Engaging attractive private credit opportunities

Video transcript

1. With the public fixed income markets now delivering better performance - why does it still make sense to invest in private credit?

Now is definitely a good time to invest into the public market fixed income because the pricing is good. It looks like a good time to enter the market. But I will say it still makes a lot of sense to invest in private credit as well because as we have seen, especially in the last year, having an uncorrelated financial instrument in your portfolio gives you this safe harbor against the disruptions and the volatility. Yes, some people argue, "If I hold a public fixed income instrument until the maturity, isn't it the same?" Yes, that's right, technically it's the same. But a lot of people buy them on leverage and then the value of this public instrument goes down 20 or 30%. Then you need to make sure that you have enough money in the margin account. Whereas you don't have this problem with private credit because private credit is meant to be held until the maturity. It's not marked to market on a daily basis and it's usually underwritten in a different way and has special characteristics which gives the investors additional information rights and additional protection as well.

2. Private credit is pretty illiquid - how do your investors deal with that illiquidity?

One of the features for the private credit is that it's illiquid, and this creates a non-correlated nature to the public market. If it will be completely liquid then it would be the same as the public fixed income instrument. However, the illiquidity is relative. For instance, with our financial instruments that we are creating, there is usually early redemption options every three months. So every three months you can redeem your investment at the face value plus the accrued interest. And it's not uncommon in the private credit space. Additionally, private credit covenants tend to be tighter and in there to be rules embedded in the contract when in certain circumstances the investors can get the investment redeemed. So there's a much more flexibility in the way how we structure the investment, how we structure the product, than in the public fixed income market. Last but not least, there's been a lot of happening around institutional blockchain and tokenization of the assets. So there's a lot of activity and big movement about tokenizing the private assets, which can give this additional liquidity or make it easier to transfer these private instruments between investors.

3. What happens if one of your borrowers fails?

First of all we hope it doesn't happen. We think it is a very unlikely scenario given the robustness of the credit risk process and quite low acceptance rate of the new borrower. So we roughly accept only 10% of the deals that we see, and we secure them very tightly to make it very unpleasant for somebody to default or to stop servicing that agreement. Also, we do have tight safeguards around collaterals. So even if this unfortunate event would happen, we would either have the collateral as soon as possible and cash it in, or we would have the company. Or we would make the life of the borrower very unpleasant. Hence, we think if somebody would like to decide to stop servicing, we wouldn't be the first ones they would be likely to default on.

4. You had 11- plus percent return in 2022 - how did you achieve that, and how do you manage the risks?

Private credit gives them that, especially asset backed lending to the mid-size companies. Mid-size company, in my world, I define as somebody has up to 150 million of the assets, on the books, is a high yield situation, and a lot of financial institution and private credit funds are playing in that field and getting these kind of returns, 10% plus, 13%, 14% return. What we face, and I get this question quite often, especially from individual high net worth investors, asking, "Is it too good to be true, isn't it too risky?" So my reaction usually is first of all, the institution, your private bank, you are banking with, they are making deals with the same borrowers. Standard Chartered, HSBC, Citibank etc are doing deals with the same borrowers I'm doing, at the same terms. Do they find it overly risky? Probably not. They are quite conservative, but they are still very happy to take these yields. Are they equally happy to pass these yields to their customers? I am not so sure. Maybe after they get their 4 or 5% commission and then you end up with 8%, and that's something you are used to. And because we are a technology platform and we go direct to the investors, we can bypass all these intermediates and that's why we give the same yield as the institution. It might be surprisingly high, but not unusual in the financial market. And we believe that there is a less than 1% chance that any borrower will default on us at any point of time. And we also believe that if it was about to happen, we would foresee it. We would foresee it because we are looking at the collateral, and the collateral is the thing which is generating the income for them. So if you see that the income from the collateral is going down, something is wrong, right. And I would likely activate the covenants or the provision in the contract, I will claw the money back sooner rather than waiting for, let's say dumb money, right. Dumb money is like a sitting duck waiting there for catastrophe to happen. So our investors' money are hopefully the smart money there on the table and we will get out sooner than something happen.

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