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Expert Voices: Percent CEO Nelson Chu talks venture debt and private credit

Sep 18, 2023
Photo illustration of Nelson Chu with a pattern of the Percent logo.

Photo illustration: Gabriella Turrisi/Axios. Photo: courtesy of Percent

Private credit and venture debt are still in high demand, even as equity financing deals have picked up, Percent founder and CEO Nelson Chu tells Axios.

Why it matters: Operating as a marketplace for consumers and institutions to invest in various forms of private credit, Percent has a unique view into lending activity across consumer, SMB and corporate sectors.

This interview has been edited for brevity and clarity.

What's happening in the private credit markets these days, especially in the months following the collapse of Silicon Valley Bank?

  • The big takeaway — and the good news for everybody — is that the venture equity market is thawing ever so slightly. It's not as completely frozen as it was before.
  • But you're still in a situation where companies who are looking to survive or bridge themselves to the next round are looking to other options on the off-chance that venture equity doesn't really work.
  • So venture debt is still very, very high on people's lists, and we're seeing interest, not just domestically but also internationally as well.

On the venture debt side of things, the question that always comes up beyond rates is just whatever covenants or structure is thrown into these deals. What are you seeing from that perspective?

  • It always comes down to where the pendulum swings. Prior to the Fed raising rates, it was a borrowers' market where there was so much capital chasing after high-quality deal flow that [companies] who were considered high-quality could just dictate terms, much to the chagrin of the capital provider.
  • But that pendulum has swung very far the other way, given the mismatch between the desire for capital versus the capital that's willing to allocate. So we are definitely seeing a lot more covenant structure built into it.
  • That inherently provides better protection for the capital provider, in the event that something goes south because that's what they're hedging against at this point.
  • So higher warrant coverage, various cash requirements that are required… It's all up for discussion, to be honest. And the rates have obviously ticked up significantly higher at this point.

Post SVB, who's been most active in the market?

  • I think the legacy names are still the same, but on the venture debt side, it has evolved very quickly into who used to be at SVB and where they are now. So HSBC and Stifel have definitely picked up the mantle on that front.
  • SVB is still trying to do banking, but I would say it's probably a shell of its former self, given how many people have left the firm.

I feel like we're seeing a ton of warehouse facilities being announced by revenue-based financing startups and SMB lenders. What are you seeing on that front?

  • I think the ability to create a new startup as a kind of revenue advance or buy now, pay later for businesses — anything new in the lending space —is going to be extremely challenging right now.
  • All these existing companies already have facilities and they're just trying to figure out how to deploy it. They're also weighing it against the cost of capital required to deploy and ensure they're still making money on each loan that they're doing.
  • So, the venture appetite for this type of startup has definitely waned substantially from where it was before.
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