In 2019, it seems that everything can be done online. From scheduling a dog walker to investing in stocks, many tasks that used to be done offline are increasingly finding a home on the internet. The lending market is no different.
Over the past few years, there has been a proliferation of fintech companies, including multiple debt-lending platforms. These range from organisations offering consumer loans and quick cash to companies providing small business loans, sometimes in as little as 24 hours. There are also a few that are designed more in line with the traditional private credit asset class, which offer debt products that would be familiar to accredited investors.
One of the aspirations of debt-lending fintech platforms is to provide greater access. This might mean bringing products to borrowers that could not access them before or unlocking opportunities for investors, increasing portfolio diversity and increasing the ease of investing.
CNote is one such platform. It focuses on opening up the asset class to make it more accessible for investors and allow them to make a positive social impact. Founded by two women with decades of experience in private equity, investment banking and venture capital, it caters to businesses that fall into the gaps left by institutional funding and bank lending, including companies founded by women or members of minority communities.
CNote’s co-founder and chief executive officer, Cat Berman, says it targets these kinds of businesses because they are traditionally underfunded in comparison with companies founded by men. The platform has deployed more than $25 million in loans since it was founded in 2016. Berman says that technology is a great avenue to bring capital to those who may not get it otherwise.
“What led me to CNote was really recognising that there was a gap in the market,” Berman says. “There was an opportunity to use technology to help close the wealth gap, and create more economic opportunity for everyone. What our technology is best at is unlocking previously inaccessible asset classes.”
The Wisdom Fund, CNote’s latest product, aims to target these often-overlooked businesses. Berman says that many of these companies are funded through CNote’s partnerships with community development financial institutions (CDFIs), which are traditionally less accessible for investors.
“There are a lot of debt instruments that many of us have relied upon for years and now we are in this exciting age of realising there are quite a few alternatives that have been undiscovered and under-utilised,” Berman says. “We represent some of those leaders in that field, being able to open up a new chapter of debt investments and debt opportunity.”
The vehicle has no fees and accepts a minimum investment of $50,000. The fund is targeting returns of 4 percent on five-year term loans. Berman adds that this platform not only helps an under-served market but allows investors to diversify their portfolios and make a positive social impact in the process.
CrowdOut also hopes to give investors opportunities for diversification. The Austin, Texas-based platform was founded by two professionals who both had more than 10 years’ experience across private equity, direct lending, hedge funds and investment banking.
CrowdOut allows investors to shop for individual loans that are being raised in a crowdfunding format and invest in specific projects. These loans typically go to companies in need of bridge capital, which CrowdOut mainly provides through senior debt products.
Chief executive Alexander Schoenbaum says that he and his co-founder started the platform after receiving feedback from family offices that they were seeking more sources of alpha. “Continuing to diversify away from the public markets, investors like [our platform] as a place to put money, but not all of their money,” Schoenbaum says. “Our platform is a way to earn higher-yielding investments than a savings account or bond investments, but also stay outside of the public markets.”
Loans made so far have ranged from $1 million up to $30 million, with targeted returns of 8-12 percent. The minimum investment amount is $1,000, which enables investors to delve into new sources of return without much financial risk. The platform charges a fee of 10 percent of the interest collected on the loan to investors.
“We have now done more than a dozen loans, have hundreds of investors and have originated about $190 million of loans to date,” Schoenbaum says. “The owners and operators love what we are giving them. For them, it is access to a fully institutional product.”
He adds that CrowdOut is hoping to continue adding more debt products in the future and that it will be able to grow its impact in the private debt field.
The fintech debt sector is not comprised entirely of standalone companies. Mercury Capital Advisors, a New York-based placement agent, created its own fintech platform, Mercury iFunds, which gives the company’s accredited investors a more streamlined opportunity to invest in funds online.
The end-to-end investment platform comprises fund options ranging across asset classes, including private equity, credit and real estate. All the funds are picked by a team of 16 originators and underwriters who conduct due diligence.
“What we do at Mercury with iFunds is provide a diversified range of opportunities,” says Alan Pardee, co-founder and managing director of Mercury Capital Advisors. “Investors will be making their own decisions as to how to craft their ultimate investment decisions regarding investing in individual funds, three funds, five funds. They can make their selection.”
The minimum investment is $100,000. This is typically less than what each fund individually mandates, and allows investors to spread their capital across multiple opportunities, if they choose.
Investors in Mercury iFunds are required to have at least $50 million of AUM. However, Pardee says that those that do not can work with a registered investment advisor and still partake in the platform’s opportunities.
With fintech platforms helping to broaden access and opportunity, it seems likely that the field will continue to grow. But without long track records or historical data, fintech’s place in the overall debt market of the future remains unclear.
“There is a surge of interest in activity in the electronic distribution of funds,” says Pardee. “But how much will it be in the future? We don’t know. The debt markets will probably be more transformed by things away from raising capital for funds, rather than from the crowdfunding sites that allow for peer-to-peer lending.”
However, some of those in the field are much more optimistic. Berman expects to see “more and more fintech firms emerge, recognising that debt is a great opportunity, specifically if you have a technology that can increase access or offer customisation around liquidity, return, or even social impact.” n