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BFD Expert Voices - Private Credit

BFD Expert Voices

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 Ryan.

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.

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 it's all up for discussion, to be honest — higher warrant coverage, various cash requirements that are required — 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 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.

1 big thing: Percent's Nelson Chu talks venture debt and private credit

Photo illustration of Nelson Chu with a pattern of the Percent logo.

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

Sept. 11 — Today's investors are more engaged and tech-savvy and have higher expectations for technology and service providers, the CEOs of Morningstar, Betterment and Apex Fintech told Ryan last weekend during a panel discussion at the Future Proof Festival.

Why it matters: Financial advisers must adapt to serve a younger cohort of investors.

Go deeper: Read Monday's newsletter, plus Monday's Pro Rata on Andreessen Horowitz getting sued for discrimination.

2. The new adviser opportunity

Illustration of a hand holding a cell phone displaying an investment screen with money shapes and textures surrounding them

Sept. 12 — Citi is spinning out Bridge, an SMB lending startup incubated within the bank, the company told Lucinda exclusively.

Why it matters: This is Citi's fourth spinout of an internally incubated business — a rarity among U.S.-based banking giants.

Go deeper: Read Tuesday's newsletter, plus Tuesday's Pro Rata on Elon Musk's secret deal with Jack Dorsey.

3. Citi's incubation game

Illustration of a coffee cup with a bank vault for a lid.

Sept. 13 — Nearly two years after walking away from a SPAC deal, Kin Insurance has raised $33 million in Series D extension funding, bringing its valuation just above $1 billion, the company told Lucinda exclusively.

Why it matters: Kin's public market peers — many of which SPACed — have struggled to maintain investor confidence.

Go deeper: Read Wednesday's newsletter, plus Wednesday's Pro Rata on CalSTRS bucking an industry trend.

4. Kin hits unicorn status

Illustration of a hand placing a quarter into a house chimney

Sept. 13 — Crypto-focused venture firm Electric Capital is raising $300 million for its third investment vehicle, per an SEC filing.

Why it matters: 2023 has been a sleepier year for the crypto industry (at least compared with 2021's euphoria), and a slower year for VCs, Axios' Kia Kokalitcheva wrote.

5. Electric Capital raising $300 million

Illustration of a collage of circles made of money forming a decentralized web.

Sept. 14 — Moment, seeking to make bond trading as easy as stock trading, raised $17 million in Series A funding led by Andreessen Horowitz, the company told Lucinda exclusively.

Why it matters: Bond trading has surged amid the highest interest rate environment since the dot-com boom.

Go deeper: Read Thursday's newsletter, plus Thursday's Pro Rata on Databricks becoming one of the AI sector's most valuable companies.

6. Bond trading has a Moment

Illustration of a dollar bill being broken up into binary code

No fluorescent lighting at Future Proof, the open-air wealth management extravaganza in Huntington Beach, California.

7. One fun thing: Ryan on stage at Future Proof

Ryan Lawler on stage hosting CEO Insights panel at Future Proof

Happy Friday, Fintech readers. Research associate Natalie Breymeyer here with your weekly digest.

🥰 Natalie is looking forward to a visit with family this weekend.

Special thanks to Rob Reinalda for his careful edits today and every day.

And thanks to you for reading. Please tell your fintech friends about this newsletter. They can sign up here.

September 15, 2023

1 big thing: Percent's Nelson Chu talks venture debt and private credit