset managers seeking compliance with regulatory standards and performance metrics. For asset sellers, such as banks, factoring companies, and alternative lending platforms, this translates to real-time feedback on instrument eligibility and the efficient management of their respective pipeline.
The future of finance
The appeal of private debt is enduring. As trading technology within private debt markets develops, it fundamentally redefines existing processes to make private debt more accessible, efficient, and transparent. This will help empower investors and foster a more dynamic and accessible market.
MSME finance offers benefits across the board: investors gain access to an asset class with an attractive risk profile, enhancing their portfolios with more liquidity. This, in turn, facilitates broader access to affordable capital for underserved MSMEs, allowing MSME business owners to expand their businesses, innovate, and invest in better technologies and infrastructure. Altogether, this will help support businesses and create jobs around the world, constructing a sustainable foundation to stimulate economic recovery.
Tradeteq is the leading provider of data, technology and software to the trade finance and private debt sectors. Founded in London in 2016, Tradeteq has built the marketplace infrastructure to power private debt investments and help investment managers and asset sellers efficiently connect, interact, and transact. Tradeteq’s team delivers deep cross-disciplined knowledge together with client focus and understanding. Its digital platform enables it to be a true innovation partner to clients, significantly accelerating their pace of technology adoption while reducing complexity and costs. Tradeteq is the official technology partner of the Trade Finance Distribution Initiative, the industry-led group that sets the standards for global trade finance distribution.
