Episode Summary
In this episode of Signals, Nick Mazing sits down with Nelson Chu, Founder and CEO of Percent. They dive into the world of private credit, an asset class growing in popularity. Chu, who started his career at Merrill Lynch and BofA, shares how his platform is revolutionizing the way borrowers tap into the private credit market.
Chu explains how Percent has been filling a gap left by banks since the 2008 financial crisis. With technology, they’re enabling borrowers to raise money faster, more efficiently, and transparently. Chu also discusses the challenges of building compliance attestation tools, order book management systems, and asset surveillance tools. Nelson also discusses building out a three-sided marketplace, bringing together borrowers, underwriters, and investors, and growing it to $1.2 billion in funded loans.
The conversation wraps up with a look at the future of private credit. Chu is optimistic, citing regulatory changes and the rapid growth of private credit as reasons for his confidence. He also shares how Percent’s technology empowers borrowers, investors, and underwriters to collaborate more effectively. This episode offers a deep dive into the evolving landscape of private credit and the role of technology in shaping its future.
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Guest-at-a-Glance
💡 Name: Nelson Chu
💡What he does: Founder and CEO
💡Company: Percent
💡Noteworthy: Nelson brings a traditional finance background and a vision for revolutionizing private credit.
💡 Where to find Nelson: LinkedIn
Key Insights
Private Credit: A Powerful Tool for Borrowers
Nelson discusses the potential of private credit as a tool for borrowers. He explains how Percent empowers borrowers in need of debt capital to tap into capital markets using technology. This allows them to raise money faster, more efficiently, and more transparently. Private credit growth as an asset class is a testament to its effectiveness and potential for future expansion.
Technology: The Game-Changer in Private Credit
Chu highlights the transformative role of technology in the private credit industry. He shares how Percent’s technology has enabled the company to facilitate everything from sourcing deals to structuring them, syndicating them, and ultimately surveilling and servicing them post-close. This technological innovation is set to be transformative for an industry poised to take off.
Private Credit: A Bright Future Ahead
Nelson shares his optimistic outlook on the future of private credit. He notes that the non-bank lending sector will become even more important to fill the gap created by banks leaving this space. With private credit growing rapidly and a huge market opportunity in emerging markets, Nelson believes that the future of private credit is promising.
Episode Highlights
Building Tech Infrastructure for Private Credit
Timestamp: [00:03:50]
Nelson discusses the challenges and triumphs of building tech infrastructure for private credit. This was a response to the lack of existing technology in the private credit space. Nelson believes that if they were facing these challenges, others in the trillion-dollar market must be as well. This led to the idea of building the first-ever vertical software solution for private credit.
“When we started to do this, we realized that there was zero tech to speak of as us being the underwriter in this space whatsoever. So we’re building our compliance attestation tools. We’re building our own order book management systems, and probably most terrifyingly, we’re building our asset surveillance tools as well.”
The Power of Private Credit
Timestamp: [00:06:02]
Nelson shares his take on the power of private credit. He discusses how Percent empowers borrowers who need debt capital to tap into capital markets using technology. This allows them to raise money faster, more efficiently, and more transparently.
‘’Private credit, for us in particular, we’re allowing and empowering all these borrowers who need the debt capital to tap into capital markets using technology to raise money faster, more efficiently, more transparently.”
Percent’s Journey: From Underwriter to Software Solution
Timestamp: [00:11:47]
Nelson shares the evolution of Percent from being the only underwriter on the platform to becoming a pure-play software solution. This transition allowed them to build software that caters to all three sides of the private credit market: borrowers, investors, and underwriters. Nelson highlights the importance of this transition in making the private credit market less opaque and more efficient.
“All that information was fed to our product and engineering teams to be able to build software that now faces all three sides. So each side has their own portal to be able to use and transact together and collaborate from start to finish, which is very rare and does not exist historically in this very broken, opaque market.”
The Promising Future of Private Credit
Timestamp: [00:09:45]
Nelson shares his optimistic outlook on the future of private credit. He discusses the potential of private credit in emerging markets and how technology can transform the industry.
“To bring, almost, traditional capital markets infrastructure into those regions and transform what happens over there from a financial services standpoint. So we like our chances in the US. We like what private credit can do overseas in emerging markets, and you look at where the smart money is going, KKR or Blackstone, Apollo, all of them are doubling down on private credit.”
Full Transcript
[00:00:00] Nelson Chu: And if they’re not banks, they don’t have a balance sheet to pull from to be able to make these loans, in which case they have to use the capital markets ecosystem to raise the debt capital they need to finance the loan portfolio and their growth.
[00:00:11] And so private credit, for us in particular, we’re allowing and empowering all these borrowers who need the debt capital to tap into capital markets using technology. To raise money faster, more efficiently, more transparently
[00:00:23] Nick Mazing: Hello and welcome. You listen to Signals by AlphaSense, and I’m your host, Nick Mazing. Today we’re going to discuss private credit with Nelson Chu, who is the Founder and CEO of Percent, a private credit platform, which brings together borrowers, investors, and underwriters. Private credit has been a growing asset class.
[00:00:54] We have all seen the charts of the banks being disintermediated. Don’t ever say this word right, by direct lenders. We have seen a lot of acquisitions in the space in the last few months where we have some of the largest. Alternative asset managers acquiring private credit players to expand their offerings and so on.
[00:01:13] Nelson, first congratulations on your series B. Certainly a big achievement in this market. And can you tell us a little bit more about you and about percent?
[00:01:22] Nelson Chu: Yeah, absolutely. And great to be here. Thanks so much for having me. so for everyone’s benefit, my name is Nelson Chu. I’m the founder and CEO o of percent. my background is a little bit in traditional finance. I think anybody who is doing anything in capital markets, FinTech probably has to have a little bit of a background in finance.
[00:01:37] Well, I will. Say, I don’t think I learned much about finance when I was in finance, cuz it was the first start of my career. so I spent time at Merrill Lynch. I was the last summer analyst class for Merrill Lynch, so that’s a little badge of honor that I own. Became Bank America after that. And then at one point I had all these people whispering in my ear.
[00:01:54] You gotta go to the buy side, buy side’s better than the sell side. So after a year and a half on the sell side at Bank America, I said, okay, why don’t we give the buy side a shot? I joined the largest buy side shop on the street in BlackRock, and within two months I came to the sad realization that buy side was not better than the sell side.
[00:02:08] And so I had to basically stick it out for a year and then I quit. Right. And so from there I ended up launching my own company. I was a consulting company that helped other founders build their companies from ground up, gave them all the resources to be successful, had a couple unicorns as clients, so we grew them into that stage.
[00:02:22] And everything from product, marketing, branding, engineering is sort of we focused on. And uh, that was the part that made me go, you know what, we have all these good ideas. We have a good team that knows how to build companies. We have good access to VCs for the right idea at the right time. We should build a venture backed company for ourself.
[00:02:38] And that’s really how percent came to be.
[00:02:40] Nick Mazing: Mm-hmm. So, tell us more a little bit about your journey about founding the company and how you got to where you are today.
[00:02:46] Nelson Chu: Yeah. I think, advice that I give founders all the time is really that that idea you had on the back of napkin to start the company is not where you end up. Very rarely, at least. So be flexible, be adaptable, and that definitely applies to us here as well. Right? Back in 20 17, 20 18, when we first started this company, we really set out to build a better alternative investment platform, specifically for private credit.
[00:03:07] Cause I was an asset class that wasn’t getting a lot of love in that alternative investment universe. And the difference was, for us at least, we thought we could build a better mouse trap. Right? we thought we could build something that was much more investor friendly. Everything else at the time was really offering investments that were very, very long duration like, four to five years, super high minimums, 25, $30,000, and the yield was about the same everywhere else, nine to 16%.
[00:03:30] And so our thinking was if we could actually build something that had shorter duration investment opportunities, call it sub three months, lower minimums, call it $500 and the same yield as everybody else. We could build something that would have a good impact on retail credit investors, and that all worked great.
[00:03:47] Those hypotheses were all totally valid except for one thing. When we started to do this, we realized that there was a zero tech to speak of as us being the underwriter in this space whatsoever. So we’re building our own, compliance attestation tools. We’re building our own order book management systems, and probably the most terrifyingly.
[00:04:04] We’re building our own asset surveillance tools as well. And so if we thought, man, if we’re having these problems, clearly everybody else has gotta be having these problems as well. And then we looked at the market, it was over a trillion dollars and we were just thinking, okay, there’s a much bigger idea here to really build the first ever vertical software solution.
[00:04:21] and to be that infrastructure provider for private credit. And that’s sort of how we evolve into where we are today. It’s been a four year journey, to get to where we are and being able to kind of offer the technology that we touted and hoped for back in the day when we first started. but it’s never been a more exciting time to be here at Percent.
[00:04:36] Nick Mazing: So let’s talk about private credit now as an asset class. Why is it in demand? Obviously, the fixed income space has been very volatile after the Federal Reserve started hiking rates. So tell us more about the space in general.
[00:04:50] Nelson Chu: Yeah, some big key takeaways I guess. Um, so private credit is something that a lot of people may not fully understand because they don’t interact with it on a regular basis. It’s not something that you can say, oh, I want to invest in that, right? But the reality is they probably have actually used or benefited from private credit in some way, shape, or form.
[00:05:07] So let’s kind of remind back a little bit. back in 2009, 2008, global financial crisis, the banks actually used to do a lot more lending on the small business and consumer, credit side. Right? Ever since the global financial crisis regulators came in and they said, you can’t really do that anymore.
[00:05:22] And so you, if you do, it’s gonna be a lot more expensive. And so the banks all stepped back and paired back all the lending activity they were doing to consumers and small businesses, and as a result, there was a huge gap in the market and all these non-bank lenders stepped in. These are gonna be like the names, names you probably recognize, whether it’s SoFi or a firm or all these other places, right?
[00:05:41] That kind of offered unique opportunities with technology to fill that credit void. And that did really well, to be honest, for the last couple years. And so all those companies are not banks. And if they’re not banks, they don’t have a balance sheet to pull from to be able to make these loans, in which case they have to use the capital markets ecosystem to raise the debt capital they need to finance the loan portfolio and their growth.
[00:06:02] And so private credit, for us in particular, we’re allowing and empowering all these borrowers who need the debt capital to tap into capital markets using technology. To raise money faster, more efficiently, more transparently than they ever could before. And so there’s a reason why it’s so attractive right now, especially in light of the Fed raising rates, for investors at the right lease.
[00:06:21] For borrowers, it’s a little more expensive, so they have a whole separate problem on their hands. But for investors at least, it’s a situation where, because private credit and private market debt is so much more short duration. Then public market debt, which is kind of just sitting on the sidelines right now, waiting for the markets and the rates to stabilize before coming back out to market.
[00:06:39] Private credit has to come out to market again outta necessity based on their structure. And so investors are getting the benefit of being able to get higher yield and more alpha in this environment they ever could before. And so in our ecosystem at least, there’s almost always like a. Call it about 10% spread ish, eight to 10% between, the Fed funds rate and what yield you can expect in the lower middle market segment of private credit.
[00:07:04] Nick Mazing: Mm-hmm. And now that’s from the investor side. Now let’s, let’s talk about the, the borrower side. How do you help startup small businesses, with their funding needs?
[00:07:15] Nelson Chu: Yeah, so there’s uh, two types of private credit in terms of sub-asset classes if you will. you have the asset back side, which is more like SoFi Affirm. They have a portfolio of loans they need to be able to raise debt capital to finance more loans and grow their overall book. And so that is pretty standard stuff and investors can get access to diversified exposure into this portfolio by a specific borrower who needs that capital.
[00:07:39] The flip side of it, which is. Even more timely now in the wake of SVBs collapse where there’s a 6.7 billion venture debt hole that needs to be filled in light of, you know, what everything had happened and, and how much they had on their books, uh, is a situation where private companies, startups, venture back companies, you name it, have the opportunity to tap into the private debt market to be able to achieve their goals.
[00:08:00] Whether it’s extend their runway, whether it’s grow a little faster, whether it’s just buy them time and bridge them into the next financing round, whatever it may be. They’ll have that opportunity to tap into private debt to be able to do that. But historically, it’s been very, very opaque and very difficult to do.
[00:08:15] And our software enables them to get paired up with the underwriters and the investors significantly faster, and also not have to deal with all the post-close reporting, surveillance, monitoring, whatever may be that’s required from them. And that way they can focus on doing their business. And so we provide a lot of value to all three sides of the market, but in particular to the borrowers of this environment who need debt capital more than ever.
[00:08:37] Nick Mazing: And where do you see the private credit space going kind of in the next six to 12 months? I think it’s certainly very interesting times after the collapse of the original banks and so on.
[00:08:48] Nelson Chu: Well, I am 100% bias on this, so take this all with a grain of salts, but still, I like our chances, right? I like private credits chances here, and there’s a lot of good reason for that. So I mentioned back in 2009, global financial crisis regulators stepped in. Every single time the regulators step in, they end up creating or causing or changing rules that essentially force the banks to step back and so they didn’t.
[00:09:09] Oh nine, they’re gonna do it again this time in light of what happened with SVB to change the way they operate on a regular basis, which means that non-bank lending is gonna become even more important to fill that gap that’s gonna be created by the banks leading this space. And so that in of itself is great macro tailwinds in favor of everything we’re doing here.
[00:09:27] But on top of that, private credit is just growing so quickly at this point. when you look at sort of how much opportunity is still out there, for example, private credit by pre’s data is about like 1.2, 1.3 trillion. Latin America private credit is like a couple billion. That’s crazy, right? There is a huge market opportunity in emerging markets.
[00:09:45] To bring almost like, traditional capital markets, infrastructure into those regions and transform what happens over there from a financial services standpoint. So we like our chances in the us we like what private credit can do overseas in emerging markets, and you look at where the smart money is going, KKR or Blackstone, Apollo, all of them are doubling down on private credit.
[00:10:05] JP Morgan and Goldman Sachs just launched syndication desks for secondaries on private credit because they’re making a real market out of it. The beauty of it is, for us in particular, and for private credit, We help facilitate everything from sourcing deals, structuring them, syndicating them out like JP Morgan and GS is doing, and then ultimately surveillance and servicing of it post close.
[00:10:24] That’s all what you can do with technology and it’s gonna be transformative for an industry that is poised to take off.
[00:10:29] Nick Mazing: Now, let’s talk about percent in a little bit more detail. When we, when we spoke before the code, it’s a three-sided marketplace. I said it’s two-sided. It’s actually three-sided. And obviously
[00:10:39] Nelson Chu: Don’t remind me.
[00:10:42] Nick Mazing: and with, with this business models, you obviously have a, Major cold start problem, right? How do you bring all sides to the table?
[00:10:49] Number one, so and so, can you give us a little bit more overview about, how percent works, what happens, why people use it, and so on.
[00:10:57] Nelson Chu: Absolutely, and you bring up a really good point. Two sided markets are hard enough as is. Three sided markets are just downright miserable. Uh, so, you know, talk me through the fundraising process for this company over the last five years, and I can explain why VCs hate three sided markets. but we knew that as well, right?
[00:11:12] Going into it. And as a result, we knew that if we were gonna be successful, we had to at least ourselves take down one side, just in case, right? Just to make sure we know what we’re doing. So for the first four years of the company’s life, we’re in year five now. We actually, were the only underwriter on the platform essentially doing all these deals.
[00:11:29] 1.2 billion of volume 400 plus transactions. Later we learned and got a really good crash course in how the market works, how deals can be done at scale, and most importantly, what are the pain points and the value props that each side needs, whether you’re a borrower, an investor or even an underwriter as ourselves, and all that intel.
[00:11:47] All that information was fed to our product and engineering teams to be able to build software that now faces all three sides. So each side has their own portal to be able to use and transact together and collaborate from start to finish, which is very rare and does not exist historically in this very broken, opaque market.
[00:12:03] Now, starting in January 1st of this year, we made the philosophical choice to shut down all underwriting new underwriting for borrowers, right? And that means that every single new borrower that comes on board had to come with an underwriter who was gonna do help them bring that deal to market. And that’s been a transformational change for us as a company to really become a pure place software solution that we’ve been kind of hoping to be all these years.
[00:12:25] So it’s been a very interesting process, down all three sides one by one. You know, when we first got started, we had a lot of borrowers who needed that capital. We’re trying to promise investors that there’s good deals here on this side because we underwrote it. And then once at that point hit happened, we had too many investors and not enough borrowers.
[00:12:42] We had a little step ladder up. We had a lot of underwriters that came to us and said, how is percent you guys doing 400 deals in four years? We did 40. Can we use your tech? We said, hold on. We’re not ready for you yet. And now finally, January 1st of this year was a monumental day in the company’s life.
[00:12:57] And be able to make that transition and it’s full steam ahead at this point in getting all three sides to work together. And this actually panned out the most over the weekend. That SUV collapsed, because we had several hundred startups reach out to us and our partners saying they need bridge financing to hit payroll the next day.
[00:13:12] All those things. And so this was the first test for us to say. Did our technology actually work? Like, can we actually do this at scale? And the good news is by Sunday, early afternoon before the Treasury Department came in and bailed out the entire global banking system, uh, we had, you know, about 50 million in capital ready to go by Monday morning to support dozens of startups with their financing needs.
[00:13:33] So it tells you when all three sides are motivated to work together, use technology that can scale how fast you can actually operate. And that was incredible for us to see. And it means that we’re onto something for the, for the next year and beyond.
[00:13:46] Nick Mazing: Nelson, thank you for joining us today.
[00:13:48] Nelson Chu: Thanks so much for having me. It was great talking to you.
[00:13:50] Nick Mazing: Today we spoke with Nelson Chu, the Founder, and CEO of Percent, a private credit marketplace with over 1.2 billion already funded. This was another episode of Signals by AlphaSense. My name is Nick Mazing and you can find us on all the major platforms. Thank you for watching or listening.
