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Niche Markets, High Impact: Leading the Charge in Early-Stage Credit Facilities · Leaders in Lending

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Speaker 1: You are listening to Leaders in Lending from Upstart, a
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Speaker 1: podcast dedicated to helping consumer lenders grow their programs and
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Speaker 1: improve their product offerings. Each week, here decision makers in
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Speaker 1: the finance industry offer insights into the future of the
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Speaker 1: lending industry, best practices around digital transformation, and more. Let's
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Speaker 1: get into the show.
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Speaker 2: Hi.
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Speaker 3: This is Lynd Suterbil of Upstart, and welcome to Leaders
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Speaker 3: in Lending. I'll be joined today by Jillian Murrish, who
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Speaker 3: is the CEO and co founder of pere Asset Management,
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Speaker 3: a private credit investment firm focused on niche jales and
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Speaker 3: specialty finance. Jillian has a deep background on both the
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Speaker 3: buy and sell side and the private credit markets. Let's
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Speaker 3: get started. Hi Jillian, and welcome to podcast.
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Speaker 2: Hi Alinn, I'm so happy to be here. Thank you
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Speaker 2: for having me on great Well.
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Speaker 3: To start off, can you tell me a bit about
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Speaker 3: what role pere Asset Management plays in the market.
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Speaker 2: Absolutely so. We are a capital provider in the specialty
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Speaker 2: finance space. Specifically, what we do is provide senior secured
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Speaker 2: credit facilities to early stage loan originators, so we lend
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Speaker 2: against their loan book. They use our capital to go
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Speaker 2: out and originate ones. And then second and we act
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Speaker 2: as a buyer in the secondary market of these long portfolios. So,
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Speaker 2: you know, if a fund is winding down and they
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Speaker 2: need liquidity, or a you know, loan originator is winding
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Speaker 2: down and they need to sell their long book off,
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Speaker 2: or they just have some need for liquidity, they need
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Speaker 2: to clear off their warehouse line, they'll come to us.
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Speaker 2: We'll put in a bid on that portfolio and buy
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Speaker 2: it after it's ben well seasoned. So those are really
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Speaker 2: two roles we play as a capital provider.
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Speaker 3: Great, well, I know you and and kinter New co
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Speaker 3: founded Peer in twenty seventeen. Was this your first time
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Speaker 3: being a co founder in a real way?
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Speaker 2: Yes, I had. My first company was in college and
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Speaker 2: it was a consumer goods companies selling cell phone cases,
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Speaker 2: and I was the sole founder of that firm, but
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Speaker 2: ended up bringing on a business partner later. But in
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Speaker 2: my adult career, this is my first time co founding
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Speaker 2: a firm.
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Speaker 3: Sure, sure, So what I would say, you know, what's
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Speaker 3: been one of the most kind of surprising lessons that
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Speaker 3: you've learned since twenty seventeen is being a a co
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Speaker 3: founder of a of a new company.
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Speaker 2: Well, first, and foremost, I'm so glad I'm not at
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Speaker 2: this alone. I've learned that I loved having a co founder.
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Speaker 2: It's especially someone who compliments me so so well. So
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Speaker 2: people who know Connor and I know that we're opposite
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Speaker 2: in demeanor. So I'm more dynamic. Lou would love to
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Speaker 2: be social. You know, Connor is a bit more reserved
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Speaker 2: and quiet, and so that's an outward you know, easy
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Speaker 2: to notice difference in our personalities, But when you dig deeper,
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Speaker 2: I get down to the things that we like to
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Speaker 2: spend our time doing. You know, what are we good at,
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Speaker 2: what are we the best at? It's generally the opposite,
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Speaker 2: and so it makes it really fun to run a
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Speaker 2: company with someone like that, because I'm doing a lot
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Speaker 2: of what I love and very little of what I
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Speaker 2: don't love. So I think that's really the real reason
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Speaker 2: why having a co founder who's just you know, likes
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Speaker 2: doing opposite things it's fantastic. And then, you know, something
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Speaker 2: I didn't think about when we started the firm, but
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Speaker 2: I started to develop a sense for why the partnership
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Speaker 2: has worked so well, and it really comes down to,
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Speaker 2: I think the fact that we have the same risk tolerance,
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Speaker 2: so when we have very different views on various aspects
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Speaker 2: of our business of the market in general. We generally
3:38
Speaker 2: approach problems in different ways and identify different risks, but
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Speaker 2: at the end of the day, it's a go no
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Speaker 2: go decision on various things with the business and with
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Speaker 2: investments we make. And having someone who has a similar
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Speaker 2: level of risk tolerance of things, you know, imperfect information
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Speaker 2: or no, we actually need perfect information on this, but
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Speaker 2: not on this. I think it's allowed us to make
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Speaker 2: decisions in a seamless way and run the company in
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Speaker 2: a relatively frictionless way since inception, which I'm so grateful for.
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Speaker 2: He's been an incredible co founder.
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Speaker 3: Well good, that's good to hear because I know, I'm
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Speaker 3: sure that's a very very closely tied relationship. And just
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Speaker 3: you know, having work tear at Upstart from the time
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Speaker 3: when we were smaller and pre public and now a
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Speaker 3: public company, you spend a lot of time kind of
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Speaker 3: in the trenches with people. So how did you, I think,
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Speaker 3: how did you encounter meet and then what really led
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Speaker 3: to the idea of starting peer asset management.
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Speaker 2: So we minted a conference in I think twenty thirteen
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Speaker 2: or twenty fourteen. We haven't mailed down the exact exact
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Speaker 2: date or which conference it was, but we met in
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Speaker 2: person through mutual industry participants, and I remember kind of
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Speaker 2: my first conversation and hearing about him from others that
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Speaker 2: he was a pioneer in investing in specialties nance. You know,
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Speaker 2: at the time, it was really called marketplace lending, and
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Speaker 2: I was running the capital markets practice at an online originator,
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Speaker 2: so I was producing loans and selling them off into
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Speaker 2: the capitol market's ecosystem, and Connor was on the other
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Speaker 2: side running a suite of funds buying these loans. So
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Speaker 2: you know, he had actually bought one of the first
5:19
Speaker 2: whole loans at Funding Circle, you know, it was one
5:22
Speaker 2: of the first loan buyers lending club. And when I
5:25
Speaker 2: was building out our loan whole loan sale program, he
5:28
Speaker 2: was one of my first calls. It was, Hey, he
5:30
Speaker 2: was innovative in the space. You know, amendment a conference,
5:34
Speaker 2: maybe he'll buy my loans. And it was a real
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Speaker 2: estate originator and his bread and butter was consumer and
5:39
Speaker 2: small business. So he came in for a meeting and
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Speaker 2: very quickly said, you know, I don't think I'm going
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Speaker 2: to get comfortable in this space, but was curious, wanted
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Speaker 2: to hear you out. And so within the first meeting
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Speaker 2: we realized we weren't going to transact, but we were
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Speaker 2: opposite on opposite sides of this market, and we were
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Speaker 2: opposite participants. And quickly we started providing value to each
6:00
Speaker 2: other in terms of kind of under the hood, know how,
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Speaker 2: from the other side of the trade, which started providing
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Speaker 2: me a lot of value in my work at that time.
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Speaker 2: You know, he would share warehouse lenders to the funds
6:11
Speaker 2: or requiring XYZ. When you're putting together programs, you know,
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Speaker 2: managed them this way. You know, I would say, hey,
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Speaker 2: a lot of firms are using you know, sub servicers
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Speaker 2: and farming out, you know, servicing even below what you
6:23
Speaker 2: would have imagined, and so ask about you know, these specifics.
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Speaker 2: And so it became an interesting working relationship where we
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Speaker 2: get together probably once a quarter and just share insights,
6:33
Speaker 2: talk about the space, see if we could be helpful
6:35
Speaker 2: to each other. And in twenty sixteen, I have to
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Speaker 2: give Conor the credit. We got together for one of
6:41
Speaker 2: our catchups and I walked in the door, sat down
6:44
Speaker 2: at the table at Pete's Coffee in Westwood. I remember
6:47
Speaker 2: like it was yesterday, and he said, I want to
6:51
Speaker 2: spin out from from my firm and form a new
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Speaker 2: asset manager. I think we'd make great business partners. Will
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Speaker 2: you do it? And whoa? And you know, it was
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Speaker 2: actually perfect timing where I was ready to go back
7:04
Speaker 2: out and do something on my own. You know, I
7:07
Speaker 2: had been that young entrepreneur and then went and worked
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Speaker 2: in and helped build firms, but it was really ready
7:11
Speaker 2: to go out and strike out on my own again.
7:13
Speaker 2: And so the timing was perfect. And so we started
7:18
Speaker 2: talking through our thesis that we had on the space
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Speaker 2: that we really had been developing over the course of
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Speaker 2: a few years. And really we're seeing that the primary
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Speaker 2: market in the space was quite saturated and there were
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Speaker 2: big institutions and banks buying the loans from all the platforms,
7:32
Speaker 2: yields it compressed, and so we were really getting creative
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Speaker 2: as to where where was the alpha, like, where could
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Speaker 2: we generate alpha? How could we deliver better returns for investors?
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Speaker 2: And for me that was sitting within the ecosystem delivering
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Speaker 2: loans and see where was there less liquidity? Where were
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Speaker 2: the fewer investors when I was bringing things out out
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Speaker 2: to market, And for Connor was where was I competing
7:55
Speaker 2: against fewer people? And really that was how we identified
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Speaker 2: the secondary market, just not having active participants or consistent
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Speaker 2: participant and that was really kind of the genesis for Peer.
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Speaker 2: And then also the early stage credit facilities just weren't
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Speaker 2: weren't really serving loan originators in a great way. And
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Speaker 2: I had experienced that as an operator and talking with
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Speaker 2: the CEOs and CFOs of all the other early stage originators.
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Speaker 2: It was a common problem across the board for kind
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Speaker 2: of fifty million dollar warehouse lines. It was, you know,
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Speaker 2: I'm using a logic puzzle to fund my loans, some
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Speaker 2: with a partner of capital, some with my bank line,
8:30
Speaker 2: some of my family office line, and you know, I
8:34
Speaker 2: ended up with one large line from a family office
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Speaker 2: that funded all my origination flow. And even though it
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Speaker 2: was more expensive, it was a great product and it
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Speaker 2: was better for operational ease. So that was when I
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Speaker 2: looked at Connor and I said, if we can solve
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Speaker 2: that early stage or early stage warehouse facility problems, there's
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Speaker 2: a lot of demand for it, and we could make
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Speaker 2: you know, pretty penny doing it because nobody is and
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Speaker 2: it's such a value to these early stage firms.
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Speaker 3: No, that sounds it sounds like you guys definitely have
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Speaker 3: a really kind of complementary skill set. I think sometimes
9:06
Speaker 3: you see people go into business or hire people or
9:08
Speaker 3: work with people who have they look for people who
9:10
Speaker 3: have very similar sales skill sets and then they have
9:13
Speaker 3: those kind of gaps there that they don't know about.
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Speaker 3: It sounds like the two of you have complementary skills
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Speaker 3: and experiences on the market that's really helped help kind
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Speaker 3: of term my charge what you're doing.
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Speaker 2: So what else you know?
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Speaker 3: I know you mentioned you you worked in an online
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Speaker 3: real estate lender. What as you kind of built and
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Speaker 3: scaled with that company? What are some of the biggest
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Speaker 3: things I mean, obviously that helped you identify the market
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Speaker 3: you wanted to go into, But what are some of
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Speaker 3: the biggest kind of lessons you learned that you brought
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Speaker 3: to peer to help help shape what you're building?
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Speaker 4: There?
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Speaker 2: Say, first and foremost smaller, earlier stage a loan originators
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Speaker 2: require a very different credit facility product than large mature originators.
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Speaker 2: And in the early days, you know, not kind of
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Speaker 2: twenty thirteen to twenty fifteen or twenty twelve to twenty sixteen,
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Speaker 2: the large warehouse providers like the mcqueries of the world's areas.
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Speaker 2: You know, we're trying to come in and serve that
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Speaker 2: market and you know, being great participants in doing so.
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Speaker 2: And I saw there were a lot of challenges you know,
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Speaker 2: using the same structure and the same type of terms
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Speaker 2: for a small firm versus a mature firm. And really,
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Speaker 2: in my view at that time, I developed, you know,
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Speaker 2: a very strong view that early stage originators the priority
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Speaker 2: for their credit facilities should be that it preserves flexibility, optionality,
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Speaker 2: and has ease of operational use. When you're an early
10:34
Speaker 2: stage originator focusing on growth in those early credit co words,
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Speaker 2: the operational friction that a larger, larger, more structured facility
10:44
Speaker 2: can bring can really tank or create bigger challenges than
10:48
Speaker 2: a lower cost of capital would make worth. Furthermore, you know, again,
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Speaker 2: cost of capital at that size just isn't as important
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Speaker 2: because again the growth, the proof of concept, focusing on
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Speaker 2: credit quality out was more important. And then lastly, like
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Speaker 2: the multi year lockups of the more traditional warehouse facilities,
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Speaker 2: we're not providing the flexibility that the early stage originators
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Speaker 2: needed around product, like product would evolve and change within
11:15
Speaker 2: the first year or two or three. You know, one
11:17
Speaker 2: thing I was working well, one product wasn't, and having
11:20
Speaker 2: that flexibility of product mixer being able to kind of
11:22
Speaker 2: change that barring based subtly based on what products are
11:25
Speaker 2: working or not would be most critical for success. So
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Speaker 2: I think it was really identifying that it was kind
11:30
Speaker 2: of two very different products later stage mature warehouse lines
11:34
Speaker 2: versus early stage lines, and the needs change over time,
11:38
Speaker 2: where you know, larger mature originators really care about cost
11:42
Speaker 2: of capital for good reason, and it starts becoming a
11:45
Speaker 2: profit center for them, whereas early stage that's not really
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Speaker 2: the focus. So being in the trenches building that capital
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Speaker 2: markets practice from forty million to three quarters of a billion,
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Speaker 2: I really saw that internally and what was working at
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Speaker 2: what stage of the business. And surprisingly some of the
12:04
Speaker 2: more structured and sophisticated facilities created risk on both sides
12:12
Speaker 2: for being too structured. So like, for example, I received
12:15
Speaker 2: a term sheet one time from a kind of quasi bank,
12:19
Speaker 2: and I remember they had plattal reportings. It had to
12:22
Speaker 2: be on Wednesdays, and we would sell all of our
12:26
Speaker 2: loans off our book on Tuesdays. And so the barring base,
12:30
Speaker 2: which shows you would have no loans tied to it
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Speaker 2: every Wednesday, and it balance all the cash, and so
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Speaker 2: that lender would have almost no insight into what was
12:39
Speaker 2: platteralizing them in between those interim reporting periods. And so
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Speaker 2: you know, really my viewshade to A, it's just a
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Speaker 2: different product, and then B, the facility does need to
12:51
Speaker 2: be built around the early stage originator versus a product
12:55
Speaker 2: as a credit facility being served to them. So that
12:58
Speaker 2: was probably the most important learning from from my time there.
13:02
Speaker 3: And I think you when you when you and I've
13:03
Speaker 3: talked before, you described that as kind of more of
13:06
Speaker 3: a solutions oriented capital provider like that, Yeah, the capital
13:10
Speaker 3: provider is kind of meeting the originator at the at
13:12
Speaker 3: the place they need to be met, and I could
13:15
Speaker 3: I can see that with those sorts of kind of
13:17
Speaker 3: very specific restrictions where maybe the person who is drafting
13:20
Speaker 3: that isn't actively involved in more of the business side
13:24
Speaker 3: of what they're drafting, and the the timing of that
13:27
Speaker 3: doesn't exactly exactly make sense. So you know, I do
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Speaker 3: think you have a really interesting, unique perspective on that
13:35
Speaker 3: path to funding for early stage fintech originators, and you
13:39
Speaker 3: kind of talk through it at a at a high
13:41
Speaker 3: level that maybe you know, kind of more detail of
13:43
Speaker 3: of what are those sources of funding like you know,
13:45
Speaker 3: helping our you know listeners understand, uh, you know, whether
13:49
Speaker 3: that's partner or personal capital, family office, kind of what
13:52
Speaker 3: that path looks like and what those capital providers can
13:57
Speaker 3: offer and maybe some pros and cons as they as
13:59
Speaker 3: they go through that path.
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Speaker 2: As a founder, sure happy to talk through this. So
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Speaker 2: for early stage originators who just started out, you know,
14:07
Speaker 2: you've been building a product and you've originated zero loans, like,
14:11
Speaker 2: no loans have gone through your pipes yet. You know,
14:15
Speaker 2: what we see as most typical source of funding is
14:18
Speaker 2: usually equity capital. So maybe the firm has raised a
14:21
Speaker 2: few million dollars of equity capital. They're using that to
14:23
Speaker 2: build out their tech and their infrastructure and you know
14:26
Speaker 2: barber acquisition channels, and then they reserve maybe five hundred
14:30
Speaker 2: thousand dollars for that first cohort of loans other founders,
14:34
Speaker 2: which I think this is a very smart move. What
14:36
Speaker 2: they what we've seen happen often is the founder will
14:39
Speaker 2: actually go out to either friends and family or they'll
14:42
Speaker 2: also seen those venture partners personally do this where they'll
14:46
Speaker 2: give a one hundred thousand, two hundred thousand dollars unsecured
14:50
Speaker 2: promisory note to the operating company, and the intended purpose
14:54
Speaker 2: is to be used to fund loans. And you know,
14:57
Speaker 2: it's a fixed coupon. Generally it used to be twelve
14:59
Speaker 2: for then it's probably higher now, and and they use
15:04
Speaker 2: that capital to fund the first five hundred thousand or
15:06
Speaker 2: a million dollars of loans. I think that's a fantastic model.
15:09
Speaker 2: You're not using your equity capital, which is the most
15:11
Speaker 2: extensive capital, to fund your loans. But you're also not
15:14
Speaker 2: trying to structure something and get into covenants and you know,
15:19
Speaker 2: creating SPVs because at that point it's too small. You
15:22
Speaker 2: have to prove the concept that you can actually originate
15:25
Speaker 2: and get loans through your pipes before you go through
15:28
Speaker 2: all that headache to actually set up something as structured.
15:31
Speaker 2: So from there, I think, you know, once you have
15:33
Speaker 2: five hundred one thousand, two million dollars of loan volume,
15:36
Speaker 2: generally the next step is dependent on how fast your
15:41
Speaker 2: loan product shows performance. So very short duration products you
15:45
Speaker 2: could have a full revolution or revolution of that credit
15:48
Speaker 2: product within three months. Longer products that have you know,
15:52
Speaker 2: maybe it's student loans with five year term, you have
15:56
Speaker 2: to start showing early performance data, but that is a
16:00
Speaker 2: larger challenge and you're going to have to stretch out
16:02
Speaker 2: that time really to see performance before you're going out
16:05
Speaker 2: for this next facility. So just bear that in mind
16:08
Speaker 2: and keep that in mind for the pace of growth
16:11
Speaker 2: from kind of zero to one million. It depends on
16:13
Speaker 2: how quickly you can kind of show any sort of performance.
16:17
Speaker 2: So from there it's really approaching firms like ours and
16:21
Speaker 2: potentially family offices to get a ten to fifteen million
16:24
Speaker 2: dollar first credit facility. This is unique compared to the
16:28
Speaker 2: first promise promisor re NOOTE structure, and that an SPV
16:32
Speaker 2: is generally required to be set up which is a
16:34
Speaker 2: subsidiary of the operating company and it's a bankruptcy remote
16:38
Speaker 2: spe that houses the loans that the loan originator originate.
16:43
Speaker 2: Usually a credit facility provider of ten to fifteen million
16:47
Speaker 2: will want to refinance and own whatever loan or put
16:50
Speaker 2: in whatever loans are already on your book into that
16:52
Speaker 2: SPD and then you can draw down capital and grow
16:55
Speaker 2: from there. So really there's only a few institutional providers
17:00
Speaker 2: that will do warehouse lines that small you know, we're
17:03
Speaker 2: one of them. There's probably three or four others that
17:05
Speaker 2: we know of that are quite active. And then other
17:08
Speaker 2: options we've seen are you know, it's a family office.
17:10
Speaker 2: We know that we're close to the founders that identified
17:13
Speaker 2: that will do that first smaller credit facility.
17:17
Speaker 3: Sure, So what do you I mean? It sounds like
17:19
Speaker 3: the path can be can be varied and depends on size.
17:22
Speaker 3: And I you know, as you were talking about the
17:25
Speaker 3: duration of the loans that they're offering here, it almost
17:28
Speaker 3: made a case for some of the press releases Upstarts
17:32
Speaker 3: had around our parallel timing curve and how we think
17:34
Speaker 3: about testing a model over time and even though the
17:39
Speaker 3: duration's long, particularly as you look at products like like
17:42
Speaker 3: mortgages or or very long duration duration products. So you know,
17:48
Speaker 3: when you think about kind of then graduating to the
17:50
Speaker 3: capital markets, like what is that? Is it just a
17:53
Speaker 3: function of size of the lender of the originator? Is
17:56
Speaker 3: there some sophistication like how do you think about a
18:01
Speaker 3: firm being ready to really access institutional capital money versus
18:05
Speaker 3: more of the you know, a family office VC backing.
18:10
Speaker 2: Sure, So I think it's really that next step beyond
18:13
Speaker 2: firms like ours is the more traditional institutional capital markets
18:16
Speaker 2: they'd be accessing. And I think it's a function of
18:18
Speaker 2: two things. One loan book size, so how much of
18:22
Speaker 2: you originated? And two is there any sort of performance indication?
18:26
Speaker 2: Like you said, really long dated assets can do you
18:29
Speaker 2: show month over month performance and really get kind of
18:32
Speaker 2: a show show a similar loan product that has longer
18:39
Speaker 2: credit history that you can kind of show your performance
18:41
Speaker 2: curve agains and start giving a picture to what performance
18:45
Speaker 2: is going to look like. So when I say size,
18:47
Speaker 2: generally that means fifteen million dollar book. You can start
18:51
Speaker 2: having those conversations and they'll come in when the book
18:53
Speaker 2: is maybe twenty million in size, and at that point
18:56
Speaker 2: you're reaching for a fifteen million or one hundred or
18:58
Speaker 2: one hundred and fifty million dollars. Credit facility is usually
19:01
Speaker 2: that next stutter step, and that's coming from the firms
19:04
Speaker 2: like the Cross Rivers that out of lie is the aries,
19:07
Speaker 2: the larger, more well known institutional asset managers who are
19:11
Speaker 2: doing those facilities. They're usually a multi year term instead
19:15
Speaker 2: of shorter duration. It's usually and three year terms is
19:18
Speaker 2: what we see. Often some sort of kind of lock
19:21
Speaker 2: up for a period of time to make it worth
19:23
Speaker 2: their time to do those deals, and that generally the
19:26
Speaker 2: cost of capital becomes more effective because oftentimes we see
19:30
Speaker 2: those types of firms use leverage on the back end
19:33
Speaker 2: for their source of capital so they can provide lower
19:35
Speaker 2: costs and still make a return that makes sense for
19:38
Speaker 2: the commensurate risk. So it's a function of those two things.
19:42
Speaker 2: And one thing I just realized I missed on the
19:45
Speaker 2: previous stage of growth before you access these institutional capital
19:50
Speaker 2: markets is some firms actually launch their own internal fund,
19:54
Speaker 2: so they go raise a fund that's ten million dollars
19:57
Speaker 2: and go make their loans out of that. That is
20:00
Speaker 2: I would say the most complex, riddled with challenges that
20:05
Speaker 2: I would recommend, But you know, some folks are really
20:07
Speaker 2: successful doing it, and oftentimes the yield you have to
20:11
Speaker 2: pay in that type of vehicle can be lower than
20:14
Speaker 2: accessing a credit facility from a firm like ours or
20:17
Speaker 2: our competitors. Yet again there's a lot of complexity, compliance risk,
20:23
Speaker 2: legal risk in doing so, but we see it a
20:25
Speaker 2: few times a year that that's kind of the option
20:27
Speaker 2: that that stage kind of some fifteen million uses.
20:31
Speaker 3: Sure, and I could see that where that would be
20:33
Speaker 3: a pretty resource intensive thing to do internally at a
20:36
Speaker 3: company where you have to hire a lot of expertise.
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21:24
Speaker 3: What are some I think kind of common missteps you
21:27
Speaker 3: may see originators make going through this process. Whether it's
21:31
Speaker 3: not hiring the right expertise, whether it's not really understanding
21:35
Speaker 3: terms of various deals. But what sort of mistakes do
21:37
Speaker 3: you see you get made in this space?
21:40
Speaker 2: So to detail on what I was just talking about,
21:43
Speaker 2: I would say making things too complex too early and
21:47
Speaker 2: there's a variety of categories and buckets I can talk
21:50
Speaker 2: about for what too complex means. But generally, the more
21:53
Speaker 2: complex and complicated you're making your funding source and funding
21:56
Speaker 2: structure early on, the more pitfalls you can make so
22:00
Speaker 2: simpler the better, trying to use one funding source instead
22:04
Speaker 2: of many, and trying to keep the structures light. So
22:07
Speaker 2: that's why that promisory note suggestion for the five hundred
22:10
Speaker 2: k a million dollar first part of the loan book
22:13
Speaker 2: is very simple in structure. You know, there aren't many
22:16
Speaker 2: covenants you could trip or mistakes you can make in
22:19
Speaker 2: how you're managing that capital. It's just kind of here's
22:22
Speaker 2: here's the charter of what you can do with the money,
22:25
Speaker 2: and beyond that, it's a very light touch. So trying
22:29
Speaker 2: to keep things simple for what a simplest for the
22:31
Speaker 2: stage of your business. More specifically, some examples of complexity
22:36
Speaker 2: I've seen that cause pitfalls are generally around giving up
22:41
Speaker 2: optionality too early. So you know, maybe the ten million
22:45
Speaker 2: dollar lender who signs a three year deal with a
22:48
Speaker 2: large institutional lender and they have signed a deal with
22:52
Speaker 2: a very specific loan product and there's no flexibility for
22:56
Speaker 2: you know, criteria in that facility where is that problem
23:00
Speaker 2: no longer works and they want to do another product
23:02
Speaker 2: or pitch that to the firm, There's not as much
23:05
Speaker 2: flexibility there, and they can end up slowing growth or
23:09
Speaker 2: just being hamstrung entirely. So we've seen that happen other
23:13
Speaker 2: things like equity, you know, giving up structured equity alongside
23:17
Speaker 2: your credit facility too early. With control rights, we've seen where,
23:23
Speaker 2: you know, very early, if one of these lenders get
23:26
Speaker 2: stars in their eyes, we can get one hundred million
23:28
Speaker 2: in depth from one of these large firms, and we're
23:30
Speaker 2: going to give up ten percent and a board seat
23:33
Speaker 2: and you know consent on XYZ for M and A
23:37
Speaker 2: for this and that, and you know, a Series A
23:40
Speaker 2: or even seed stage company doing that, it's just leaving
23:43
Speaker 2: so much equity value on the table for their business
23:45
Speaker 2: by giving up that optionality and flexibility. So I think again,
23:50
Speaker 2: preserving optionality, preserving flexibility, keeping things simple as you're smaller
23:55
Speaker 2: generally are the keys to success.
23:57
Speaker 3: Yeah, that's a great point. As I think about I've
24:00
Speaker 3: been at Upstart a little over four and a half years,
24:02
Speaker 3: but the company has been around since twenty twelve. You know,
24:06
Speaker 3: we've certainly made a lot of changes on our product suite.
24:09
Speaker 3: So the first iteration of loans that were made by
24:14
Speaker 3: the company is not what the personal loan product looks
24:17
Speaker 3: like today. And now we've added on, added on new products,
24:20
Speaker 3: and I think if we had been constrained from R
24:23
Speaker 3: and D and really developing, that we wouldn't be the
24:26
Speaker 3: same company we are today. Do you think that's a
24:29
Speaker 3: is it A part of it is just the excitement
24:32
Speaker 3: of growing too wanting to grow too fast, that there's
24:34
Speaker 3: somebody here who wants to give you a lot of
24:35
Speaker 3: money and you want to say yes, and you want
24:37
Speaker 3: to access that and you want to experience that rocket ship.
24:41
Speaker 3: So you may put blinders on a little bit to
24:43
Speaker 3: what you're giving up as part of it.
24:45
Speaker 2: I think it's probably the twofold you know one many
24:49
Speaker 2: of the early stage firms may not have capital markets
24:53
Speaker 2: expertise on the founding team and may not be able
24:56
Speaker 2: to afford that higher. It's an expensive higher if it's
24:59
Speaker 2: not and know how of an existing founder, so you know,
25:04
Speaker 2: in that instance there may they may not know how
25:07
Speaker 2: how restrictive that those equity rights could be, or they
25:12
Speaker 2: can't you know, they's you know, hey, locking in a
25:15
Speaker 2: roafer with this large one firm and only having one
25:18
Speaker 2: capital funding source. You know, maybe they don't have the
25:20
Speaker 2: experience or understanding that. In COVID, some of these, you know,
25:24
Speaker 2: some firms pulled their funding and said, hey, material average change,
25:27
Speaker 2: no more funding. So it's just a lot of know
25:30
Speaker 2: how in that seat that can be expensive to buy
25:33
Speaker 2: and founders don't have it. I think that could contribute
25:35
Speaker 2: to making that decision. I think also fear of not
25:39
Speaker 2: finding other good options for capital, Like it's scary to
25:42
Speaker 2: choose a twelve month facility that's fifteen million and have
25:46
Speaker 2: to go get your next facility a year later. That
25:48
Speaker 2: is that those are two deals you have to get
25:51
Speaker 2: done instead of one, maybe even three deals you'd have
25:53
Speaker 2: to get done instead of this one multi year deal.
25:56
Speaker 2: So and then again they're you know, they're if it's
25:59
Speaker 2: a venture company, growth is the number is one of
26:01
Speaker 2: the number one metrics, and the that can seem to
26:05
Speaker 2: be a clear path there, Yet if you've seen it
26:09
Speaker 2: happen a number of times, there there can be pitfalls
26:12
Speaker 2: with making that choice.
26:13
Speaker 3: So sure, and I think we you know, we certainly
26:16
Speaker 3: saw and during during COVID, the funding markets changed very
26:21
Speaker 3: rapidly for in a almost in intra day, very fast
26:28
Speaker 3: early and early in twenty twenty. I know you you
26:31
Speaker 3: had mentioned we were talking previously that you're seeing more
26:34
Speaker 3: opportunities and where there's kind of distress sales happening across
26:38
Speaker 3: some originators. So just tell me more about that and
26:41
Speaker 3: what what is happening to some of those uh like
26:45
Speaker 3: distressed sales, what what preceded that, and kind of where
26:49
Speaker 3: those originators ended up having to to sell in the secondary.
26:54
Speaker 2: Sure. So really there's a whole cohort of finn specialty
27:01
Speaker 2: finance loan originators who were founded pre COVID and had
27:05
Speaker 2: to go through that period. And the COVID period was
27:09
Speaker 2: good for some and very hard for others. And there's
27:12
Speaker 2: this cobort that it really did not serve well. And
27:15
Speaker 2: the reason is twofold one. There was so much stimulus
27:18
Speaker 2: that origination volume for certain segments of lenders dried up completely.
27:23
Speaker 2: You know, for consumer lenders, it was tough. There was
27:25
Speaker 2: tons and tons of stimulus. Borrowers weren't needing to borrow
27:29
Speaker 2: because they were receiving a stimulus check. And then second,
27:32
Speaker 2: you know, as stimulus who were off certain loan originators
27:36
Speaker 2: had gotten more aggressive with lending criteria to be able
27:39
Speaker 2: to actually put loans on the street, and then when
27:42
Speaker 2: stimulus dried up, performance suffered. And so there's a cohort
27:45
Speaker 2: of borrowers that kind of sit in that narrative and
27:48
Speaker 2: struggled through that kind of twenty twenty to twenty twenty
27:50
Speaker 2: two period and have some black marks in their credit
27:54
Speaker 2: quality or origination volume history. And what we're seeing is
27:58
Speaker 2: those firms are not able to raise the series A
28:00
Speaker 2: v r C. And you know, the adventure community seems
28:04
Speaker 2: to have, you know, really turned their back on those
28:06
Speaker 2: types of firms. You know, it's if the story wasn't
28:09
Speaker 2: up into the right it's you know, hey, we're not interested.
28:13
Speaker 2: So a lot of those firms are burning through their runway.
28:15
Speaker 2: Now in the last year, there's been a number who've
28:18
Speaker 2: had to shut down, and as they're shutting down, one
28:21
Speaker 2: thing they need to clean up is selling their loans
28:23
Speaker 2: off whatever credit facility they have or wherever it's sitting
28:26
Speaker 2: on their balance sheet. And so, you know, again for
28:29
Speaker 2: our business, we're a secondary market buyer, so we come in,
28:31
Speaker 2: we try to get active on those deals and buy
28:33
Speaker 2: those lung portfolios on the flip side, it's interesting. So
28:38
Speaker 2: there's this whole cohort of of VC back companies that
28:41
Speaker 2: have kind of been abandoned to had black marks through
28:44
Speaker 2: COVID and aren't getting funded and or shutting down. But
28:47
Speaker 2: on the opposite side, we're seeing companies that were launched
28:51
Speaker 2: twenty twenty two and later who are showing you know,
28:54
Speaker 2: great performance, showing great growth, and are getting funded left
28:57
Speaker 2: and right by the venture community. So it's the kind
29:00
Speaker 2: of divergent path where we're seeing a lot of the
29:03
Speaker 2: new great originators tackling very specific borrower segments and really
29:07
Speaker 2: thoughtful ways we're responsibly and doing a great job. They're
29:11
Speaker 2: getting equity funded. Those firms are in need of credit
29:14
Speaker 2: facilities to grow and scale. And then on the other hand,
29:17
Speaker 2: these originators who started and probably have bad luck with
29:19
Speaker 2: timing are not getting funded, and so it's it's hard
29:22
Speaker 2: to see you know, the flame out happening more often
29:26
Speaker 2: and more often. And but then on the other side,
29:30
Speaker 2: there's all this happy, happy growth and story for the
29:32
Speaker 2: newly formed firms.
29:34
Speaker 3: Sure, and and honestly for firms like yourself, some of
29:38
Speaker 3: those uh distressed situations for other that where they were
29:43
Speaker 3: hit by bad timing or opportunities for other players in
29:46
Speaker 3: the market. And that's that's true everywhere, so across the
29:48
Speaker 3: market that there's there's always opportunity. It just depends which
29:52
Speaker 3: which side of it you're on. So I think that
29:55
Speaker 3: the timing pieces is important and obviously not something that
29:59
Speaker 3: those found could have known in advance.
30:01
Speaker 2: That maybe just a little.
30:04
Speaker 3: Bit of being a victim of bad news. And you know,
30:07
Speaker 3: similar to the bank failures last year, none of us
30:09
Speaker 3: really had that on our on our BINGO card for
30:12
Speaker 3: twenty twenty three, So a surprising, surprising event that had
30:17
Speaker 3: a lot of downstream impacts. So you know that you
30:20
Speaker 3: mentioned the green shoots that there are some originators who
30:23
Speaker 3: are are able to access and start to get into
30:26
Speaker 3: series A, Series B, anywhere else. You're seeing really like
30:29
Speaker 3: opportunity for originators on that side of the type of
30:33
Speaker 3: work you do.
30:34
Speaker 2: Yes, again, to reiterate I briefly mentioned in my last answer.
30:39
Speaker 2: The originators who are finding very specific borrowers segments and
30:47
Speaker 2: serving those in a really unique responsible way are finding
30:51
Speaker 2: a lot of traction in the venture community, is what
30:53
Speaker 2: we're seeing. So the more hyper niche a lender can
30:57
Speaker 2: get in the problem they're solving well, we're seeing more
31:01
Speaker 2: success with venture rounds getting done. Okay, that's interesting.
31:05
Speaker 3: So trying not to not trying to like boil the
31:07
Speaker 3: ocean with solving the problem for every person, every market,
31:11
Speaker 3: every asset class. But focus, do you have a preference
31:14
Speaker 3: as you think about loans like secured versus unsecured? Does
31:19
Speaker 3: your firm get involved in any secured loans as well,
31:23
Speaker 3: or are you going to focus specifically on one or
31:26
Speaker 3: the other.
31:27
Speaker 2: I like talking about this question, so I think the
31:30
Speaker 2: definition of security and unsecured has really has changed over
31:35
Speaker 2: time since probably twenty fifteen. And my first question is,
31:41
Speaker 2: you know, it's obvious that hard equipment like chapters, trailers,
31:44
Speaker 2: or real estate would be in the secured market, But
31:47
Speaker 2: would lending against a music royalty stream where the capital
31:51
Speaker 2: is paid directly from the streaming firms like Spotify, Apple
31:55
Speaker 2: YouTube into your own bank account as the lender, is
31:58
Speaker 2: that secured lending or unsecured. And so we're in this
32:02
Speaker 2: unique situation at peer where we're lending to these originators
32:06
Speaker 2: who have found the most ingenious quarters of cash flow
32:10
Speaker 2: to lend against that may or may not be tied
32:13
Speaker 2: to a physical hard asset but is that cash flow
32:16
Speaker 2: stream that they have their hands wrapped around a secured asset, So,
32:21
Speaker 2: you know, a peer, we certainly do deal with the
32:23
Speaker 2: most classic unsecured consumer loans where there is no clateral there,
32:28
Speaker 2: it's an unsecured personal loan. And then we have this
32:31
Speaker 2: gray area of things like the music boral, these cash
32:33
Speaker 2: flow streams, and then we have the most crystal clear
32:37
Speaker 2: secured things like equipment or real estate or auto and
32:41
Speaker 2: so that's a spectrum to us. And we used to
32:45
Speaker 2: look at our our firm and look at deals in
32:48
Speaker 2: that way, and we you know, we classify to secured
32:50
Speaker 2: or unsecured in the way we were thinking about it
32:52
Speaker 2: presenting it internally, and we actually pulled that off of
32:56
Speaker 2: our criteria years ago of how we how we view them.
33:00
Speaker 2: It's just it's a gray area and there's differences and
33:03
Speaker 2: good things about you know, one versus the other. So
33:05
Speaker 2: we do it all at pure as the answer.
33:08
Speaker 3: Okay, well that's a good point because I think that
33:10
Speaker 3: secured could be a physical asset, but in your case,
33:13
Speaker 3: it's a stream of you know, talking about like music
33:16
Speaker 3: reyalties as an example, like, it's not a physical asset
33:19
Speaker 3: at the end of the day, but there is a
33:21
Speaker 3: recurring revenue stream there driving it versus just a just
33:26
Speaker 3: a kind of an installment product. What are some of
33:29
Speaker 3: the most I think is you're thinking about those like
33:31
Speaker 3: niche opportunities where people are creating companies that are originators,
33:36
Speaker 3: that are lending to very specific areas. What are some
33:40
Speaker 3: of the most interesting things you've seen are the most
33:42
Speaker 3: most niche opportunities there.
33:46
Speaker 2: So a day we did as a past here that
33:48
Speaker 2: I learned was to a small business lender who would
33:52
Speaker 2: lend and be clatteralized by a license to the small
33:55
Speaker 2: Businesses Data asset. And before diving into this lender, I
34:00
Speaker 2: was unaware of the amount of liquid marketplaces there are
34:05
Speaker 2: for various data sets. And you know or there's also
34:09
Speaker 2: vast broker networks for certain types of data sets that
34:12
Speaker 2: can be liquidated quite quickly as well. And so it's
34:15
Speaker 2: everything from a healthcare company who has a trial data
34:20
Speaker 2: that they can sell that can be the piggyback jumping
34:22
Speaker 2: point for another healthcare trial. It could be a sneaker
34:25
Speaker 2: company who packages and sells the data for the number
34:29
Speaker 2: of times a consumer clicks on shoe options before buying,
34:34
Speaker 2: and how many clicks resulted in what sort of cart
34:37
Speaker 2: value and those sort of you know, various both data
34:40
Speaker 2: sets can be sold in lots of different ways and
34:43
Speaker 2: liquidated quickly. So fascinating firm that's doing, you know, small
34:48
Speaker 2: business data lending where I think during COVID everyone heard
34:52
Speaker 2: about the large deal where the airlines were selling customer
34:55
Speaker 2: lists or information about their loyalty programs and that is
34:59
Speaker 2: helping these uh these airlines day afloat during COVID period,
35:03
Speaker 2: and so it was it's that but on a very
35:04
Speaker 2: micro scale and with this liquid data. So it's an
35:08
Speaker 2: interesting deal. In the book, we really like that lender.
35:12
Speaker 2: Fun the fun things that we've seen that we haven't done.
35:15
Speaker 2: You know, there is one lender who was like leasing pets,
35:19
Speaker 2: like actually the physical animal and we've been out adult
35:23
Speaker 2: concerns about like buffer they repossessing a dog, and it
35:26
Speaker 2: was we were too busy in the time to dig
35:28
Speaker 2: in and so perhaps this firm is great and it's
35:30
Speaker 2: a wonderful lender, but at the time it was just
35:33
Speaker 2: a quick like, oh, we're too busy with other things.
35:35
Speaker 2: That move on. So we see, we see really things
35:39
Speaker 2: across the board. I would say another another one that
35:42
Speaker 2: we we liked is a lender who lends to students
35:45
Speaker 2: going to software coding camp. It's a very specific niche lender.
35:49
Speaker 2: They can really understand that bar and what they do,
35:51
Speaker 2: what the placement out of the school is. Yeah.
35:54
Speaker 3: I think the lending for pets one has actually come
35:57
Speaker 3: up anecdotally here as we've been talking about other other
36:01
Speaker 3: companies and what they do. And there's a company not
36:04
Speaker 3: just the leasing, but the loans for the pet stores
36:07
Speaker 3: where it's a you know, really an overpriced animal in
36:10
Speaker 3: many cases and to somebody who probably is not should
36:14
Speaker 3: not be maybe borrowing to buy a puppy what maybe
36:18
Speaker 3: a puppy mill dog. And it's always interesting like what
36:21
Speaker 3: could the consumer consequences of that? And and and who
36:24
Speaker 3: regulates a company that does that that sort of business?
36:28
Speaker 3: So certainly interesting. Yeah, and I think the you know,
36:32
Speaker 3: how do you think that? It kind of raises a
36:34
Speaker 3: really a last question for me then, like, as you're
36:37
Speaker 3: thinking about about other companies like that where you're you're
36:42
Speaker 3: gonna set up a facility for or or even buying
36:45
Speaker 3: secondaries from how do you think about things like privacy,
36:49
Speaker 3: reputational risk, so not just kind of the quantitative parts
36:52
Speaker 3: of the deal, but the more kind of subjective risks
36:57
Speaker 3: in evaluating who you do partner with or who you
36:59
Speaker 3: work with in the future.
37:01
Speaker 2: That is at the forefront of our decision making before
37:04
Speaker 2: even getting into the qualitative aspects of a product. So
37:08
Speaker 2: things that may resemble payday lending, you know, are where
37:11
Speaker 2: it's the bar doesn't have a great path to success
37:15
Speaker 2: in paying off a loan, where it's you know, loaning
37:17
Speaker 2: stacking and that sort of thing. You know, that's a
37:20
Speaker 2: big no no for us at peer you know, again,
37:23
Speaker 2: challenges with usery rates across states that can raise flags
37:27
Speaker 2: for us. You know, we were fortunate that there's such
37:30
Speaker 2: a wide swath of great businesses to work with that
37:33
Speaker 2: are serving really useful, really productive purposes that it's quite
37:38
Speaker 2: clear and easy to pick those off the top and
37:41
Speaker 2: say those are the ones we want to pursue. And
37:44
Speaker 2: anything that has a sort of ick factor, you know,
37:47
Speaker 2: we don't need to reach for or spend time on.
37:50
Speaker 2: Consumer lending products obviously have a greater compliance environment than
37:55
Speaker 2: commercial loans, and so we have to have a greater
37:57
Speaker 2: scrutiny when we're getting involved with consumer lunch and sumer lending.
38:01
Speaker 2: We do a lot in the space, and it's really
38:03
Speaker 2: just about understanding it, making sure your your counterparts have
38:06
Speaker 2: the correct licensing, have a great compliance environment internally, and
38:11
Speaker 2: then you can be funding great products that are helping
38:13
Speaker 2: people in fantastic ways. So it's yeah, it's it's it's
38:19
Speaker 2: I think it's one of those things where it's like,
38:20
Speaker 2: you know when you see it to stay away, and
38:24
Speaker 2: our space is so small, the specialty finance corner of
38:27
Speaker 2: the world that we all live in, and it's it
38:31
Speaker 2: helps in both directions. It's very easy to work with
38:33
Speaker 2: great companies and great people because you know, you can
38:36
Speaker 2: triangulate with contacts that you're close with to get great references,
38:40
Speaker 2: and then on the flip side, you know you can
38:42
Speaker 2: also learn about firms who may not be doing things
38:44
Speaker 2: so well in a quite quick way with a few
38:47
Speaker 2: phone calls. So it's I think it's helpful being in
38:50
Speaker 2: such a niche space with a number of close people
38:53
Speaker 2: who've been at this for about a decade now.
38:56
Speaker 3: Sure, sure, And I do think the the uh, the
39:01
Speaker 3: good players will self regulate absolutely, absolutely, and and and
39:06
Speaker 3: collectively there's a there's a lot of industry associations that
39:11
Speaker 3: are dedicated to really like helping us share that guidance,
39:14
Speaker 3: provide the guidance, and and some of the larger companies
39:17
Speaker 3: who may have more resources and have more experience in
39:21
Speaker 3: the market, can help provide that to some newer originators
39:24
Speaker 3: as well. So I think there's a lot of partnership
39:27
Speaker 3: happening across the across the fintech industry goes in.
39:30
Speaker 2: It's better for everyone when people are, you know, originators
39:34
Speaker 2: are doing things the right way. So it's it's really
39:37
Speaker 2: great to see firms like like yours who are providing
39:40
Speaker 2: that guidance and and getting out there and being the
39:43
Speaker 2: leaders and examples and compliance.
39:45
Speaker 3: Absolutely so well, thank you, definitely, thank you for for
39:49
Speaker 3: joining us on the podcast. Certainly interesting to hear about
39:52
Speaker 3: the work that you've done and are doing it. Pere
39:55
Speaker 3: and any any last uh kind of hot takes or
39:59
Speaker 3: thoughts to leave us with.
40:01
Speaker 2: Ooh fun question. Oh very specific to what we do.
40:06
Speaker 2: But the other early stage credit facility providers or firms
40:12
Speaker 2: seem to or really like to take equity or invest
40:15
Speaker 2: in equity and the firms that they work with, I
40:17
Speaker 2: think it makes a lot of sense because they're providing
40:19
Speaker 2: a lot of equity value. I really disagree with that
40:24
Speaker 2: because I think it makes you a bad predator. So
40:26
Speaker 2: that's my hot take against a lot of what the
40:29
Speaker 2: general tie thinks and does. So I think as a
40:32
Speaker 2: creditor and doing credit facilities, you should not own the
40:34
Speaker 2: equity in the companies because then you can really enforce
40:38
Speaker 2: your rights. Is that senior security lender and you're not
40:40
Speaker 2: conflicted by owning the equity in a business, And that
40:43
Speaker 2: seemed to be quite a common practice, but we I
40:46
Speaker 2: say no to that. Great, well, good.
40:48
Speaker 3: It sounds like being a founder is the right place,
40:51
Speaker 3: so you can kind of branch out on your own
40:55
Speaker 3: with those new ideas. But it makes a lot of sense,
40:57
Speaker 3: right the conflict of conflicts of interest. If you are
41:00
Speaker 3: kind of on both sides of it, it's a little
41:02
Speaker 3: bit harder to draw a line in the sand.
41:04
Speaker 2: Exactly. Yeah, that's my hot take. That awesome.
41:07
Speaker 3: Well, thank you, thanks again for joining us here on
41:10
Speaker 3: leaders Lending.
41:12
Speaker 2: Thank you for having me, Lynn, I really appreciate it.
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