TRANSCRIPT
slava (00:02.285)
Hello and welcome back to another episode of Smart Humans. As always, I'm excited for today's guest. We have another amazing asset class as we're gonna be talking about private credit. We have one of the best, so welcome Nelson Chu. We have the founder and CEO of Percent, welcome.
Nelson (00:19.854)
Thanks so much for having me. Great to see you.
slava (00:22.061)
Absolutely, well, let's get started where we always do, which is how did you even get into alts? Where did this all begin?
Nelson (00:29.454)
Yeah, I'd have to say accidentally. I don't think anyone sets out with a career saying I want to do alternative investments. So I started my career in traditional finance doing nothing related to fixed income, nothing related to alts, more on the wealth management side. But after about two and a half years, I was just thinking, you know what, this whole finance thing isn't really for me. I don't think I'm ever doing new finance ever again. Clearly very famous last words because here we are deep into that space. But at that point, kind of started my own thing, launched a consulting company.
helping other founders build their companies from the ground up. But I ended up getting a bunch of fintech companies as a result because of my finance background. So I've always been in and around the fintech space at this point. And doing that for about five or six years, realized that, you know what? We have a team that knows how to build stuff. We hopefully have some good ideas, know a bunch of VCs. Why don't we do something in the old fashioned venture backed way? And that's kind of how Percent came to be. So we kind of saw the landscape at the time in 2017, 2018. And we thought there's actually a really good opportunity to build,
What we would believe is a better investor experience for those who invest in alts. Back then, all the investments were super long duration. It was like four to five year lockups. The minimums were super high. It was like 25, 30 grand. And for those that were provided returns, everyone was yielding about nine to 16%. So the reality was if we can come up with a shorter duration product, a lower minimum product, and about the same yield as everybody else, we'd be able to get something interesting here. And private credit happened to be the best asset class that fit all those criteria. So.
Here we are six years later. It's been a good run. I think I'd like to think that we made a bit of a name for ourselves in private credit specifically. And it's been fun so far.
slava (02:04.109)
Amazing. So you were doing wealth management for a couple of years, you said, and then you were consulting for five or six. So you had like eight years of experiencing finance, fintech, et cetera. What were the options you were looking at in terms of you landed on percent and private credit, but what were you looking at and why choose what you did?
Nelson (02:24.43)
that's a, man, we're going turning about the clock here. I got to remember what our other options were back when we were kind of starting this. I think there was definitely something like very, cause let's go back in time in 2017, 2018, very crypto oriented. so probably some sort of token and probably some sort of thing that we thought would be able to take off. it was probably in and around finance in general, but I don't think it was securitized products and private credit. That's for sure, given that's not my background.
So I think we were definitely deep into the crypto ecosystem, trying to see what we could do there. I probably had some sort of like entertainment idea for crypto, just trying to make things very transparent on a ledger. But given sort of what we knew, who we knew and all of that, and even just making sure that we stayed above board from the regulator standpoint, we knew that we would have to do something that was in the firmly fintech space. And that's where we landed on percent. But yeah, I'd have to go back in time.
But I do remember this was just interesting to see. We still have the mood boards from when we first created the company. We still had all the names that we're choosing when we created the company. So this company used to be called Cadence way back in the day with a very, I don't know, like aspirational wealth management type feeling branding, I guess, if you will. But Cadence, the reason for the name was because we wanted people to invest with a Cadence, right? So shorter duration investments rolls over every single month and they can kind of do it over and over again.
We settled on percent after a series a just because it's probably a better name and I don't think anybody wanted to go to a with cadence .io domain name. I think percent .com rings rings a little better.
slava (03:58.605)
I mean, percent sounds like a great name to me. The, you know, you as a consultant had to become an expert pretty quickly with your clients, I'm sure on things that maybe you weren't an expert at, and probably that's a little bit what it felt like to become CEO and founder. What's it like to have to ramp up and, you know, people have been doing private credit for years, decades, if not, you know, many decades. So what's that been like to take on private credit as your.
latest consulting gig, let's call it in the early days.
Nelson (04:29.838)
It's a great question. I think this actually goes to a bit of the founder journey as well. When you first start a company, there's, and you've never done it before, you actually just make a ton of mistakes. And there's some of them are very boneheaded mistakes. Some of these are mistakes that you just would never have been able to foresee. But the ones who can survive and hopefully thrive in time are the ones who actually make less mistakes, just in general. There's a lot of luck that goes into it. There's a lot of planning and strategy and execution and all that stuff, but.
Making less mistakes goes a very long way. So I think I'm actually looking very fondly back on my time when I was doing the consulting company, because at the end of the day, what we offered initially was making pitch decks for people. Like we had, sorry, we, I use the colloquial we here because I was the only designer on the team at the time. It was just a single person LLC, but I was making pitch decks for people. And the expectation was that, he has a finance background. He has a little bit of design skills. He knows how to tell a good narrative. So this will be great.
got a bunch of clients that way, but they all raise money. So the funny part about, you know, I think if you help a client raise money, they tend to have a lot of money to spend. They want to give it back to you. So they were just asking, do you have, can you do branding? Can you do UI UX design? And I kind of just like, yeah, I could do all those things. I have a team that can do that. And he just hired a bunch of people as a result to kind of fill that gap as we scaled. So in that timeframe, learned a lot. I mean, just learned a lot about how to build a team, learned a lot about.
just even the administrative process of like incorporation for companies. I was advising companies on, you know, how to value their company when they raise around a financing, because I just saw so much. So those five or six years were instrumental in when we found a percent, not making mistakes. Like we did all the little things right in that instance. And it allowed us to get to where we are today. I'd like to think that starting a startup at the early stage is actually very similar, no matter what asset class you're in, no matter what sector you're in.
There's all the same things around how do you get initial traction and and acquisition marketing acquisitions and getting brand awareness and things like that. There's going to be how do you build a product without, you know, being able to torpedo your roadmap and just ship on time. Like all those little things are things that doesn't matter what kind of startup you're doing. And so when we were able to basically start percent, we applied all the things that we had learned and allowed us to again, get to market very quickly, build up a several thousand sign up list.
Nelson (06:50.574)
build a little bit of a name for ourselves, drum up some press, things like that. And whether it was percent or some other thing in CPG or it doesn't matter, we would have been able to kind of do the same things. So it's been a fun journey so far, but learning all the things on the consulting side, I think helped percent so much in the earliest stages of the company's life.
slava (07:08.973)
Awesome. My last question about how you got into alts, you come from a place of not being an expert and you said that yourself and now you're obviously doing really well and successful. And now you probably even give mentorship to others looking to start companies. So give us your thoughts on what's it like to be an expert in an industry and starting a company versus being somewhat of an outsider, which is really where you came from and you know, doing a great job. So.
What's that been like to have all these experts around you? But yeah, you had to figure it out. So what's the Nelson today? Think of it, you know, six years later.
Nelson (07:48.878)
Yeah, I'm not going to lie. I don't think I'm still an expert today in private credit. Like we have a fantastically talented team that comes from the industry that is very good at that. But I will say the outsider's perspective is pretty unique as well, right? Because if you have been in private credit, if you've been in finance just in general for a very long time, the usual expectation when you see a problem is that's kind of the way it's always been done or like that's not going to work. Or you just have so much negative bias because you've lived through it and it's just been so painful.
to be experiencing on a day -to -day basis. I come in and I'm like, this is silly. Like, why is it being done that way? Well, this can be done way more efficiently. This is just so ridiculous. In that industry, like, you know, this is like something that happened decades ago at this point. So that almost like naivete, if you will, in the sense that, you know, it's all possible. Let's just do it. Has allowed us to, I think, provide real innovation in the space that really hasn't seen any innovation for decades. So coming from an outsider.
is actually not a bad perspective in the grand scheme of things. As long as you have a team that does have industry experience, which we do, because at the end of the day, you're still playing in a regulated asset class. You're still playing in one that requires domain expertise doing the nitty gritty stuff. So I've been very fortunate to build up a team that all comes from traditional finance, all comes from market data vendors on the technology side. And that supplements my ability to just say, let's go, go. And don't worry what everyone's saying. Like, don't worry people telling us, no, let's just do this.
So it's a very nice balance in that regard.
slava (09:18.125)
Nice. I love the outsider perspective, removing the negative bias. That's awesome. And being a bit naive could be helpful. So you mentioned that in 2017, 18 is when you started, you almost created a crypto company. So what's your perspective on crypto as an asset class? Are you long or short, bear or bull today?
Nelson (09:38.99)
It's interesting. I'd like to, it's crypto is, is such a fascinating thought experiment in free market capitalism without regulations. I guess it's kind of the best way to think about it because when nobody's coming in to say no, and you can't do these things, especially if you're outside of the United States, what do people do? Right. And you end up seeing a whole lot of like,
insider trading, front running, wash trading, things like that. And it's just kind of crazy, right? But I think amidst all of that, there's been some bright shining lights of what it can become. And I say, I put Bitcoin in that category. I put Ethereum in that category. And actually I put USDC in that category as well. I think stable coins are one of the best innovations that have come out of the kind of crypto blockchain.
era that we've been in experiencing right now. When I first heard of this and when USDC almost like was not almost barely even existing, I was just thinking to myself, this is a fantastic use case, right? Because in countries with extremely high inflation, in countries where currencies are always at risk, if you give somebody the opportunity to send money to their relatives in a different country and have them be able to hold on to something that holds value.
That's incredible, right? Pegged to the US dollar, which today arguably is still the most stable currency. And we even see it today, right? Like we have contractors that we work with that are in Argentina, for example, and they actually prefer to get paid in USD technically, because they converted to the stable coin and they just basically traded themselves to get Argentinian money when they need it. Otherwise, you know, they can optimize and get a spread on it for themselves, which is super cool. So talk about a fantastic use case remittances, you know,
inflationary pressures, all that stuff. I love crypto, blockchain, and stablecoins for that reason. But I do think Bitcoin has made a name for itself and it's probably here to stay. But the rest of it, it's a lot of like, you know, intriguing use cases of almost like solutions looking for problems in some respects. And I don't even think they care because they're just making money hand over fist. But yeah, a little bit of regulation, I think, in this industry will go a long way because there's a reason why they make it non -US.
Nelson (11:56.366)
available to non -US only. There's a good reason for that.
slava (12:00.013)
And how about in terms of your personal exposure to crypto? Is that something you do?
Nelson (12:04.462)
Yes, but it wasn't the intent I guess so I had threw some money around Bitcoin in like, I don't know 2015 2016 and it wasn't a huge investment It's now become I guess like something bigger because I haven't sold anything because the way I look at it is like This is kind of a call option. I don't need this money. So if it does well Wonderful, if it goes to zero, I kind of already marked it as zero. So if whatever happens happens
But yeah, I was just throwing money around dabbling around in it because we had Companies on the consulting side that were in the crypto space and they were like have you seen this and I was just thinking no I haven't but let me just throw like, you know a thousand bucks and see what happens So it's been an interesting run on that side. So observe it go through its own cycles But each cycle that passes has I think extended its longevity and also made it more Give it a little more mass appeal to the point where obviously all the ETFs are out for Bitcoin
Ethereum ETFs may be coming and that's going to be a stamp of approval, I think, that gives it extra legs and probably will make sure that it's here to stay if that's the case.
slava (13:06.541)
Being an entrepreneur yourself, are you angel investing or doing any pre -IPO investing into a venture?
Nelson (13:12.334)
Yeah, so I've turned down every pre IPO deal. And this was in the peak peak of like 2021 ish give or take got a lot of options, right? And the way I look at it is this, it's, if everybody wants to offload their shares, then you probably don't be the one to buy those shares. And when the pure IPO hype of like 2021, I was just thinking this just feels overvalued if that's the case. And this is all going to come crashing down.
which it has, right? A lot of the pre IPO shares that was offered just did not do well ultimately. For the venture side, I've made angel investment. I've been making angel investments for the better part of probably like five or six years now at this point, something like that. It's been fun, right? I think what's been interesting is the ones that have done well usually are in like in and around the fintech space. I've like tried healthcare. I've tried other things. And the truth is maybe that's, I don't understand it well enough to be able to make a judgment call on it.
Obviously you are betting the founder above all else. And so, you know, I think that in itself is, is a diligence requirement in its own right. But the sector itself, I can see the red flags or I can see the green flags in FinTech. And so those have tended to do the best in the grand scheme of things, but yeah, continue to make angel investments, put a pause on it in 21, just because it was a little bit too crazy. And now I think starting to dip my toes back in the water again, but.
the evaluation compression, I wanted to see it happen and see it stabilized before really kind of going back in earnest.
slava (14:45.197)
and how involved are you personally with Private Credit?
Nelson (14:48.622)
from me making personal investments. Yeah. A chunk of the portfolio, I would say as, as I tell every investor, even though this is not investment advice, private credit should not be your entire portfolio. I'd like to think that as much as I'd love for that to be the case from the founder of percent perspective, I think from just pure diversification, don't recommend it. but it should be at least a part of it. Right? Like I think there's uncorrelated returns in private credit that are not tied to the equity markets that are not tied to anything else. So it's a good thing.
slava (14:50.925)
Yeah, exactly.
Nelson (15:18.478)
I think you should have it. But how much of it is really up to your own risk tolerance? Because private credit from a Apollo area's Blackstone perspective is very different than private credit from percent. We are in the lower middle market space, which inherently comes with higher risk. We find ways to mitigate it, but still higher risk because of the segment of the asset class that you play in.
slava (15:39.277)
And then real estate.
Nelson (15:41.326)
No real estate. And that is probably much the chagrin of my parents who have wanted me to buy a place in New York for I don't even know how long. But I think, you know, my issue with real estate is how illiquid it is. I think my issue with real estate is, especially in New York, it was always bound to happen where it was actually going to be cheaper to rent than it is to buy a place.
Especially when rates are high, especially when the prices are coming down, like it's really dicey. You look at the data from like street easy, cause that's the place to go for those who live in New York. And it doesn't really prove itself out. Like the, it takes years for you to be able to actually start really getting into the principle or taking down the principle of the actual loan with mortgage. And you have HOA fees that are just insane, right? Like maintenance and all that stuff that's effectively rent. Then there's no income, there's no interest or income tax deduction on that.
So the math doesn't really check out for me, right now at least. I would love to have a place just for myself, like somewhere outside of New York. But at this point, I've found more interest in private credit. I've found more interest in art. I've found more interest in other things that I think I can move a little bit quicker from a liquidity standpoint than an actual physical house.
slava (16:53.709)
Yeah, speaking of art, what's your thoughts on art and collectibles?
Nelson (16:57.678)
I would separate art from collectibles only because art has been around for significantly longer. Obviously collectibles as an asset class is still fairly new and still trying to get tested. I picked up art during COVID and because my walls were super bare and I was thinking, gotta do something about this. It became an absolute obsession. It still is, I would say. I pick up art all the time. I think I've bought like dozens of pieces in the years since COVID, which means that I'm kind of running out of space in the apartment. I'm looking at,
objectively at the ceiling and wondering if there is a spot there to put something up there. But it's been a fun hobby. What I love about art is that you should buy what you love, right? You should not view it as an investment at the end of the day. Because just like any collectible, just like any sort of asset class that's in this space, it can go up and down very quickly based on the whims and feelings and sentiments of investors, people, collectors, things like that.
But if you love it, if you like seeing it on your wall every day, if you like moving around the apartment and changing the vibe of a room, then you'll have no regrets, right? I think that's kind of the way to think about art. The people who own a lot of blue chip pieces, yes, they obviously view it as like an asset and they can get loans against it and all that stuff. But a lot of them, most of them, I'd like to think actually just love the work that they have. And like that's kind of the beauty of art, I would say. For collectibles,
the asset class is still a little bit untested in the grand scheme of things. Like I think it feels like it really came into vogue during the zero interest rate environment. And anything that came into vogue during that timeframe has risen just as quickly and fallen just as quickly. So it's a real question of whether it's here to stay in the way that we'd like to think of as other asset classes are. I know there's a lot of startups in that space, but I think it's just difficult when the volatility is so high.
that it's just gonna be hard to make a market around that because if you get investors that get burned, they may not ever come back if that's the case. And I think you can definitely see that in collectibles because it's just very, very nascent as an asset class.
slava (19:08.909)
So when people think of the old school diversification of a portfolio, 60 -40 equities to public equities to bonds, I imagine that's not your mix and zero into alts. What would be your high level thoughts on your mix between, you know, public equities, bonds, and the whole category of alts?
Nelson (19:16.686)
Yeah.
Nelson (19:28.718)
Yeah, I would say public equities, you know, keep it at 60, right? Like that's again, not investment advice. my compliance, head is going to have a, have a fit if I say anything off like this, but, yes, so not investment advice, but 60 % equities is totally fine. You can keep that if you want, right? you can actually increase it in a bull run, right? I think, in those instances, that will be the most liquid, highest returning type investment, on a average basis. I would say that in terms of just the risk.
risk return threshold that you're looking for. When it comes to alts, I think the remainder can be in some variation of alts, but in different shades of, I would say, maturity of the asset class. So for example, you can do 20 % into large cap or later stage investments, whether that's into something like private equity funds,
into something like a private credit fund that is run by like an Apollo or an areas of Blackstone, like that'll be fine, right? Totally okay. The remainder, you can be a little more experimental. I mean, I think when you think about it, like the ability to get access to alternative investments has never been better than it is today. It'll only continue to get better. And so given that's the case, you'll be doing yourself a disservice by not investing the things that are actually a little bit removed from just the general macro, general market conditions.
So if I were to call it, it's like 60, 2020, 60 in equities, 20 in like later stage large cap alt type investments or private equity type investments, and 20 % into like pure alts diversified across things that interest you, that you actually wanna kind of really understand and get to know well. It's not a bad strategy in the grand scheme of things, but you also need to kind of keep track of the cycles as well. Because for example, if you had done that strategy in 2021, you would have been burned.
very badly across the board in the 16th, 20 and the 20 essentially. But I think right now, right, it has things like, for example, venture capital and investing in startups. It's getting to be around the good time because the valuation has settled down, right? I think it's, it's at the point where it's steeped in reality. When things are steeped in reality, it's a buyer's market. But it's also a time when people have the least money to buy. So that's a great time to enter. If that's the case, that's what we're seeing right now. But again, not advice, but just how I.
Nelson (21:53.39)
almost like view it for myself, I'm doing something similar.
slava (21:56.237)
All right, awesome. Thank you for sharing that. Shifting to the market, what's your high level view on the market? And I know it's a very open ended question and you could take it wherever you want. The stock market, the economy, global, you take it where you like.
Nelson (22:10.478)
Yeah, it's such an interesting narrative going on right now of competing data, I guess, if you will. So if you look at the jobs numbers, market's still kind of hot, but it's not in the segments that we're doing very well in the zero interest rate environment. So there's a lot of part -time work being added that's inflating the numbers. There's a lot of non -white -collar work that's inflating the numbers. And so...
That in itself means that it's actually a pretty difficult job market for people who historically have done very well from the sales, from an income standpoint or salary standpoint. And you're seeing it, I think some of it is because of AI. There's a real tide shift happening because of AI in white collar work. And I think that's going to be here to stay. So that trend needs to be watched very closely. But high job numbers means that interest rates aren't coming down. Right? And so...
You're seeing a situation where it is inflation is definitely still there. And I'm not talking about like how the Fed tracks inflation, cause it's bonkers that they still do it this manually today. Just in terms like actual sentiment from people who are out there buying things on a regular basis at the grocery store, buying things for home, whatever it may be. Those things that people need on a day -to -day basis have gone exorbitantly expensive and that has not come down. Right. And so you kind of need a higher interest rates. If that's the case, like all these things are pointing to that higher for longer.
And it's just going to be a question of like, how much pressure does that put on the economy? You're also in a situation where the stock market itself has never been so volatile because of the advent of the, I guess we can call them gamblers in the market who are playing zero data expiry options and things like that are just causing massive swings that I would say the market has really never seen before. And they are actually making significant movements on that market on a day -to -day basis.
That's fascinating to observe just as someone who's like an outsider looking at sort of how these people operate. But it leads to just some crazy situations that are happening that make it extremely unpredictable. So all of this is to say that I think we're in a series in a period of extreme unknowns. And I do think for a lot of reasons, the Fed will cut rates at some point in the next, I would say two quarters. I'm looking at like a Q4 cut, modest cut, not a huge cut.
Nelson (24:27.566)
But after that, it's anyone's guess as to where this can go. Historically, election years have always been volatile. So it's not a surprise this year is the same. And then the year after that, because it's a known entity at that point as to who's in power and where their heads are at in terms of policy, things start to settle down the year after it tends to be a good year for the economies. So I think we might see the same thing again this time around. But yeah, these competing data points around jobs, inflation, CPI, things like that.
It's just making for a very tricky way, time to navigate the markets.
slava (24:59.309)
So are you thinking one fed cut this year? Is that what you're suggesting?
Nelson (25:04.43)
One two tops, but I'm thinking probably more one and I've been saying that probably since around q4 last year I don't know who Told people that there was to be six cuts in like 2024 that just seemed absolutely bonkers when you looked at the numbers and the underlying numbers So I've always been in the camp of like one or two cuts at most towards the end of the year That's what we're gonna see and that's it because the numbers themselves don't paint a rosy picture. It's like it doesn't
Yeah, it didn't make any sense why they'd be cutting.
slava (25:35.373)
Yeah, inflation has been pretty sticky. Why do you think that if I heard you correctly, you think that 25 is going to be potentially a pretty strong year after the election? Why can you expand on that?
Nelson (25:46.254)
Yeah, that's just, there's no actual support behind that outside of historical data points, right? I think when, when people know policy, like what's coming, cause a lot of macro is driven by policy in general, right? So when people know sort of where the policy is headed, then they are able to make the proper trades for it and they can position themselves properly. It's the unknown of, is it going to be Biden? Is it going to be Trump? Is it going to be somebody else that in itself throws everything out of whack? And so, you're not sure, you know, where things are going to shake out and you're not sure like what's going to happen. There's implications on.
corporate tax breaks, there's an implication on personal tax breaks, like all those things could happen depending on who's in power. And so people are just, I think, trading that uncertainty at the moment. But once you know, like you'll be, everyone can position themselves properly, and that leads to generally less volatility, more stability, and usually, historically, post -elections, more of an up than a down.
slava (26:36.301)
Excellent. So shifting to percent, many people obviously who are listening have heard of percent, maybe a few have not. So can you just start with, so what is percent?
Nelson (26:48.014)
Yeah, super simple. Alternative investment marketplace specifically for private credit. We are almost like single asset class focus. And I like to think that that's a good thing. It's allowed us to, over the years, build a lot of workflow tools, a lot of underwriting standards, a lot of reporting standards that are very, very specific to private credit. Alt is not one size fits all by any means. And so the fact that we are single asset focus, I think is doing a service for our investors. But private credit, for those who don't know, is just non -bank lending.
So going back in time to the global financial crisis, you had banks who did a lot of lending to small businesses, to consumers. Because of the crisis, regulators came in and said, we're going to make it a little expensive for you to continue these behaviors. And so they backed away. But the demand from small businesses and consumers didn't go away. There's definitely still there. So somebody had to fill that void. Non -bank lenders came to fill that void. But non -bank lenders is literally, it's in the name. They're not a bank. So there is no balance sheet to lend from. There is no consumer deposits to lend from.
So they had to go somewhere else to tap into to get the capital they need to extend their loan portfolios. And that's really how private credit really took off, which is non -bank lenders raising facilities, credit, credit facilities from credit funds to be able to do what they do. The most well -known ones back in the day before they turned public was like SoFi for student loans, Affirm for buy now pay later. They all tapped the private credit market to grow their loan portfolio into what it is today, which is now again, public companies, which is wonderful to see. So percent itself,
provides access to these various different types of borrowers in small business lending, consumer loans, factor receivables, litigation finance, equipment leasing, and getting access to a pool of loans from all these lenders that they need to then lend out to their own borrowers. We also have the ability to invest and create managed products for investors. So rather than saying, I want a pool of this student lender, that small business lender, and this consumer lender, I'm just going to say, I want to invest in your...
total market and all the opportunities that ever come out to market. So I get a diversified basket. We have that managed product experience as well. So really is up to the investor, but firmly private credit only and in the lower middle market space. So smaller deals that don't necessarily compete with the Apollo's Blackstones and areas.
slava (29:03.821)
Awesome, so you've been around for six years. Can you give me a sense of how many customers you have and the scale of how much money has gone through the platform?
Nelson (29:11.31)
Yeah, we've done well over a billion now at this point in terms of flow through the platform on the marketplace itself. That means that we've done roughly 650 deals, give or take over the course of six years, which is just crazy to think about. And then we've supported several dozen borrowers at this point. I think we're past 60 now, if I'm not mistaken. And obviously the capital comes from investors, whether they are retail credit investors, family offices, investment advisors, or credit funds.
But we've had several thousand investors come through the system at this point and get great returns through private credit.
slava (29:47.277)
Awesome, over a billion GMV, that's awesome. So what's like an example of one of these organizations, small businesses that are looking for this money? Can you just kind of paint the picture for one or two?
Nelson (30:02.286)
Yeah, there's two types of asset classes or segments within private credit. One is the asset backed side, which is more what we talked about. These are your non -bank lenders. These are your SOFIs, affirms of the world before they got really big. And there's also the corporate debt side, which is literally you're extending financing to a single borrower. Like could be a small business, could be something like that, right? So they're very, very different. The risk profile is very different. The asset backside, it's in the name, it's backed by assets. So it's backed by a pool of loans. These loans could be
hundreds, thousands, you name it, right? And so inherently it's a little bit safer versus corporate debt because corporate debt, you're counting on that one borrower doing a good job essentially and make sure that they make good on the loan itself. So we do both, but what the concentration looks like between those two almost like shifts with the trends of the market. So for example, there was a time when we were doing a ton of asset -backed deals. We started with asset -backed deals.
slava (30:44.365)
Sorry, really quick, are you doing both at percent?
Nelson (30:59.982)
And then we added venture debt because there was a lot of interest in doing venture debt in the market that we were seeing. So we did that. And then now given where we are on the credit cycle, we've been shifting more towards providing asset -backed opportunities just because it's inherently safer from that diversification of hundreds of thousands of loans underneath a single investment product effectively.
slava (31:18.445)
But is this like a coffee shop, a hair salon, or like an airline or a mall?
Nelson (31:24.366)
Yeah. So lower middle market means that it's more probably coffee shop hair salon. If you're doing small business lending, right? So we have several dozen small business lenders on the platform at this point, all of whom have thousands of loans to coffee shops, to hair salons and things like that. But we never faced the underlying borrower, right? We always face the lender who faces the small business and we provide capital and financing to the lender to extend the loans to those small businesses.
slava (31:52.589)
Got it. So to be clear, you're not originating the deals yourself. You are the marketplace connecting the folks who are originating the deals with the investors that you're sourcing on your site. So you're matchmaking.
Nelson (32:05.262)
Yes and no. So matchmaking is what we like to call capital introductions in the industry, right? So there's actually not really much work to be done. It's literally saying, Hey, you're a borrower who needs money. You're an investor who has money. You guys go talk, go pay me my fee. Right? Like that's literally it. Very different. And you can't do that in private credit because you need actual structure here. So we spent the better part of four years, back in the back in 2020 up through 2022, essentially.
slava (32:09.421)
Okay, sir.
Nelson (32:32.59)
doing deals ourselves. We did about 400 deals in that timeframe to learn what it takes to run transactions through the system. That means that we had to create market standard deal structures. There are 52 plus attributes that you'll see in every single deal. And these are going to be things that allow us to control the risk. These are levers. For example, like what's the trailing default rate? How much over -collateralization is there? What's the advance rates? Is there a loss coverage that the borrower is willing to provide? Things like that.
that are not going to be found in capital introduction. Like this is a very, very different game, right? So we have market standard deal structures. Every single deal is structured pretty similarly from one another so you can make comparisons. But we also have standardized reporting as well. So just because you invest in a deal, it's not, our job's not done, right? We need to continue to provide reporting so you can understand how the investment's actually doing within these thousands of loans in the portfolio that you invested into.
So we provide weekly monthly reporting for all these different asset classes, ABS and private credit, sorry, asset back and corporate debt, as well as the underlying sub segments of wealth, including a small business lending, consumer loans, factoring, things like that. So all those things are things that took about four years to build. Before 2023, we said, yeah, there's enough tech here. We have enough experience and we have enough capital. Now at this point, let's just open up this market. Let's allow other underwriters, that intermediary who sits in the middle.
doing that structuring work I just mentioned, not cap intro, to be able to leverage everything that we had done and essentially bring their borrowers to market and tap into our investor marketplace. So it's a three -sided marketplace for sure, which is pretty challenging usually to do. But when you have several years of experience, I think you learn a little bit more of what makes it tick and you can be a lot more successful.
slava (34:18.509)
That's great, so just so you understand, did you used to originate your own deals or you were just doing the, go ahead.
Nelson (34:23.758)
Yeah, no, good question for clarification. So origination means a lot of things to a lot of different people, depending on where you are and are you a bank, are you a lender, are you whatever. So as always, the underlying borrowers are going to be your small businesses, your coffee shops, your hair salons and whatnot, or underlying consumer. There is a lender that is giving them money. So they are originating the borrower, right?
But then we are the ones finding these lenders and saying you need to grow your capital. And so we will underwrite and structure a product for you to be able to get you the financing that you need to continue to operate and grow your loan portfolio. So we did every deal ourselves initially.
slava (35:02.541)
But you were never the original lender, is that right?
Nelson (35:07.182)
We were never the original lender in the sense that we don't have a balance sheet that we put to work. Yes. So we always have investor capital on the other side. It is best efforts though. Right. So the borrowers are taking a little bit of risk and saying, are you sure you can raise the money? But having said that, having done 650 deals, having been around for six years, we have a lot of data points to say, if you close it at this price with this amount of money, and this is the structure that you have, this is probably how much you're going to raise like realistically, because there's just, we have so much information.
slava (35:11.277)
Okay, got it.
Nelson (35:35.566)
around how transactions are done in this market at this point, having been around for so long.
slava (35:40.077)
Great. So let's say I'm investing into percent. What can I be looking at? Let's say I invest this week into potential yields. And I know nothing's guaranteed, but what is the, are we talking 5%, 15%, 50 %? What's the yields we're looking at?
Nelson (35:58.478)
I think it's 5 % of zero interest for anybody at this point, given sort of how much you can get in your savings account. So what's been interesting to observe is it's a marketplace, so it's really supply and demand, right? And we found that retail accredited investors tend to want 10 to 12 % above the risk -free rate in our marketplace. So the risk -free rate is 5%, which is kind of roughly where it's hanging out at right now. They have proven to want 15 to 17 % pretty clearly, right? Like that's been always the case.
When it was a zero interest rate environment, they wanted 10 to 12%. So it's just moved in lockstep with the risk free rate. Family offices tend to want eight to 10%. Credit funds want six to 8 % above the risk free rate. So it's just, I would say sort of where people's return profiles are, where their tolerance for risk is, things like that, right? And that's sort of where you're seeing the market shake out and the yields on our platform as well. Not to say that we don't have stuff that's in the 20 % plus range, but that tends to be very different, right? So.
We have senior deals, we have junior deals. Senior means that you take priority in the event of a situation like a bad situation, you will be at the top, right? Junior has to be paid after senior gets paid. We have asset -backed deals and corporate debt deals. Corporate debt yields are going to be higher because it's inherently riskier because it's, you know, single obligor, single borrower risk effectively. So that weighted average right now is 18%, but it does factor in the senior, the junior, the ABS and the corporate debt.
You'll see different yields based upon asset class, geography, things like that. It's a wide mix.
slava (37:32.173)
So if I invest this week, I could be looking at an 18 % average kind of yield opportunity.
Nelson (37:38.606)
Yeah, you there'll be no shortage of those on the platform for sure. I will say that in terms of net of default and charge offs on our platform for the last 24 ish months, give or take, we've returned anywhere from 14 to 15 .1 % for investors if they invested in every single teal on the platform, basically, which is not the case for most people. But yes, if you invest in every single one, 14 to 15 % has been the historical returns.
slava (38:02.605)
And that's net of defaults and fees.
Nelson (38:04.654)
Net of net of charge offs, but not fees. So there's still fees tackled on top of that. Yeah.
slava (38:07.853)
Got it. Got it. What are fees?
Nelson (38:11.616)
So fees are twofold. So we do take 10 % of the APR. So if it's a 15 % deal, then we will take 1 .5 % on an annualized basis. And then we also charge if investors are investing in the managed products, which is that kind of basket I was mentioning to you earlier where you set it once and then you can forget it. You don't have to worry too much about it. That is an additional 1 % management fee on top.
slava (38:35.789)
Great. So my options are I could either do it myself or I could invest into like a fun product. But I'm saying it's a diversified basket.
Nelson (38:38.958)
Mm -hmm.
It's not a fund legally. Yes, diversify basket, exactly. Yeah.
slava (38:48.109)
Nice, awesome. This is super helpful for context for obviously the listeners. How are you diligencing these opportunities? Because obviously you're doing a pretty good job considering you're still keeping 14 to 15 .1 % after the defaults and charge -offs. But that's typically the risk that people think of. If I'm getting a higher return, it's probably because it's going to be less likely that I'm going to get it.
Nelson (38:53.454)
For sure.
slava (39:14.093)
So how have you stayed so strong with those results?
Nelson (39:18.67)
Yeah, it's been interesting. We've capitalized on a segment of the market that kind of like was underserved because the market got so large. So the Apollo's, the Blackstone's, the Aries of the world have gotten so big and because they raised bigger and bigger funds, they've actually gone further and further up market. There's a tier below those guys where they also ended up because the Apollo raised bigger and bigger funds. They then raised a bigger and bigger fund to do deals that Apollo, Blackstone, Aries used to do. So there's been a...
almost like a split in the market where what we like to think of as the new lower middle market has been severely underserved. And that's where we've kind of made our niche, right? That doesn't mean that it's technically riskier. So you've seen historically that whether it's a large deal or a small deal, size actually doesn't determine the rate or the risk of default. It actually is leverage. And so we don't have leverage in any of our deals, but leverage in general will blow you up if you're not very, very careful, right? So that's sort of where the biggest pain point is. And again,
Investors aren't exposed to leverage on our platform in terms of diligence We have had our fair share of defaults over the years. You can find it on the platform You can just even filter for it. We're very transparent about what happened But every single time that we had something happen We've gotten better and better at tweaking the structure learning how somebody may try and take advantage of us things like that to the point where All that knowledge all that learnings over that first four years 400 plus deals have been now applied into the platform
And we felt comfortable enough to even open it up to third party underwriters to bring their borrowers on because they'd have to adhere to our market standards. They have to adhere to our reporting standards. So in terms of even just like vetting deals, it's very easy in some respects, because if you can't even meet our criteria for what is the standard, you're out. Sorry about that. Like this is the listing process, right? And there's no actual debate about this essentially. And so we actually let very few deals through the platform based on relative to the number of deals that we see on a regular basis. We do have an underwriting team.
They are here to either do the deal underwriting ourselves or to sanity check what a third party underwriter brought to the table and make sure that again, they are adhering to our standards. But we've made it that much easier now because this is a very, very standardized process in what was traditionally a very unstandardized, very opaque market in lower middle market private credit.
slava (41:34.093)
Great. And what's the minimum that I would have to invest?
Nelson (41:37.838)
Yeah, we try and always have a wide range. So the minimums that are the deals that have high minimums is not are doing there is a SEC regulation or rule where it caps the number of investors in a deal. That's why there's that high minimum, but we always tend to have deals that are $500 minimums. We've seen a lot of success with that, right? Because it is the best way to almost like try before you buy effectively. If you have interest that pays out monthly, if you have deals that mature very quickly, you can put in 500 bucks.
no harm, no foul, see if it pays interest, see if it comes back, see if you can pull your money out. And then we've seen investors really grow their portfolio after trying before they commit. And so you see them put $1 ,000 to work, it comes back in a few months and then you see them ratchet up their portfolio significantly quicker after that. So the growth of an investor, historically, we've seen across about five quarters because they get more and more comfortable with the platform over time.
slava (42:31.565)
And a couple questions. So what's the typical minimum if the 500 is like, you know, an entry point, but sometimes they're much higher. What's the typical minimum?
Nelson (42:39.15)
There's actually usually more 500 than not. So that's always been the case. We try and keep it that way. The managed product is the one where because the duration of the actual investment is closer to like three years, we have a limit on just from the SEC. It's 99 investors in that any one product effectively. So you do the math. If it's a, you know, $1 million opportunity in that managed product, and we can only have 99 investors, then we're going to set the minimum at $10 ,000. Like for better or worse, that's what it's got to be, unfortunately.
slava (42:41.645)
Got it.
slava (43:08.845)
Got it. So you just roll those 99 investors again and again, meaning to create like a new basket.
Nelson (43:16.078)
Yeah, so you can have a new if it's a new basket with a new theme, you can actually basically restart the clock on the 99. So that's why we have no reg D. Yeah, but that's why we have so many different themes on the platform.
slava (43:22.444)
Is that a reg A plus? reg D, got it. Cool.
slava (43:31.085)
Understood. And then you said that you take five quarters for the average investor to like scale up. So what's like your average investor number of investments and their actual portfolio size after those five months sort of thing?
Nelson (43:43.15)
Yeah, it's a wide range to be honest. I would say, you know, the retail credit investors has invested several times on average by time all is said and done over the course of those quarters. They will invest roughly around $10 ,000 per investment on average, like when they get comfortable with it, essentially. But the family offices, the investment advisors, they invest hundreds of thousands, if not millions. So there's a really wide range in it. We try not to skew the numbers any one way as a result of the fact that we have very different types of investors.
slava (44:12.045)
If it was me, like how many investments should I have to be diversified if I'm not in your basket?
Nelson (44:17.102)
Yeah, it's, you know, what's crazy. Like we've had, I think I saw this once, there's a guy that invested like in maybe 250 deals because he was putting like a 500 bucks in every deal. Like there's people that do that. Right. So, that's definitely diversified. He's probably tracking close to that 14 to 51 .1 % in terms of returns. but I would say usually we've seen no one position take up more than 10 % of their portfolio total dollar value wise. That's just the normal that we've seen in terms of behavior.
slava (44:46.957)
So you suggest like 10 to 20 positions.
Nelson (44:50.734)
Usually, again, it comes down to risk tolerance and sort of what people are looking for in their portfolio. We've had people make very concentrated sector bets, right? So for example, if they don't like the US consumer right now from a risk standpoint, because credit card defaults are so high, they're going to avoid a bunch of things we have on the platform and they're going to concentrate it on small business lending, or they're going to do something internationally where the risk is not as high for the consumer specifically, right? So it actually is very, very
dependent upon your own risk tolerance and sort of where you even see the macro trends headed as a result. So it's not just, let me just find the next 10 or 15 and invest in it. I would say you should generally think about sort of why you're investing in something and make a thematic bet as well.
slava (45:37.069)
Great, and let's say I'm lucky enough that I'm talking to you, so let's say you're my advisor right now, I'm gonna put some money into percent tomorrow. How should I be thinking about interest rates, where they're headed, where they're at today versus where there might be a year or two from now and how I should be looking at my options on percent today?
Nelson (45:54.35)
Yeah, so the interesting thing, because we've been around for so long that we've seen a zero interest rate environment, a peak COVID environment, a post -COVID environment, a Fed rate hike environment, and then a Fed plateau environment. We are floating rate, right? So the reality is our rates move in lockstep with the Fed, and it's literally just 10 % to 12 % above the risk -free rate. So you can rest assured that no matter what happens, I guess,
As rates, if they do start to come down, let's say in Q4, like I was predicting, you will see our rates come down as well. It's just literally going to be in lockstep. And the beauty of our segment, which is lower middle market, is that these deals turn over significantly faster than the Apollo's, the areas of Blackstone's of the world who have significantly longer tenors on their investment products. So the fact that it does come to market quicker or more quickly means that you will see a real, almost quasi real -time reaction to the Fed anytime they do something.
And you've seen it historically, for example, like during COVID, SMB lending, SMB lending was our best asset class for a very long time. And then they were, they were at like 11 % returns for investors pre -COVID. The moment COVID hit, yeah, this performance is going to be terrible. Like there's no businesses open essentially. So what is the price you're willing to clear to continue to want to invest in SMB lending? Recognizing that PPP may be coming in, recognizing that there will be some relief happening or whatever it may be, but people wanted to get paid.
7 % higher than what it used to be pre COVID. So it hit 18 % in like nine months because the risk people thought was just there, right? Post COVID it came down and then, but it never came down to pre COVID levels. And then once the fed started hiking rates, it went back up again, right? So right now the rates for SMB lending are higher than it was peak COVID. And can you imagine like there was no businesses open during peak COVID, but the rates are higher because the fed has made it that way, right? So.
You're going to see a lot of variability, a lot of movement once the Fed starts making some changes on their side. And we go and lockstep with them because that's the way investors view and perceive the risk in lower middle market.
slava (47:58.893)
Amazing. Thank you for all that background, Percent. Super helpful. You know, we always, as listeners, want to learn from the guests. So what is it that you're watching, listening to, reading? What is it that helps make Nelson Nelson?
Nelson (48:14.318)
Sure. I would say I tend to actually listen to more things on the startup specific side. And I like to look at things that are, or listen to things that are more established than me. I think there's always a lot to learn from on that side. So I've don't really read books much these days in a traditional sense. I'm always like out and about. So podcasts have become a toll, definitely a thing. I do love the acquired podcasts. I think that has just the deep dive into the businesses and just how they work and how they evolved over time. And these are.
businesses that have been around for decades. We always, as a founder aspire to build a company that will be around for a very long time. Hopefully outlive us and to see and hear how other people have done it is just really, really inspiring. I would say. and I think, the, I think it's called the Logan Bartlett show. He's a VC at red point, but, he does have great founders come on, like because red point is who they are and the brand that they have, they're able to get really talented founders who've built great companies that are significantly larger than percent. That's for sure.
and hearing their journey, one, it's actually, it's like, well, we all go through the same thing. It's pretty relatable, no matter where you are. But two, sort of the challenge they experience at scale or as they scale, just things that we hope will have, be in a position to have those problems. It's a good problem to have, right? And we'd like to be ready in that instance. So definitely more business podcasts, definitely more startup podcasts, not really ultralated, but we talked about, I'm not from the private credit space, right? Like I'm not from this world.
And so I'd like to think that that outsider's perspective that I get from these different places only helps us, doesn't hurt us.
slava (49:46.829)
Anything else that's part of your routine that helps make you you?
Nelson (49:50.862)
I think my personality for better or worse is lends itself very well to this. So, my biggest superpower, if I were to have one is just that I don't really get stressed just in general. Like the amount of challenge that we've had in this company is ridiculous as is the case with any startup. but I just don't get stressed about work. Like I think the, the belief in, in myself, the belief in our team, the belief in the company and our vision is just always there. And the truth is I always feel like we're going to figure it out.
It's like not a big deal. Don't worry about it. It will all kind of make sense in the end. And that just allows you to make good rational decisions at the end of the day. And that's been, you know, I think worked out well for us as a result. We always take a very pragmatic approach. I think it comes from just my own personality as well.
slava (50:33.069)
Is there any practice that you're doing, whether it's meditation or walking or something you're talking about?
Nelson (50:36.814)
Absolutely none. That's the crazy part. Yeah. I think it's, and going back to the consulting side, the amount of just like insanity that I saw on the consulting side, cause it is a margin driven business. Like literally you have to turn a profit on these transactions, right? And these things that you're working on. If you don't, you can't afford to pay your people. So the consulting challenges were actually, I would argue sometimes harder than the ones at percent because you had to turn a profit.
Ran out of money so many times had to figure out how to make payroll had to call people to say them tell them pay faster than that 30 like you do all these different things and When it comes to percent it's like I can raise more money. This will be fine, right? I think my mantra has always been Nothing's ever as bad as it seems right like you could have something really really tough happen You thought you closed that deal didn't happen It is it is what it is right like the Sun will come up tomorrow. You still have a great company You have a great team you will figure it out. It's gonna all be okay, but
that downside or the lows don't actually, if they don't happen, you can't have too high highs either, right? So like nothing's ever as good as it seems either. You could have the best pitch in the world and you're like, this is a done deal. I'm ready to rock and roll and they could ghost you. Like that's happened before, right? And just don't let it get to you. Like, so stay level, stay even keeled. Do you repeat that mantra enough? You just start to really not care. Like it's, it'll be fine. Everything's going to work itself out.
slava (51:58.189)
I love it. The last question, and we always ask everybody this, which is what one investment would you recommend today, even though this is not investment advice, about three years from now or a couple years from now when I have you back on the show that we're gonna be able to see and say, look how that did, it was so amazing. Or I get to put you on the spot and say that was a bad one. So the more specific you could be, the better.
Nelson (52:20.878)
Yeah, I wish this was three years ago, then I'd say in a video, it'd make my life a lot easier, but, that would be way easier. No, I think we're at an interesting time where I think rates are going to come down. I don't think we're ever going to get to where it was before, like zero interest rate. There's no point, right? but it will make growth investing more interesting. So I think you are going to see venture return again as something interesting. And now the noise is gone as well. Right? Like there's a lot of, there was a lot of.
slava (52:24.205)
Yeah, that would be easier.
Nelson (52:49.582)
just things that didn't make objective business sense in 2021 as like why you would invest in a company like that or why venture is the way it is. All that's gone now. Like there's actual real companies being built with real fundamentals and that's a great time to be in it, right? Like I think you get outsized returns from venture for sure. You also get outside zeros as well. Like that comes with the territory, but the outsized returns do tend to offset your zeros and the ability to find that right now or soon, I would say sometime in 2024, like I would say,
Q3, Q4, 24, if not early 25, would be a really interesting time for venture because all of the bad things have been washed away and you have good companies with good founders being built. And I think with AI coming into the fold alongside with that, you're going to see a lot of economies of scale that weren't possible before that leads just faster iteration, more interesting products, solving bigger problems. And we're at the precipice of something super, super cool. So I do like venture soon, maybe not now, but soon.
as an asset class that I think will do very, very well. And obviously private credit, because I had to say that, but yes.
slava (53:52.781)
Well, can you be more specific than venture as an asset class? Can you give me a specific like you said in video? Can you give me a specific venture?
Nelson (54:01.218)
It's interesting. I'm happy that AI multiples have come down. I still think they're extremely expensive and I don't think it's actually bottomed out yet by any means. So I think the jury still has to where that's going to happen. There will be significant winners in this space. I don't necessarily think it's going to be companies that are in existence right now, just to be perfectly frank. I think there's going to be...
another wave that needs to happen. whether it's an iteration of something that's already been built or whatever it may be, that will actually be where all the, the wins come from. but the good news is AI iterates so quickly that we might find out in like two months what that looks like. So we'll see. but I think that needs to be settled a little bit. I think. Fintech has had its moments for sure, in terms of getting a beating in this last, round or last couple of years.
I think there is still fundamentally so much to be done in FinTech and this is a biased view, but it's also because I know it the best. The bar is so low for some of these things. And like the reality is if you have acceleration of easy of building software through AI and through all the other different ways that I think it's been easier to start up a company, get incorporated, build infrastructure, things like that. It's like never been easier to build infrastructure. I think there's me.
big wave happening that can change how finances or finance in general is done. And we don't think we'd scratch the surface of that yet. I would love to see healthcare improvements, to be honest. I think healthcare is so hard for the same reason that FinTech is hard, especially if you're solving really big problems. But I think it's that time. And I think healthcare is gonna have its moment soon as well. So FinTech and healthcare, those are where I probably like the most at this point. AI I will like, but not right now.
I think we need, and I say this as I invest in AI company, but like it was just, you know, to have a little bit of sprinkle in there just to make sure I have some exposure and just see, stay close to the space. But, I think the actual multiples and then the real value generation will happen in, in another cycle.
slava (56:10.061)
Amazing. Well, thank you, Nelson, for the conversation. We have covered so much from the beginning where you were in wealth management, then a consultant, which gave you the platform to start what is not called Cadence, but rather called Percent. You have your outsider's perspective, removes the negative bias. Being a little naive helps to remove some of the perspective. So that's awesome. You gave us a lot of thought about the mix on the portfolio, 60 -0 -2020.
which is 60 equities, zero bonds, 20 more the safer alts and 20 a little bit more speculative alts. You see how the AI is changing white collar jobs, which is very interesting perspective. You're thinking one to two Fed cuts this year, and then you're looking for a strong 2025 after the presidential election. You told us all about non -bank lending and where percent is playing, how it's a marketplace being able to bring over a billion dollars of dollars transacted.
over 650 deals, which is incredible. I love the idea that it's 10 to 12 % return and that's floating independent of the actual Fed. So right now it's closer to 17 or 18, but if it goes down, obviously it can go down a little bit, but still be the 10 to 12. The number that I haven't heard before, but it's super impressive is the 14 to 15 .1 % net of defaults and chargebacks. That's killer. The fact that you don't do this with leverage for me, I really love that.
There's both baskets as options or just pick your own adventure. Obviously the fact that you have his entry point of $500 is awesome and people are running up in five quarters to have the optimized portfolio. So this is all super interesting. And at the end, I couldn't pin you down to a specific company. I think I heard a little bit of AI that's not called open AI or anthropic or Mistral or whatever, but I think you're bullish on venture and we'll see how the 2024, 2025 vintage performs. So thank you very much.
Nelson (58:05.07)
I love that TLDR. That was awesome. No, thanks for having me. It was great. Enjoy the conversation a lot.
