Extra Credit: The Changing World of Private Credit Markets

For more clear and insightful economic and business news, subscribe to
Daily Upside the news. It is completely free and we guarantee that you will learn something new every day.

We had the opportunity to interview Nelson Chu, founder and CEO of Percent, a new fintech platform designed to disrupt the $7 trillion private credit market.

Nelson brings a unique perspective to the inner workings of today’s private credit markets and their critically important role in the global economy. He is also clearly an expert on how to change the percentage of the way borrowers go to the market and open a whole new door for all accredited investors.
/wp: paragraph

wp: title {“level: 1}

/wp: address

wp: paragraph

When people talk about “the market,” they always mean the stock market. But in many ways, most people are much more familiar and more involved in credit markets…even if they don’t realize it.

/wp: paragraph

wp: paragraph

Unlike the less than 60% of Americans who own stock, nearly all of us interact daily with credit instruments such as car loans, mortgage payments, and credit cards. In fact, the huge pockets of the economy revolve around assessing consumers’ creditworthiness and their so-called “ability to pay,” which means that card issuers and credit bureaus build large and complex models to analyze your risk profile in near real time. Simply put: When you walk into Target, Bloomingdales, or Best Buy, the FICO score is effectively drawn onto your forehead.

/wp: paragraph

wp: paragraph

Since the beginning of the modern economy, the availability of credit and the cost of lending has been determined by the movement of interest rates, and this has played a major role in any discussion of economic health. This year we all received a fresh reminder of how much monetary policy and interest rates can affect, and how powerful the Federal Reserve is to influence our economic outlook.

/wp: paragraph

wp: paragraph

If there is too much credit, otherwise known as “loose monetary conditions,” the economy could overheat and we would see things like the current reality of crippling inflation. Lack of credit means businesses are unable to borrow and expand, and these effects can be equally harmful.

/wp: paragraph

wp: address

private credit history

/wp: address

wp: paragraph

Formal lending has existed since ancient times.

/wp: paragraph

wp: paragraph

The first recorded document was a real stone that was discovered in Mesopotamia. It dates back to 2400 BC and served as a kind of security guarantee. Instead of $100 million + telegraphic payments, this bond was traded in corn, but the principle was exactly the same.

/wp: paragraph

wp: paragraph

modern Corporate bonds reached a little Later, and was first used to finance the Dutch East India Company in 1623. The US federal government first raised debt in 1775 to pay for the Revolutionary War. In hindsight, that was probably one of the highest rates of return in credit history.

/wp: paragraph

wp: paragraph

Now let’s fast-forward to the 1970s and the invention of both soft carpets and high-yield bonds. These bonds signal the beginning of the glory days of Wall Street, and seemingly overnight, a new form of alternative credit emerged that extended capital to a new group of companies that were otherwise too small or too risky to qualify for debt from Investment grade. This new asset class, which led to the advent of fixed-rate financing and the crazy growth of the leveraged takeover industry, has transformed US capital markets.

/wp: paragraph

wp: paragraph

But for smaller companies with revenues of less than $125 million, high-yield bonds have remained a distant dream. Commercial lenders have helped fill the gap for very small businesses (or very esoteric situations) to take advantage of the traditional high-yield market. Unlike the public bond market, where credit is (sometimes) registered with the Securities and Exchange Commission, rated by agencies, and widely marketed, private credit agreements are usually negotiated directly between the issuer and participating investors, allowing more Freedom of how the bonds are structured.

/wp: paragraph

wp: paragraph

Then came 2008In the aftermath of the Great Financial Crisis, commercial banks were forced to withdraw significantly from private credit markets thanks to regulations such as the Dodd-Frank Act. This legislation required that banks hold larger reserves of loan losses, making some lending activities less viable overnight. But this decline has left a huge gap of opportunity for aggressive and tactical financiers to fill:

/wp: paragraph

wp: list

  • It emerged as a new force that is faster moving and less regulated than the commercial, private or “direct” banks. Private equity firms such as Blackstone, KKR and the Carlyle Group have embarked on raising huge funds to lend directly.
  • Earlier this year, Carlisle reported that — for the first time in the company’s 35-year history — it had more assets under management in its trust arm, $116 billion, than its private equity unit, just $106 billion.

/wp: list

wp: paragraph

But despite its appeal and growing deal volume, private credit is a highly complex product that requires decades of experience in structuring, legal documentation, and legal complexities. All of this brings us to Nelson and Percent, a platform designed to inculcate structure and automation in a market that is as complex as it is vast.

/wp: paragraph

wp: paragraph

***

/wp: paragraph

wp: paragraph

TDU: Before we get to the percentage, how did you get into entrepreneurship?

/wp: paragraph

wp: paragraph

North Carolina: In some ways, I was meant to be an entrepreneur. My father was a software entrepreneur, helping to run a company that airlines use to manage their flight schedules and crews. It was a niche industry but it taught me a lot about the importance of building technology and efficiency in industries that don’t necessarily come naturally.

/wp: paragraph

wp: paragraph

TDU: Why private credit, what is the structural market opportunity?

/wp: paragraph

wp: paragraph

North Carolina: When I looked at the development of the high-yield market in the 1980s, the key to scaling deals and volumes was to create a globally approved language used to analyze opportunities. Everything from the transaction documents to the credit terms are now standardized across players, greatly facilitating the execution of deals.

/wp: paragraph

wp: paragraph

I think we’re experiencing a similar moment in the private credit markets today — there are a variety of deals, everything from small business loans to structured consumer credit to project debt — and none of them are standardized. We believe the opportunity is to create a platform Where all market participants can benefit from greater transparency and access.

/wp: paragraph

wp: paragraph

TDUWhat is the primary allure of private credit as an asset class?

/wp: paragraph

wp: paragraph

North Carolina: There are a lot of things happening. For starters, unlike many other sectors of the market, the volume of trades is still there. Unlike the capital markets, where the volume of deals (and deals with them) have dried up You have It has performed very poorly) Private credit is an asset class that companies around the world use to support their businesses. There are still a lot of companies that need funding, so we are seeing a huge amount of liquidity and interest on our platform. From a macro perspective, rates are rising—and while that may be painful for equity investors—exiting the “free capital” environment means that credit investors can actually be rewarded for lending capital.

/wp: paragraph

wp: paragraph

TDU: Can you show us how the deal works on percentage:

/wp: paragraph

wp: paragraph

North CarolinaMore than anything else, Percent is a platform where borrowers, investors, and insurers come together. The procedure begins with the borrower – a company (such as a fintech lender or venture capital-backed company) that requires capital. There are endless permutations, but some of the most liquid markets in percentage terms are small and medium-sized businesses looking to lease equipment to expand structured consumer debt in the form of residential mortgages, personal loans, or “buy now and pay later” loans, as well as litigation financing debt.

/wp: paragraph

wp: paragraph

Then there are the underwriters, who actually act as deal leaders. They are those with deep experience structuring deals, working through credit documentation, and evaluating risk profiles. Having done this work, they will eventually take on the risk as a lender, but they are also accumulating exposure to the third side of the market, the investors. Accredited investors can access Percent market and take advantage of all kinds of different opportunities.

/wp: paragraph

wp: paragraph

TDU: How should our readers think of getting involved?

/wp: paragraph

wp: paragraph

There are a number of compelling things about the Percent platform, but most importantly the ability to try before you buy. It is a complex market, and it is important for investors to get under their feet before allocating large pockets of capital. We recommend people do their due diligence before they invest, and if they sign up and invest, to try and spread exposure to several different types, a few hundred dollars here, a few hundred dollars there, before investing larger sums to see how the platform works for their investment strategy.

/wp: paragraph

wp: paragraph

But the best thing about Percent is the fact that many of the trades are short-term in nature, so while you can see the returns north 15%, Your capital is unrestricted for years and years.

/wp: paragraph

wp: paragraph

Check out the Percent platform today.

/wp: paragraph

wp: paragraph {“fontSize”: “small”}

This is a sponsored post created in partnership with Percent Technologies. Percent Technologies product terms and conditions can be found over here.

/wp: paragraph

Leave a Comment