February 5, 2025 • 42 mins
In episode re-air, host Lynn Sautter Beal talks with Jillian Murrish, CEO of Pier Asset Management, about the waves she and her firm are making in the market — targeting less liquid and underserved areas while focusing on secondary markets and early-stage credit facilities. Jillian shares her journey from working in online real estate to co-founding Pier Asset Management, while offering valuable lessons on flexibility, operational ease, and evolving borrowing bases for early-stage originators along the way.
Join us as we discuss:
Join us as we discuss:
- Why early-stage originators should avoid using expensive equity capital to fund loans
- The change in defining secured vs. unsecured lending
- How targeting less liquid areas can help generate alpha and deliver better returns for investors
- The role of privacy, reputational risk, and the regulatory environment play in decision-making in evaluating potential partners and deals
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
You are listening to Leaders in Lending from Upstart, a
podcast dedicated to helping consumer lenders grow their programs and
improve their product offerings. Each week, here decision makers in
the finance industry offer insights into the future of the
lending industry, best practices around digital transformation, and more. Let's
get into the show.
Speaker 2 (00:26):
Hi.
Speaker 3 (00:27):
This is Lynd Suterbil of Upstart, and welcome to Leaders
in Lending. I'll be joined today by Jillian Murrish, who
is the CEO and co founder of pere Asset Management,
a private credit investment firm focused on niche jales and
specialty finance. Jillian has a deep background on both the
buy and sell side and the private credit markets. Let's
get started. Hi Jillian, and welcome to podcast.
Speaker 2 (00:50):
Hi Alinn, I'm so happy to be here. Thank you
for having me on great Well.
Speaker 3 (00:55):
To start off, can you tell me a bit about
what role pere Asset Management plays in the market.
Speaker 2 (01:01):
Absolutely so. We are a capital provider in the specialty
finance space. Specifically, what we do is provide senior secured
credit facilities to early stage loan originators, so we lend
against their loan book. They use our capital to go
out and originate ones. And then second and we act
as a buyer in the secondary market of these long portfolios. So,
(01:24):
you know, if a fund is winding down and they
need liquidity, or a you know, loan originator is winding
down and they need to sell their long book off,
or they just have some need for liquidity, they need
to clear off their warehouse line, they'll come to us.
We'll put in a bid on that portfolio and buy
it after it's ben well seasoned. So those are really
two roles we play as a capital provider.
Speaker 3 (01:47):
Great, well, I know you and and kinter New co
founded Peer in twenty seventeen. Was this your first time
being a co founder in a real way?
Speaker 2 (01:55):
Yes, I had. My first company was in college and
it was a consumer goods companies selling cell phone cases,
and I was the sole founder of that firm, but
ended up bringing on a business partner later. But in
my adult career, this is my first time co founding
a firm.
Speaker 3 (02:13):
Sure, sure, So what I would say, you know, what's
been one of the most kind of surprising lessons that
you've learned since twenty seventeen is being a a co
founder of a of a new company.
Speaker 2 (02:25):
Well, first, and foremost, I'm so glad I'm not at
this alone. I've learned that I loved having a co founder.
It's especially someone who compliments me so so well. So
people who know Connor and I know that we're opposite
in demeanor. So I'm more dynamic. Lou would love to
be social. You know, Connor is a bit more reserved
(02:45):
and quiet, and so that's an outward you know, easy
to notice difference in our personalities, But when you dig deeper,
I get down to the things that we like to
spend our time doing. You know, what are we good at,
what are we the best at? It's generally the opposite,
and so it makes it really fun to run a
company with someone like that, because I'm doing a lot
of what I love and very little of what I
(03:05):
don't love. So I think that's really the real reason
why having a co founder who's just you know, likes
doing opposite things it's fantastic. And then, you know, something
I didn't think about when we started the firm, but
I started to develop a sense for why the partnership
has worked so well, and it really comes down to,
(03:27):
I think the fact that we have the same risk tolerance,
so when we have very different views on various aspects
of our business of the market in general. We generally
approach problems in different ways and identify different risks, but
at the end of the day, it's a go no
go decision on various things with the business and with
(03:48):
investments we make. And having someone who has a similar
level of risk tolerance of things, you know, imperfect information
or no, we actually need perfect information on this, but
not on this. I think it's allowed us to make
decisions in a seamless way and run the company in
a relatively frictionless way since inception, which I'm so grateful for.
(04:09):
He's been an incredible co founder.
Speaker 3 (04:11):
Well good, that's good to hear because I know, I'm
sure that's a very very closely tied relationship. And just
you know, having work tear at Upstart from the time
when we were smaller and pre public and now a
public company, you spend a lot of time kind of
in the trenches with people. So how did you, I think,
how did you encounter meet and then what really led
(04:34):
to the idea of starting peer asset management.
Speaker 2 (04:38):
So we minted a conference in I think twenty thirteen
or twenty fourteen. We haven't mailed down the exact exact
date or which conference it was, but we met in
person through mutual industry participants, and I remember kind of
my first conversation and hearing about him from others that
he was a pioneer in investing in specialties nance. You know,
(05:00):
at the time, it was really called marketplace lending, and
I was running the capital markets practice at an online originator,
so I was producing loans and selling them off into
the capitol market's ecosystem, and Connor was on the other
side running a suite of funds buying these loans. So
you know, he had actually bought one of the first
whole loans at Funding Circle, you know, it was one
(05:22):
of the first loan buyers lending club. And when I
was building out our loan whole loan sale program, he
was one of my first calls. It was, Hey, he
was innovative in the space. You know, amendment a conference,
maybe he'll buy my loans. And it was a real
estate originator and his bread and butter was consumer and
small business. So he came in for a meeting and
(05:42):
very quickly said, you know, I don't think I'm going
to get comfortable in this space, but was curious, wanted
to hear you out. And so within the first meeting
we realized we weren't going to transact, but we were
opposite on opposite sides of this market, and we were
opposite participants. And quickly we started providing value to each
other in terms of kind of under the hood, know how,
(06:04):
from the other side of the trade, which started providing
me a lot of value in my work at that time.
You know, he would share warehouse lenders to the funds
or requiring XYZ. When you're putting together programs, you know,
managed them this way. You know, I would say, hey,
a lot of firms are using you know, sub servicers
and farming out, you know, servicing even below what you
would have imagined, and so ask about you know, these specifics.
(06:27):
And so it became an interesting working relationship where we
get together probably once a quarter and just share insights,
talk about the space, see if we could be helpful
to each other. And in twenty sixteen, I have to
give Conor the credit. We got together for one of
our catchups and I walked in the door, sat down
at the table at Pete's Coffee in Westwood. I remember
(06:47):
like it was yesterday, and he said, I want to
spin out from from my firm and form a new
asset manager. I think we'd make great business partners. Will
you do it? And whoa? And you know, it was
actually perfect timing where I was ready to go back
out and do something on my own. You know, I
had been that young entrepreneur and then went and worked
(07:09):
in and helped build firms, but it was really ready
to go out and strike out on my own again.
And so the timing was perfect. And so we started
talking through our thesis that we had on the space
that we really had been developing over the course of
a few years. And really we're seeing that the primary
market in the space was quite saturated and there were
big institutions and banks buying the loans from all the platforms,
(07:32):
yields it compressed, and so we were really getting creative
as to where where was the alpha, like, where could
we generate alpha? How could we deliver better returns for investors?
And for me that was sitting within the ecosystem delivering
loans and see where was there less liquidity? Where were
the fewer investors when I was bringing things out out
to market, And for Connor was where was I competing
(07:55):
against fewer people? And really that was how we identified
the secondary market, just not having active participants or consistent
participant and that was really kind of the genesis for Peer.
And then also the early stage credit facilities just weren't
weren't really serving loan originators in a great way. And
I had experienced that as an operator and talking with
(08:17):
the CEOs and CFOs of all the other early stage originators.
It was a common problem across the board for kind
of fifty million dollar warehouse lines. It was, you know,
I'm using a logic puzzle to fund my loans, some
with a partner of capital, some with my bank line,
some of my family office line, and you know, I
ended up with one large line from a family office
that funded all my origination flow. And even though it
(08:40):
was more expensive, it was a great product and it
was better for operational ease. So that was when I
looked at Connor and I said, if we can solve
that early stage or early stage warehouse facility problems, there's
a lot of demand for it, and we could make
you know, pretty penny doing it because nobody is and
it's such a value to these early stage firms.
Speaker 3 (09:00):
No, that sounds it sounds like you guys definitely have
a really kind of complementary skill set. I think sometimes
you see people go into business or hire people or
work with people who have they look for people who
have very similar sales skill sets and then they have
those kind of gaps there that they don't know about.
It sounds like the two of you have complementary skills
and experiences on the market that's really helped help kind
(09:20):
of term my charge what you're doing.
Speaker 2 (09:22):
So what else you know?
Speaker 3 (09:23):
I know you mentioned you you worked in an online
real estate lender. What as you kind of built and
scaled with that company? What are some of the biggest
things I mean, obviously that helped you identify the market
you wanted to go into, But what are some of
the biggest kind of lessons you learned that you brought
to peer to help help shape what you're building?
Speaker 4 (09:42):
There?
Speaker 2 (09:43):
Say, first and foremost smaller, earlier stage a loan originators
require a very different credit facility product than large mature originators.
And in the early days, you know, not kind of
twenty thirteen to twenty fifteen or twenty twelve to twenty sixteen,
the large warehouse providers like the mcqueries of the world's areas.
(10:05):
You know, we're trying to come in and serve that
market and you know, being great participants in doing so.
And I saw there were a lot of challenges you know,
using the same structure and the same type of terms
for a small firm versus a mature firm. And really,
in my view at that time, I developed, you know,
a very strong view that early stage originators the priority
(10:26):
for their credit facilities should be that it preserves flexibility, optionality,
and has ease of operational use. When you're an early
stage originator focusing on growth in those early credit co words,
the operational friction that a larger, larger, more structured facility
can bring can really tank or create bigger challenges than
(10:48):
a lower cost of capital would make worth. Furthermore, you know, again,
cost of capital at that size just isn't as important
because again the growth, the proof of concept, focusing on
credit quality out was more important. And then lastly, like
the multi year lockups of the more traditional warehouse facilities,
we're not providing the flexibility that the early stage originators
(11:12):
needed around product, like product would evolve and change within
the first year or two or three. You know, one
thing I was working well, one product wasn't, and having
that flexibility of product mixer being able to kind of
change that barring based subtly based on what products are
working or not would be most critical for success. So
I think it was really identifying that it was kind
of two very different products later stage mature warehouse lines
(11:34):
versus early stage lines, and the needs change over time,
where you know, larger mature originators really care about cost
of capital for good reason, and it starts becoming a
profit center for them, whereas early stage that's not really
the focus. So being in the trenches building that capital
markets practice from forty million to three quarters of a billion,
(11:56):
I really saw that internally and what was working at
what stage of the business. And surprisingly some of the
more structured and sophisticated facilities created risk on both sides
for being too structured. So like, for example, I received
a term sheet one time from a kind of quasi bank,
(12:19):
and I remember they had plattal reportings. It had to
be on Wednesdays, and we would sell all of our
loans off our book on Tuesdays. And so the barring base,
which shows you would have no loans tied to it
every Wednesday, and it balance all the cash, and so
that lender would have almost no insight into what was
(12:39):
platteralizing them in between those interim reporting periods. And so
you know, really my viewshade to A, it's just a
different product, and then B, the facility does need to
be built around the early stage originator versus a product
as a credit facility being served to them. So that
was probably the most important learning from from my time there.
Speaker 3 (13:02):
And I think you when you when you and I've
talked before, you described that as kind of more of
a solutions oriented capital provider like that, Yeah, the capital
provider is kind of meeting the originator at the at
the place they need to be met, and I could
I can see that with those sorts of kind of
very specific restrictions where maybe the person who is drafting
that isn't actively involved in more of the business side
(13:24):
of what they're drafting, and the the timing of that
doesn't exactly exactly make sense. So you know, I do
think you have a really interesting, unique perspective on that
path to funding for early stage fintech originators, and you
kind of talk through it at a at a high
level that maybe you know, kind of more detail of
of what are those sources of funding like you know,
(13:45):
helping our you know listeners understand, uh, you know, whether
that's partner or personal capital, family office, kind of what
that path looks like and what those capital providers can
offer and maybe some pros and cons as they as
they go through that path.
Speaker 2 (14:00):
As a founder, sure happy to talk through this. So
for early stage originators who just started out, you know,
you've been building a product and you've originated zero loans, like,
no loans have gone through your pipes yet. You know,
what we see as most typical source of funding is
usually equity capital. So maybe the firm has raised a
(14:21):
few million dollars of equity capital. They're using that to
build out their tech and their infrastructure and you know
barber acquisition channels, and then they reserve maybe five hundred
thousand dollars for that first cohort of loans other founders,
which I think this is a very smart move. What
they what we've seen happen often is the founder will
actually go out to either friends and family or they'll
(14:42):
also seen those venture partners personally do this where they'll
give a one hundred thousand, two hundred thousand dollars unsecured
promisory note to the operating company, and the intended purpose
is to be used to fund loans. And you know,
it's a fixed coupon. Generally it used to be twelve
for then it's probably higher now, and and they use
(15:04):
that capital to fund the first five hundred thousand or
a million dollars of loans. I think that's a fantastic model.
You're not using your equity capital, which is the most
extensive capital, to fund your loans. But you're also not
trying to structure something and get into covenants and you know,
creating SPVs because at that point it's too small. You
have to prove the concept that you can actually originate
(15:25):
and get loans through your pipes before you go through
all that headache to actually set up something as structured.
So from there, I think, you know, once you have
five hundred one thousand, two million dollars of loan volume,
generally the next step is dependent on how fast your
loan product shows performance. So very short duration products you
could have a full revolution or revolution of that credit
(15:48):
product within three months. Longer products that have you know,
maybe it's student loans with five year term, you have
to start showing early performance data, but that is a
larger challenge and you're going to have to stretch out
that time really to see performance before you're going out
for this next facility. So just bear that in mind
(16:08):
and keep that in mind for the pace of growth
from kind of zero to one million. It depends on
how quickly you can kind of show any sort of performance.
So from there it's really approaching firms like ours and
potentially family offices to get a ten to fifteen million
dollar first credit facility. This is unique compared to the
first promise promisor re NOOTE structure, and that an SPV
(16:32):
is generally required to be set up which is a
subsidiary of the operating company and it's a bankruptcy remote
spe that houses the loans that the loan originator originate.
Usually a credit facility provider of ten to fifteen million
will want to refinance and own whatever loan or put
in whatever loans are already on your book into that
(16:52):
SPD and then you can draw down capital and grow
from there. So really there's only a few institutional providers
that will do warehouse lines that small you know, we're
one of them. There's probably three or four others that
we know of that are quite active. And then other
options we've seen are you know, it's a family office.
We know that we're close to the founders that identified
(17:13):
that will do that first smaller credit facility.
Speaker 3 (17:17):
Sure, So what do you I mean? It sounds like
the path can be can be varied and depends on size.
And I you know, as you were talking about the
duration of the loans that they're offering here, it almost
made a case for some of the press releases Upstarts
had around our parallel timing curve and how we think
about testing a model over time and even though the
(17:39):
duration's long, particularly as you look at products like like
mortgages or or very long duration duration products. So you know,
when you think about kind of then graduating to the
capital markets, like what is that? Is it just a
function of size of the lender of the originator? Is
there some sophistication like how do you think about a
(18:01):
firm being ready to really access institutional capital money versus
more of the you know, a family office VC backing.
Speaker 2 (18:10):
Sure, So I think it's really that next step beyond
firms like ours is the more traditional institutional capital markets
they'd be accessing. And I think it's a function of
two things. One loan book size, so how much of
you originated? And two is there any sort of performance indication?
Like you said, really long dated assets can do you
show month over month performance and really get kind of
(18:32):
a show show a similar loan product that has longer
credit history that you can kind of show your performance
curve agains and start giving a picture to what performance
is going to look like. So when I say size,
generally that means fifteen million dollar book. You can start
having those conversations and they'll come in when the book
(18:53):
is maybe twenty million in size, and at that point
you're reaching for a fifteen million or one hundred or
one hundred and fifty million dollars. Credit facility is usually
that next stutter step, and that's coming from the firms
like the Cross Rivers that out of lie is the aries,
the larger, more well known institutional asset managers who are
doing those facilities. They're usually a multi year term instead
(19:15):
of shorter duration. It's usually and three year terms is
what we see. Often some sort of kind of lock
up for a period of time to make it worth
their time to do those deals, and that generally the
cost of capital becomes more effective because oftentimes we see
those types of firms use leverage on the back end
for their source of capital so they can provide lower
(19:35):
costs and still make a return that makes sense for
the commensurate risk. So it's a function of those two things.
And one thing I just realized I missed on the
previous stage of growth before you access these institutional capital
markets is some firms actually launch their own internal fund,
so they go raise a fund that's ten million dollars
(19:57):
and go make their loans out of that. That is
I would say the most complex, riddled with challenges that
I would recommend, But you know, some folks are really
successful doing it, and oftentimes the yield you have to
pay in that type of vehicle can be lower than
accessing a credit facility from a firm like ours or
(20:17):
our competitors. Yet again there's a lot of complexity, compliance risk,
legal risk in doing so, but we see it a
few times a year that that's kind of the option
that that stage kind of some fifteen million uses.
Speaker 3 (20:31):
Sure, and I could see that where that would be
a pretty resource intensive thing to do internally at a
company where you have to hire a lot of expertise.
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Speaker 3 (21:24):
What are some I think kind of common missteps you
may see originators make going through this process. Whether it's
not hiring the right expertise, whether it's not really understanding
terms of various deals. But what sort of mistakes do
you see you get made in this space?
Speaker 2 (21:40):
So to detail on what I was just talking about,
I would say making things too complex too early and
there's a variety of categories and buckets I can talk
about for what too complex means. But generally, the more
complex and complicated you're making your funding source and funding
structure early on, the more pitfalls you can make so
simpler the better, trying to use one funding source instead
(22:04):
of many, and trying to keep the structures light. So
that's why that promisory note suggestion for the five hundred
k a million dollar first part of the loan book
is very simple in structure. You know, there aren't many
covenants you could trip or mistakes you can make in
how you're managing that capital. It's just kind of here's
here's the charter of what you can do with the money,
(22:25):
and beyond that, it's a very light touch. So trying
to keep things simple for what a simplest for the
stage of your business. More specifically, some examples of complexity
I've seen that cause pitfalls are generally around giving up
optionality too early. So you know, maybe the ten million
dollar lender who signs a three year deal with a
(22:48):
large institutional lender and they have signed a deal with
a very specific loan product and there's no flexibility for
you know, criteria in that facility where is that problem
no longer works and they want to do another product
or pitch that to the firm, There's not as much
flexibility there, and they can end up slowing growth or
(23:09):
just being hamstrung entirely. So we've seen that happen other
things like equity, you know, giving up structured equity alongside
your credit facility too early. With control rights, we've seen where,
you know, very early, if one of these lenders get
stars in their eyes, we can get one hundred million
in depth from one of these large firms, and we're
(23:30):
going to give up ten percent and a board seat
and you know consent on XYZ for M and A
for this and that, and you know, a Series A
or even seed stage company doing that, it's just leaving
so much equity value on the table for their business
by giving up that optionality and flexibility. So I think again,
preserving optionality, preserving flexibility, keeping things simple as you're smaller
(23:55):
generally are the keys to success.
Speaker 3 (23:57):
Yeah, that's a great point. As I think about I've
been at Upstart a little over four and a half years,
but the company has been around since twenty twelve. You know,
we've certainly made a lot of changes on our product suite.
So the first iteration of loans that were made by
the company is not what the personal loan product looks
like today. And now we've added on, added on new products,
(24:20):
and I think if we had been constrained from R
and D and really developing, that we wouldn't be the
same company we are today. Do you think that's a
is it A part of it is just the excitement
of growing too wanting to grow too fast, that there's
somebody here who wants to give you a lot of
money and you want to say yes, and you want
to access that and you want to experience that rocket ship.
(24:41):
So you may put blinders on a little bit to
what you're giving up as part of it.
Speaker 2 (24:45):
I think it's probably the twofold you know one many
of the early stage firms may not have capital markets
expertise on the founding team and may not be able
to afford that higher. It's an expensive higher if it's
not and know how of an existing founder, so you know,
in that instance there may they may not know how
(25:07):
how restrictive that those equity rights could be, or they
can't you know, they's you know, hey, locking in a
roafer with this large one firm and only having one
capital funding source. You know, maybe they don't have the
experience or understanding that. In COVID, some of these, you know,
some firms pulled their funding and said, hey, material average change,
(25:27):
no more funding. So it's just a lot of know
how in that seat that can be expensive to buy
and founders don't have it. I think that could contribute
to making that decision. I think also fear of not
finding other good options for capital, Like it's scary to
choose a twelve month facility that's fifteen million and have
to go get your next facility a year later. That
(25:48):
is that those are two deals you have to get
done instead of one, maybe even three deals you'd have
to get done instead of this one multi year deal.
So and then again they're you know, they're if it's
a venture company, growth is the number is one of
the number one metrics, and the that can seem to
be a clear path there, Yet if you've seen it
(26:09):
happen a number of times, there there can be pitfalls
with making that choice.
Speaker 3 (26:13):
So sure, and I think we you know, we certainly
saw and during during COVID, the funding markets changed very
rapidly for in a almost in intra day, very fast
early and early in twenty twenty. I know you you
had mentioned we were talking previously that you're seeing more
(26:34):
opportunities and where there's kind of distress sales happening across
some originators. So just tell me more about that and
what what is happening to some of those uh like
distressed sales, what what preceded that, and kind of where
those originators ended up having to to sell in the secondary.
Speaker 2 (26:54):
Sure. So really there's a whole cohort of finn specialty
finance loan originators who were founded pre COVID and had
to go through that period. And the COVID period was
good for some and very hard for others. And there's
this cobort that it really did not serve well. And
(27:15):
the reason is twofold one. There was so much stimulus
that origination volume for certain segments of lenders dried up completely.
You know, for consumer lenders, it was tough. There was
tons and tons of stimulus. Borrowers weren't needing to borrow
because they were receiving a stimulus check. And then second,
you know, as stimulus who were off certain loan originators
(27:36):
had gotten more aggressive with lending criteria to be able
to actually put loans on the street, and then when
stimulus dried up, performance suffered. And so there's a cohort
of borrowers that kind of sit in that narrative and
struggled through that kind of twenty twenty to twenty twenty
two period and have some black marks in their credit
quality or origination volume history. And what we're seeing is
(27:58):
those firms are not able to raise the series A
v r C. And you know, the adventure community seems
to have, you know, really turned their back on those
types of firms. You know, it's if the story wasn't
up into the right it's you know, hey, we're not interested.
So a lot of those firms are burning through their runway.
Now in the last year, there's been a number who've
(28:18):
had to shut down, and as they're shutting down, one
thing they need to clean up is selling their loans
off whatever credit facility they have or wherever it's sitting
on their balance sheet. And so, you know, again for
our business, we're a secondary market buyer, so we come in,
we try to get active on those deals and buy
those lung portfolios on the flip side, it's interesting. So
there's this whole cohort of of VC back companies that
(28:41):
have kind of been abandoned to had black marks through
COVID and aren't getting funded and or shutting down. But
on the opposite side, we're seeing companies that were launched
twenty twenty two and later who are showing you know,
great performance, showing great growth, and are getting funded left
and right by the venture community. So it's the kind
of divergent path where we're seeing a lot of the
(29:03):
new great originators tackling very specific borrower segments and really
thoughtful ways we're responsibly and doing a great job. They're
getting equity funded. Those firms are in need of credit
facilities to grow and scale. And then on the other hand,
these originators who started and probably have bad luck with
timing are not getting funded, and so it's it's hard
to see you know, the flame out happening more often
(29:26):
and more often. And but then on the other side,
there's all this happy, happy growth and story for the
newly formed firms.
Speaker 3 (29:34):
Sure, and and honestly for firms like yourself, some of
those uh distressed situations for other that where they were
hit by bad timing or opportunities for other players in
the market. And that's that's true everywhere, so across the
market that there's there's always opportunity. It just depends which
which side of it you're on. So I think that
(29:55):
the timing pieces is important and obviously not something that
those found could have known in advance.
Speaker 2 (30:01):
That maybe just a little.
Speaker 3 (30:04):
Bit of being a victim of bad news. And you know,
similar to the bank failures last year, none of us
really had that on our on our BINGO card for
twenty twenty three, So a surprising, surprising event that had
a lot of downstream impacts. So you know that you
mentioned the green shoots that there are some originators who
are are able to access and start to get into
(30:26):
series A, Series B, anywhere else. You're seeing really like
opportunity for originators on that side of the type of
work you do.
Speaker 2 (30:34):
Yes, again, to reiterate I briefly mentioned in my last answer.
The originators who are finding very specific borrowers segments and
serving those in a really unique responsible way are finding
a lot of traction in the venture community, is what
we're seeing. So the more hyper niche a lender can
(30:57):
get in the problem they're solving well, we're seeing more
success with venture rounds getting done. Okay, that's interesting.
Speaker 3 (31:05):
So trying not to not trying to like boil the
ocean with solving the problem for every person, every market,
every asset class. But focus, do you have a preference
as you think about loans like secured versus unsecured? Does
your firm get involved in any secured loans as well,
or are you going to focus specifically on one or
(31:26):
the other.
Speaker 2 (31:27):
I like talking about this question, so I think the
definition of security and unsecured has really has changed over
time since probably twenty fifteen. And my first question is,
you know, it's obvious that hard equipment like chapters, trailers,
or real estate would be in the secured market, But
(31:47):
would lending against a music royalty stream where the capital
is paid directly from the streaming firms like Spotify, Apple
YouTube into your own bank account as the lender, is
that secured lending or unsecured. And so we're in this
unique situation at peer where we're lending to these originators
who have found the most ingenious quarters of cash flow
(32:10):
to lend against that may or may not be tied
to a physical hard asset but is that cash flow
stream that they have their hands wrapped around a secured asset, So,
you know, a peer, we certainly do deal with the
most classic unsecured consumer loans where there is no clateral there,
it's an unsecured personal loan. And then we have this
(32:31):
gray area of things like the music boral, these cash
flow streams, and then we have the most crystal clear
secured things like equipment or real estate or auto and
so that's a spectrum to us. And we used to
look at our our firm and look at deals in
that way, and we you know, we classify to secured
or unsecured in the way we were thinking about it
(32:52):
presenting it internally, and we actually pulled that off of
our criteria years ago of how we how we view them.
It's just it's a gray area and there's differences and
good things about you know, one versus the other. So
we do it all at pure as the answer.
Speaker 3 (33:08):
Okay, well that's a good point because I think that
secured could be a physical asset, but in your case,
it's a stream of you know, talking about like music
reyalties as an example, like, it's not a physical asset
at the end of the day, but there is a
recurring revenue stream there driving it versus just a just
a kind of an installment product. What are some of
(33:29):
the most I think is you're thinking about those like
niche opportunities where people are creating companies that are originators,
that are lending to very specific areas. What are some
of the most interesting things you've seen are the most
most niche opportunities there.
Speaker 2 (33:46):
So a day we did as a past here that
I learned was to a small business lender who would
lend and be clatteralized by a license to the small
Businesses Data asset. And before diving into this lender, I
was unaware of the amount of liquid marketplaces there are
for various data sets. And you know or there's also
(34:09):
vast broker networks for certain types of data sets that
can be liquidated quite quickly as well. And so it's
everything from a healthcare company who has a trial data
that they can sell that can be the piggyback jumping
point for another healthcare trial. It could be a sneaker
company who packages and sells the data for the number
(34:29):
of times a consumer clicks on shoe options before buying,
and how many clicks resulted in what sort of cart
value and those sort of you know, various both data
sets can be sold in lots of different ways and
liquidated quickly. So fascinating firm that's doing, you know, small
business data lending where I think during COVID everyone heard
(34:52):
about the large deal where the airlines were selling customer
lists or information about their loyalty programs and that is
helping these uh these airlines day afloat during COVID period,
and so it was it's that but on a very
micro scale and with this liquid data. So it's an
interesting deal. In the book, we really like that lender.
(35:12):
Fun the fun things that we've seen that we haven't done.
You know, there is one lender who was like leasing pets,
like actually the physical animal and we've been out adult
concerns about like buffer they repossessing a dog, and it
was we were too busy in the time to dig
in and so perhaps this firm is great and it's
a wonderful lender, but at the time it was just
(35:33):
a quick like, oh, we're too busy with other things.
That move on. So we see, we see really things
across the board. I would say another another one that
we we liked is a lender who lends to students
going to software coding camp. It's a very specific niche lender.
They can really understand that bar and what they do,
what the placement out of the school is. Yeah.
Speaker 3 (35:54):
I think the lending for pets one has actually come
up anecdotally here as we've been talking about other other
companies and what they do. And there's a company not
just the leasing, but the loans for the pet stores
where it's a you know, really an overpriced animal in
many cases and to somebody who probably is not should
(36:14):
not be maybe borrowing to buy a puppy what maybe
a puppy mill dog. And it's always interesting like what
could the consumer consequences of that? And and and who
regulates a company that does that that sort of business?
So certainly interesting. Yeah, and I think the you know,
how do you think that? It kind of raises a
(36:34):
really a last question for me then, like, as you're
thinking about about other companies like that where you're you're
gonna set up a facility for or or even buying
secondaries from how do you think about things like privacy,
reputational risk, so not just kind of the quantitative parts
of the deal, but the more kind of subjective risks
(36:57):
in evaluating who you do partner with or who you
work with in the future.
Speaker 2 (37:01):
That is at the forefront of our decision making before
even getting into the qualitative aspects of a product. So
things that may resemble payday lending, you know, are where
it's the bar doesn't have a great path to success
in paying off a loan, where it's you know, loaning
stacking and that sort of thing. You know, that's a
big no no for us at peer you know, again,
(37:23):
challenges with usery rates across states that can raise flags
for us. You know, we were fortunate that there's such
a wide swath of great businesses to work with that
are serving really useful, really productive purposes that it's quite
clear and easy to pick those off the top and
say those are the ones we want to pursue. And
(37:44):
anything that has a sort of ick factor, you know,
we don't need to reach for or spend time on.
Consumer lending products obviously have a greater compliance environment than
commercial loans, and so we have to have a greater
scrutiny when we're getting involved with consumer lunch and sumer lending.
We do a lot in the space, and it's really
just about understanding it, making sure your your counterparts have
(38:06):
the correct licensing, have a great compliance environment internally, and
then you can be funding great products that are helping
people in fantastic ways. So it's yeah, it's it's it's
I think it's one of those things where it's like,
you know when you see it to stay away, and
our space is so small, the specialty finance corner of
(38:27):
the world that we all live in, and it's it
helps in both directions. It's very easy to work with
great companies and great people because you know, you can
triangulate with contacts that you're close with to get great references,
and then on the flip side, you know you can
also learn about firms who may not be doing things
so well in a quite quick way with a few
phone calls. So it's I think it's helpful being in
(38:50):
such a niche space with a number of close people
who've been at this for about a decade now.
Speaker 3 (38:56):
Sure, sure, And I do think the the uh, the
good players will self regulate absolutely, absolutely, and and and
collectively there's a there's a lot of industry associations that
are dedicated to really like helping us share that guidance,
provide the guidance, and and some of the larger companies
(39:17):
who may have more resources and have more experience in
the market, can help provide that to some newer originators
as well. So I think there's a lot of partnership
happening across the across the fintech industry goes in.
Speaker 2 (39:30):
It's better for everyone when people are, you know, originators
are doing things the right way. So it's it's really
great to see firms like like yours who are providing
that guidance and and getting out there and being the
leaders and examples and compliance.
Speaker 3 (39:45):
Absolutely so well, thank you, definitely, thank you for for
joining us on the podcast. Certainly interesting to hear about
the work that you've done and are doing it. Pere
and any any last uh kind of hot takes or
thoughts to leave us with.
Speaker 2 (40:01):
Ooh fun question. Oh very specific to what we do.
But the other early stage credit facility providers or firms
seem to or really like to take equity or invest
in equity and the firms that they work with, I
think it makes a lot of sense because they're providing
a lot of equity value. I really disagree with that
(40:24):
because I think it makes you a bad predator. So
that's my hot take against a lot of what the
general tie thinks and does. So I think as a
creditor and doing credit facilities, you should not own the
equity in the companies because then you can really enforce
your rights. Is that senior security lender and you're not
conflicted by owning the equity in a business, And that
seemed to be quite a common practice, but we I
(40:46):
say no to that. Great, well, good.
Speaker 3 (40:48):
It sounds like being a founder is the right place,
so you can kind of branch out on your own
with those new ideas. But it makes a lot of sense,
right the conflict of conflicts of interest. If you are
kind of on both sides of it, it's a little
bit harder to draw a line in the sand.
Speaker 2 (41:04):
Exactly. Yeah, that's my hot take. That awesome.
Speaker 3 (41:07):
Well, thank you, thanks again for joining us here on
leaders Lending.
Speaker 2 (41:12):
Thank you for having me, Lynn, I really appreciate it.
Speaker 5 (41:14):
Up Start partners with banks and credit unions to grow
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(41:36):
and auto lending programs, or you're just getting started, upstart
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It's all possible with Upstart in your corner. Learn more
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(41:59):
growing your business by visiting upstart dot com slash Lenders.
That's upstart dot com slash lenders
You are listening to Leaders in Lending from Upstart, a
podcast dedicated to helping consumer lenders grow their programs and
improve their product offerings. Each week, here decision makers in
the finance industry offer insights into the future of the
lending industry, best practices around digital transformation, and more. Let's
get into the show.
Speaker 2 (00:26):
Hi.
Speaker 3 (00:27):
This is Lynd Suterbil of Upstart, and welcome to Leaders
in Lending. I'll be joined today by Jillian Murrish, who
is the CEO and co founder of pere Asset Management,
a private credit investment firm focused on niche jales and
specialty finance. Jillian has a deep background on both the
buy and sell side and the private credit markets. Let's
get started. Hi Jillian, and welcome to podcast.
Speaker 2 (00:50):
Hi Alinn, I'm so happy to be here. Thank you
for having me on great Well.
Speaker 3 (00:55):
To start off, can you tell me a bit about
what role pere Asset Management plays in the market.
Speaker 2 (01:01):
Absolutely so. We are a capital provider in the specialty
finance space. Specifically, what we do is provide senior secured
credit facilities to early stage loan originators, so we lend
against their loan book. They use our capital to go
out and originate ones. And then second and we act
as a buyer in the secondary market of these long portfolios. So,
(01:24):
you know, if a fund is winding down and they
need liquidity, or a you know, loan originator is winding
down and they need to sell their long book off,
or they just have some need for liquidity, they need
to clear off their warehouse line, they'll come to us.
We'll put in a bid on that portfolio and buy
it after it's ben well seasoned. So those are really
two roles we play as a capital provider.
Speaker 3 (01:47):
Great, well, I know you and and kinter New co
founded Peer in twenty seventeen. Was this your first time
being a co founder in a real way?
Speaker 2 (01:55):
Yes, I had. My first company was in college and
it was a consumer goods companies selling cell phone cases,
and I was the sole founder of that firm, but
ended up bringing on a business partner later. But in
my adult career, this is my first time co founding
a firm.
Speaker 3 (02:13):
Sure, sure, So what I would say, you know, what's
been one of the most kind of surprising lessons that
you've learned since twenty seventeen is being a a co
founder of a of a new company.
Speaker 2 (02:25):
Well, first, and foremost, I'm so glad I'm not at
this alone. I've learned that I loved having a co founder.
It's especially someone who compliments me so so well. So
people who know Connor and I know that we're opposite
in demeanor. So I'm more dynamic. Lou would love to
be social. You know, Connor is a bit more reserved
(02:45):
and quiet, and so that's an outward you know, easy
to notice difference in our personalities, But when you dig deeper,
I get down to the things that we like to
spend our time doing. You know, what are we good at,
what are we the best at? It's generally the opposite,
and so it makes it really fun to run a
company with someone like that, because I'm doing a lot
of what I love and very little of what I
(03:05):
don't love. So I think that's really the real reason
why having a co founder who's just you know, likes
doing opposite things it's fantastic. And then, you know, something
I didn't think about when we started the firm, but
I started to develop a sense for why the partnership
has worked so well, and it really comes down to,
(03:27):
I think the fact that we have the same risk tolerance,
so when we have very different views on various aspects
of our business of the market in general. We generally
approach problems in different ways and identify different risks, but
at the end of the day, it's a go no
go decision on various things with the business and with
(03:48):
investments we make. And having someone who has a similar
level of risk tolerance of things, you know, imperfect information
or no, we actually need perfect information on this, but
not on this. I think it's allowed us to make
decisions in a seamless way and run the company in
a relatively frictionless way since inception, which I'm so grateful for.
(04:09):
He's been an incredible co founder.
Speaker 3 (04:11):
Well good, that's good to hear because I know, I'm
sure that's a very very closely tied relationship. And just
you know, having work tear at Upstart from the time
when we were smaller and pre public and now a
public company, you spend a lot of time kind of
in the trenches with people. So how did you, I think,
how did you encounter meet and then what really led
(04:34):
to the idea of starting peer asset management.
Speaker 2 (04:38):
So we minted a conference in I think twenty thirteen
or twenty fourteen. We haven't mailed down the exact exact
date or which conference it was, but we met in
person through mutual industry participants, and I remember kind of
my first conversation and hearing about him from others that
he was a pioneer in investing in specialties nance. You know,
(05:00):
at the time, it was really called marketplace lending, and
I was running the capital markets practice at an online originator,
so I was producing loans and selling them off into
the capitol market's ecosystem, and Connor was on the other
side running a suite of funds buying these loans. So
you know, he had actually bought one of the first
whole loans at Funding Circle, you know, it was one
(05:22):
of the first loan buyers lending club. And when I
was building out our loan whole loan sale program, he
was one of my first calls. It was, Hey, he
was innovative in the space. You know, amendment a conference,
maybe he'll buy my loans. And it was a real
estate originator and his bread and butter was consumer and
small business. So he came in for a meeting and
(05:42):
very quickly said, you know, I don't think I'm going
to get comfortable in this space, but was curious, wanted
to hear you out. And so within the first meeting
we realized we weren't going to transact, but we were
opposite on opposite sides of this market, and we were
opposite participants. And quickly we started providing value to each
other in terms of kind of under the hood, know how,
(06:04):
from the other side of the trade, which started providing
me a lot of value in my work at that time.
You know, he would share warehouse lenders to the funds
or requiring XYZ. When you're putting together programs, you know,
managed them this way. You know, I would say, hey,
a lot of firms are using you know, sub servicers
and farming out, you know, servicing even below what you
would have imagined, and so ask about you know, these specifics.
(06:27):
And so it became an interesting working relationship where we
get together probably once a quarter and just share insights,
talk about the space, see if we could be helpful
to each other. And in twenty sixteen, I have to
give Conor the credit. We got together for one of
our catchups and I walked in the door, sat down
at the table at Pete's Coffee in Westwood. I remember
(06:47):
like it was yesterday, and he said, I want to
spin out from from my firm and form a new
asset manager. I think we'd make great business partners. Will
you do it? And whoa? And you know, it was
actually perfect timing where I was ready to go back
out and do something on my own. You know, I
had been that young entrepreneur and then went and worked
(07:09):
in and helped build firms, but it was really ready
to go out and strike out on my own again.
And so the timing was perfect. And so we started
talking through our thesis that we had on the space
that we really had been developing over the course of
a few years. And really we're seeing that the primary
market in the space was quite saturated and there were
big institutions and banks buying the loans from all the platforms,
(07:32):
yields it compressed, and so we were really getting creative
as to where where was the alpha, like, where could
we generate alpha? How could we deliver better returns for investors?
And for me that was sitting within the ecosystem delivering
loans and see where was there less liquidity? Where were
the fewer investors when I was bringing things out out
to market, And for Connor was where was I competing
(07:55):
against fewer people? And really that was how we identified
the secondary market, just not having active participants or consistent
participant and that was really kind of the genesis for Peer.
And then also the early stage credit facilities just weren't
weren't really serving loan originators in a great way. And
I had experienced that as an operator and talking with
(08:17):
the CEOs and CFOs of all the other early stage originators.
It was a common problem across the board for kind
of fifty million dollar warehouse lines. It was, you know,
I'm using a logic puzzle to fund my loans, some
with a partner of capital, some with my bank line,
some of my family office line, and you know, I
ended up with one large line from a family office
that funded all my origination flow. And even though it
(08:40):
was more expensive, it was a great product and it
was better for operational ease. So that was when I
looked at Connor and I said, if we can solve
that early stage or early stage warehouse facility problems, there's
a lot of demand for it, and we could make
you know, pretty penny doing it because nobody is and
it's such a value to these early stage firms.
Speaker 3 (09:00):
No, that sounds it sounds like you guys definitely have
a really kind of complementary skill set. I think sometimes
you see people go into business or hire people or
work with people who have they look for people who
have very similar sales skill sets and then they have
those kind of gaps there that they don't know about.
It sounds like the two of you have complementary skills
and experiences on the market that's really helped help kind
(09:20):
of term my charge what you're doing.
Speaker 2 (09:22):
So what else you know?
Speaker 3 (09:23):
I know you mentioned you you worked in an online
real estate lender. What as you kind of built and
scaled with that company? What are some of the biggest
things I mean, obviously that helped you identify the market
you wanted to go into, But what are some of
the biggest kind of lessons you learned that you brought
to peer to help help shape what you're building?
Speaker 4 (09:42):
There?
Speaker 2 (09:43):
Say, first and foremost smaller, earlier stage a loan originators
require a very different credit facility product than large mature originators.
And in the early days, you know, not kind of
twenty thirteen to twenty fifteen or twenty twelve to twenty sixteen,
the large warehouse providers like the mcqueries of the world's areas.
(10:05):
You know, we're trying to come in and serve that
market and you know, being great participants in doing so.
And I saw there were a lot of challenges you know,
using the same structure and the same type of terms
for a small firm versus a mature firm. And really,
in my view at that time, I developed, you know,
a very strong view that early stage originators the priority
(10:26):
for their credit facilities should be that it preserves flexibility, optionality,
and has ease of operational use. When you're an early
stage originator focusing on growth in those early credit co words,
the operational friction that a larger, larger, more structured facility
can bring can really tank or create bigger challenges than
(10:48):
a lower cost of capital would make worth. Furthermore, you know, again,
cost of capital at that size just isn't as important
because again the growth, the proof of concept, focusing on
credit quality out was more important. And then lastly, like
the multi year lockups of the more traditional warehouse facilities,
we're not providing the flexibility that the early stage originators
(11:12):
needed around product, like product would evolve and change within
the first year or two or three. You know, one
thing I was working well, one product wasn't, and having
that flexibility of product mixer being able to kind of
change that barring based subtly based on what products are
working or not would be most critical for success. So
I think it was really identifying that it was kind
of two very different products later stage mature warehouse lines
(11:34):
versus early stage lines, and the needs change over time,
where you know, larger mature originators really care about cost
of capital for good reason, and it starts becoming a
profit center for them, whereas early stage that's not really
the focus. So being in the trenches building that capital
markets practice from forty million to three quarters of a billion,
(11:56):
I really saw that internally and what was working at
what stage of the business. And surprisingly some of the
more structured and sophisticated facilities created risk on both sides
for being too structured. So like, for example, I received
a term sheet one time from a kind of quasi bank,
(12:19):
and I remember they had plattal reportings. It had to
be on Wednesdays, and we would sell all of our
loans off our book on Tuesdays. And so the barring base,
which shows you would have no loans tied to it
every Wednesday, and it balance all the cash, and so
that lender would have almost no insight into what was
(12:39):
platteralizing them in between those interim reporting periods. And so
you know, really my viewshade to A, it's just a
different product, and then B, the facility does need to
be built around the early stage originator versus a product
as a credit facility being served to them. So that
was probably the most important learning from from my time there.
Speaker 3 (13:02):
And I think you when you when you and I've
talked before, you described that as kind of more of
a solutions oriented capital provider like that, Yeah, the capital
provider is kind of meeting the originator at the at
the place they need to be met, and I could
I can see that with those sorts of kind of
very specific restrictions where maybe the person who is drafting
that isn't actively involved in more of the business side
(13:24):
of what they're drafting, and the the timing of that
doesn't exactly exactly make sense. So you know, I do
think you have a really interesting, unique perspective on that
path to funding for early stage fintech originators, and you
kind of talk through it at a at a high
level that maybe you know, kind of more detail of
of what are those sources of funding like you know,
(13:45):
helping our you know listeners understand, uh, you know, whether
that's partner or personal capital, family office, kind of what
that path looks like and what those capital providers can
offer and maybe some pros and cons as they as
they go through that path.
Speaker 2 (14:00):
As a founder, sure happy to talk through this. So
for early stage originators who just started out, you know,
you've been building a product and you've originated zero loans, like,
no loans have gone through your pipes yet. You know,
what we see as most typical source of funding is
usually equity capital. So maybe the firm has raised a
(14:21):
few million dollars of equity capital. They're using that to
build out their tech and their infrastructure and you know
barber acquisition channels, and then they reserve maybe five hundred
thousand dollars for that first cohort of loans other founders,
which I think this is a very smart move. What
they what we've seen happen often is the founder will
actually go out to either friends and family or they'll
(14:42):
also seen those venture partners personally do this where they'll
give a one hundred thousand, two hundred thousand dollars unsecured
promisory note to the operating company, and the intended purpose
is to be used to fund loans. And you know,
it's a fixed coupon. Generally it used to be twelve
for then it's probably higher now, and and they use
(15:04):
that capital to fund the first five hundred thousand or
a million dollars of loans. I think that's a fantastic model.
You're not using your equity capital, which is the most
extensive capital, to fund your loans. But you're also not
trying to structure something and get into covenants and you know,
creating SPVs because at that point it's too small. You
have to prove the concept that you can actually originate
(15:25):
and get loans through your pipes before you go through
all that headache to actually set up something as structured.
So from there, I think, you know, once you have
five hundred one thousand, two million dollars of loan volume,
generally the next step is dependent on how fast your
loan product shows performance. So very short duration products you
could have a full revolution or revolution of that credit
(15:48):
product within three months. Longer products that have you know,
maybe it's student loans with five year term, you have
to start showing early performance data, but that is a
larger challenge and you're going to have to stretch out
that time really to see performance before you're going out
for this next facility. So just bear that in mind
(16:08):
and keep that in mind for the pace of growth
from kind of zero to one million. It depends on
how quickly you can kind of show any sort of performance.
So from there it's really approaching firms like ours and
potentially family offices to get a ten to fifteen million
dollar first credit facility. This is unique compared to the
first promise promisor re NOOTE structure, and that an SPV
(16:32):
is generally required to be set up which is a
subsidiary of the operating company and it's a bankruptcy remote
spe that houses the loans that the loan originator originate.
Usually a credit facility provider of ten to fifteen million
will want to refinance and own whatever loan or put
in whatever loans are already on your book into that
(16:52):
SPD and then you can draw down capital and grow
from there. So really there's only a few institutional providers
that will do warehouse lines that small you know, we're
one of them. There's probably three or four others that
we know of that are quite active. And then other
options we've seen are you know, it's a family office.
We know that we're close to the founders that identified
(17:13):
that will do that first smaller credit facility.
Speaker 3 (17:17):
Sure, So what do you I mean? It sounds like
the path can be can be varied and depends on size.
And I you know, as you were talking about the
duration of the loans that they're offering here, it almost
made a case for some of the press releases Upstarts
had around our parallel timing curve and how we think
about testing a model over time and even though the
(17:39):
duration's long, particularly as you look at products like like
mortgages or or very long duration duration products. So you know,
when you think about kind of then graduating to the
capital markets, like what is that? Is it just a
function of size of the lender of the originator? Is
there some sophistication like how do you think about a
(18:01):
firm being ready to really access institutional capital money versus
more of the you know, a family office VC backing.
Speaker 2 (18:10):
Sure, So I think it's really that next step beyond
firms like ours is the more traditional institutional capital markets
they'd be accessing. And I think it's a function of
two things. One loan book size, so how much of
you originated? And two is there any sort of performance indication?
Like you said, really long dated assets can do you
show month over month performance and really get kind of
(18:32):
a show show a similar loan product that has longer
credit history that you can kind of show your performance
curve agains and start giving a picture to what performance
is going to look like. So when I say size,
generally that means fifteen million dollar book. You can start
having those conversations and they'll come in when the book
(18:53):
is maybe twenty million in size, and at that point
you're reaching for a fifteen million or one hundred or
one hundred and fifty million dollars. Credit facility is usually
that next stutter step, and that's coming from the firms
like the Cross Rivers that out of lie is the aries,
the larger, more well known institutional asset managers who are
doing those facilities. They're usually a multi year term instead
(19:15):
of shorter duration. It's usually and three year terms is
what we see. Often some sort of kind of lock
up for a period of time to make it worth
their time to do those deals, and that generally the
cost of capital becomes more effective because oftentimes we see
those types of firms use leverage on the back end
for their source of capital so they can provide lower
(19:35):
costs and still make a return that makes sense for
the commensurate risk. So it's a function of those two things.
And one thing I just realized I missed on the
previous stage of growth before you access these institutional capital
markets is some firms actually launch their own internal fund,
so they go raise a fund that's ten million dollars
(19:57):
and go make their loans out of that. That is
I would say the most complex, riddled with challenges that
I would recommend, But you know, some folks are really
successful doing it, and oftentimes the yield you have to
pay in that type of vehicle can be lower than
accessing a credit facility from a firm like ours or
(20:17):
our competitors. Yet again there's a lot of complexity, compliance risk,
legal risk in doing so, but we see it a
few times a year that that's kind of the option
that that stage kind of some fifteen million uses.
Speaker 3 (20:31):
Sure, and I could see that where that would be
a pretty resource intensive thing to do internally at a
company where you have to hire a lot of expertise.
Speaker 4 (20:40):
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Speaker 3 (21:24):
What are some I think kind of common missteps you
may see originators make going through this process. Whether it's
not hiring the right expertise, whether it's not really understanding
terms of various deals. But what sort of mistakes do
you see you get made in this space?
Speaker 2 (21:40):
So to detail on what I was just talking about,
I would say making things too complex too early and
there's a variety of categories and buckets I can talk
about for what too complex means. But generally, the more
complex and complicated you're making your funding source and funding
structure early on, the more pitfalls you can make so
simpler the better, trying to use one funding source instead
(22:04):
of many, and trying to keep the structures light. So
that's why that promisory note suggestion for the five hundred
k a million dollar first part of the loan book
is very simple in structure. You know, there aren't many
covenants you could trip or mistakes you can make in
how you're managing that capital. It's just kind of here's
here's the charter of what you can do with the money,
(22:25):
and beyond that, it's a very light touch. So trying
to keep things simple for what a simplest for the
stage of your business. More specifically, some examples of complexity
I've seen that cause pitfalls are generally around giving up
optionality too early. So you know, maybe the ten million
dollar lender who signs a three year deal with a
(22:48):
large institutional lender and they have signed a deal with
a very specific loan product and there's no flexibility for
you know, criteria in that facility where is that problem
no longer works and they want to do another product
or pitch that to the firm, There's not as much
flexibility there, and they can end up slowing growth or
(23:09):
just being hamstrung entirely. So we've seen that happen other
things like equity, you know, giving up structured equity alongside
your credit facility too early. With control rights, we've seen where,
you know, very early, if one of these lenders get
stars in their eyes, we can get one hundred million
in depth from one of these large firms, and we're
(23:30):
going to give up ten percent and a board seat
and you know consent on XYZ for M and A
for this and that, and you know, a Series A
or even seed stage company doing that, it's just leaving
so much equity value on the table for their business
by giving up that optionality and flexibility. So I think again,
preserving optionality, preserving flexibility, keeping things simple as you're smaller
(23:55):
generally are the keys to success.
Speaker 3 (23:57):
Yeah, that's a great point. As I think about I've
been at Upstart a little over four and a half years,
but the company has been around since twenty twelve. You know,
we've certainly made a lot of changes on our product suite.
So the first iteration of loans that were made by
the company is not what the personal loan product looks
like today. And now we've added on, added on new products,
(24:20):
and I think if we had been constrained from R
and D and really developing, that we wouldn't be the
same company we are today. Do you think that's a
is it A part of it is just the excitement
of growing too wanting to grow too fast, that there's
somebody here who wants to give you a lot of
money and you want to say yes, and you want
to access that and you want to experience that rocket ship.
(24:41):
So you may put blinders on a little bit to
what you're giving up as part of it.
Speaker 2 (24:45):
I think it's probably the twofold you know one many
of the early stage firms may not have capital markets
expertise on the founding team and may not be able
to afford that higher. It's an expensive higher if it's
not and know how of an existing founder, so you know,
in that instance there may they may not know how
(25:07):
how restrictive that those equity rights could be, or they
can't you know, they's you know, hey, locking in a
roafer with this large one firm and only having one
capital funding source. You know, maybe they don't have the
experience or understanding that. In COVID, some of these, you know,
some firms pulled their funding and said, hey, material average change,
(25:27):
no more funding. So it's just a lot of know
how in that seat that can be expensive to buy
and founders don't have it. I think that could contribute
to making that decision. I think also fear of not
finding other good options for capital, Like it's scary to
choose a twelve month facility that's fifteen million and have
to go get your next facility a year later. That
(25:48):
is that those are two deals you have to get
done instead of one, maybe even three deals you'd have
to get done instead of this one multi year deal.
So and then again they're you know, they're if it's
a venture company, growth is the number is one of
the number one metrics, and the that can seem to
be a clear path there, Yet if you've seen it
(26:09):
happen a number of times, there there can be pitfalls
with making that choice.
Speaker 3 (26:13):
So sure, and I think we you know, we certainly
saw and during during COVID, the funding markets changed very
rapidly for in a almost in intra day, very fast
early and early in twenty twenty. I know you you
had mentioned we were talking previously that you're seeing more
(26:34):
opportunities and where there's kind of distress sales happening across
some originators. So just tell me more about that and
what what is happening to some of those uh like
distressed sales, what what preceded that, and kind of where
those originators ended up having to to sell in the secondary.
Speaker 2 (26:54):
Sure. So really there's a whole cohort of finn specialty
finance loan originators who were founded pre COVID and had
to go through that period. And the COVID period was
good for some and very hard for others. And there's
this cobort that it really did not serve well. And
(27:15):
the reason is twofold one. There was so much stimulus
that origination volume for certain segments of lenders dried up completely.
You know, for consumer lenders, it was tough. There was
tons and tons of stimulus. Borrowers weren't needing to borrow
because they were receiving a stimulus check. And then second,
you know, as stimulus who were off certain loan originators
(27:36):
had gotten more aggressive with lending criteria to be able
to actually put loans on the street, and then when
stimulus dried up, performance suffered. And so there's a cohort
of borrowers that kind of sit in that narrative and
struggled through that kind of twenty twenty to twenty twenty
two period and have some black marks in their credit
quality or origination volume history. And what we're seeing is
(27:58):
those firms are not able to raise the series A
v r C. And you know, the adventure community seems
to have, you know, really turned their back on those
types of firms. You know, it's if the story wasn't
up into the right it's you know, hey, we're not interested.
So a lot of those firms are burning through their runway.
Now in the last year, there's been a number who've
(28:18):
had to shut down, and as they're shutting down, one
thing they need to clean up is selling their loans
off whatever credit facility they have or wherever it's sitting
on their balance sheet. And so, you know, again for
our business, we're a secondary market buyer, so we come in,
we try to get active on those deals and buy
those lung portfolios on the flip side, it's interesting. So
there's this whole cohort of of VC back companies that
(28:41):
have kind of been abandoned to had black marks through
COVID and aren't getting funded and or shutting down. But
on the opposite side, we're seeing companies that were launched
twenty twenty two and later who are showing you know,
great performance, showing great growth, and are getting funded left
and right by the venture community. So it's the kind
of divergent path where we're seeing a lot of the
(29:03):
new great originators tackling very specific borrower segments and really
thoughtful ways we're responsibly and doing a great job. They're
getting equity funded. Those firms are in need of credit
facilities to grow and scale. And then on the other hand,
these originators who started and probably have bad luck with
timing are not getting funded, and so it's it's hard
to see you know, the flame out happening more often
(29:26):
and more often. And but then on the other side,
there's all this happy, happy growth and story for the
newly formed firms.
Speaker 3 (29:34):
Sure, and and honestly for firms like yourself, some of
those uh distressed situations for other that where they were
hit by bad timing or opportunities for other players in
the market. And that's that's true everywhere, so across the
market that there's there's always opportunity. It just depends which
which side of it you're on. So I think that
(29:55):
the timing pieces is important and obviously not something that
those found could have known in advance.
Speaker 2 (30:01):
That maybe just a little.
Speaker 3 (30:04):
Bit of being a victim of bad news. And you know,
similar to the bank failures last year, none of us
really had that on our on our BINGO card for
twenty twenty three, So a surprising, surprising event that had
a lot of downstream impacts. So you know that you
mentioned the green shoots that there are some originators who
are are able to access and start to get into
(30:26):
series A, Series B, anywhere else. You're seeing really like
opportunity for originators on that side of the type of
work you do.
Speaker 2 (30:34):
Yes, again, to reiterate I briefly mentioned in my last answer.
The originators who are finding very specific borrowers segments and
serving those in a really unique responsible way are finding
a lot of traction in the venture community, is what
we're seeing. So the more hyper niche a lender can
(30:57):
get in the problem they're solving well, we're seeing more
success with venture rounds getting done. Okay, that's interesting.
Speaker 3 (31:05):
So trying not to not trying to like boil the
ocean with solving the problem for every person, every market,
every asset class. But focus, do you have a preference
as you think about loans like secured versus unsecured? Does
your firm get involved in any secured loans as well,
or are you going to focus specifically on one or
(31:26):
the other.
Speaker 2 (31:27):
I like talking about this question, so I think the
definition of security and unsecured has really has changed over
time since probably twenty fifteen. And my first question is,
you know, it's obvious that hard equipment like chapters, trailers,
or real estate would be in the secured market, But
(31:47):
would lending against a music royalty stream where the capital
is paid directly from the streaming firms like Spotify, Apple
YouTube into your own bank account as the lender, is
that secured lending or unsecured. And so we're in this
unique situation at peer where we're lending to these originators
who have found the most ingenious quarters of cash flow
(32:10):
to lend against that may or may not be tied
to a physical hard asset but is that cash flow
stream that they have their hands wrapped around a secured asset, So,
you know, a peer, we certainly do deal with the
most classic unsecured consumer loans where there is no clateral there,
it's an unsecured personal loan. And then we have this
(32:31):
gray area of things like the music boral, these cash
flow streams, and then we have the most crystal clear
secured things like equipment or real estate or auto and
so that's a spectrum to us. And we used to
look at our our firm and look at deals in
that way, and we you know, we classify to secured
or unsecured in the way we were thinking about it
(32:52):
presenting it internally, and we actually pulled that off of
our criteria years ago of how we how we view them.
It's just it's a gray area and there's differences and
good things about you know, one versus the other. So
we do it all at pure as the answer.
Speaker 3 (33:08):
Okay, well that's a good point because I think that
secured could be a physical asset, but in your case,
it's a stream of you know, talking about like music
reyalties as an example, like, it's not a physical asset
at the end of the day, but there is a
recurring revenue stream there driving it versus just a just
a kind of an installment product. What are some of
(33:29):
the most I think is you're thinking about those like
niche opportunities where people are creating companies that are originators,
that are lending to very specific areas. What are some
of the most interesting things you've seen are the most
most niche opportunities there.
Speaker 2 (33:46):
So a day we did as a past here that
I learned was to a small business lender who would
lend and be clatteralized by a license to the small
Businesses Data asset. And before diving into this lender, I
was unaware of the amount of liquid marketplaces there are
for various data sets. And you know or there's also
(34:09):
vast broker networks for certain types of data sets that
can be liquidated quite quickly as well. And so it's
everything from a healthcare company who has a trial data
that they can sell that can be the piggyback jumping
point for another healthcare trial. It could be a sneaker
company who packages and sells the data for the number
(34:29):
of times a consumer clicks on shoe options before buying,
and how many clicks resulted in what sort of cart
value and those sort of you know, various both data
sets can be sold in lots of different ways and
liquidated quickly. So fascinating firm that's doing, you know, small
business data lending where I think during COVID everyone heard
(34:52):
about the large deal where the airlines were selling customer
lists or information about their loyalty programs and that is
helping these uh these airlines day afloat during COVID period,
and so it was it's that but on a very
micro scale and with this liquid data. So it's an
interesting deal. In the book, we really like that lender.
(35:12):
Fun the fun things that we've seen that we haven't done.
You know, there is one lender who was like leasing pets,
like actually the physical animal and we've been out adult
concerns about like buffer they repossessing a dog, and it
was we were too busy in the time to dig
in and so perhaps this firm is great and it's
a wonderful lender, but at the time it was just
(35:33):
a quick like, oh, we're too busy with other things.
That move on. So we see, we see really things
across the board. I would say another another one that
we we liked is a lender who lends to students
going to software coding camp. It's a very specific niche lender.
They can really understand that bar and what they do,
what the placement out of the school is. Yeah.
Speaker 3 (35:54):
I think the lending for pets one has actually come
up anecdotally here as we've been talking about other other
companies and what they do. And there's a company not
just the leasing, but the loans for the pet stores
where it's a you know, really an overpriced animal in
many cases and to somebody who probably is not should
(36:14):
not be maybe borrowing to buy a puppy what maybe
a puppy mill dog. And it's always interesting like what
could the consumer consequences of that? And and and who
regulates a company that does that that sort of business?
So certainly interesting. Yeah, and I think the you know,
how do you think that? It kind of raises a
(36:34):
really a last question for me then, like, as you're
thinking about about other companies like that where you're you're
gonna set up a facility for or or even buying
secondaries from how do you think about things like privacy,
reputational risk, so not just kind of the quantitative parts
of the deal, but the more kind of subjective risks
(36:57):
in evaluating who you do partner with or who you
work with in the future.
Speaker 2 (37:01):
That is at the forefront of our decision making before
even getting into the qualitative aspects of a product. So
things that may resemble payday lending, you know, are where
it's the bar doesn't have a great path to success
in paying off a loan, where it's you know, loaning
stacking and that sort of thing. You know, that's a
big no no for us at peer you know, again,
(37:23):
challenges with usery rates across states that can raise flags
for us. You know, we were fortunate that there's such
a wide swath of great businesses to work with that
are serving really useful, really productive purposes that it's quite
clear and easy to pick those off the top and
say those are the ones we want to pursue. And
(37:44):
anything that has a sort of ick factor, you know,
we don't need to reach for or spend time on.
Consumer lending products obviously have a greater compliance environment than
commercial loans, and so we have to have a greater
scrutiny when we're getting involved with consumer lunch and sumer lending.
We do a lot in the space, and it's really
just about understanding it, making sure your your counterparts have
(38:06):
the correct licensing, have a great compliance environment internally, and
then you can be funding great products that are helping
people in fantastic ways. So it's yeah, it's it's it's
I think it's one of those things where it's like,
you know when you see it to stay away, and
our space is so small, the specialty finance corner of
(38:27):
the world that we all live in, and it's it
helps in both directions. It's very easy to work with
great companies and great people because you know, you can
triangulate with contacts that you're close with to get great references,
and then on the flip side, you know you can
also learn about firms who may not be doing things
so well in a quite quick way with a few
phone calls. So it's I think it's helpful being in
(38:50):
such a niche space with a number of close people
who've been at this for about a decade now.
Speaker 3 (38:56):
Sure, sure, And I do think the the uh, the
good players will self regulate absolutely, absolutely, and and and
collectively there's a there's a lot of industry associations that
are dedicated to really like helping us share that guidance,
provide the guidance, and and some of the larger companies
(39:17):
who may have more resources and have more experience in
the market, can help provide that to some newer originators
as well. So I think there's a lot of partnership
happening across the across the fintech industry goes in.
Speaker 2 (39:30):
It's better for everyone when people are, you know, originators
are doing things the right way. So it's it's really
great to see firms like like yours who are providing
that guidance and and getting out there and being the
leaders and examples and compliance.
Speaker 3 (39:45):
Absolutely so well, thank you, definitely, thank you for for
joining us on the podcast. Certainly interesting to hear about
the work that you've done and are doing it. Pere
and any any last uh kind of hot takes or
thoughts to leave us with.
Speaker 2 (40:01):
Ooh fun question. Oh very specific to what we do.
But the other early stage credit facility providers or firms
seem to or really like to take equity or invest
in equity and the firms that they work with, I
think it makes a lot of sense because they're providing
a lot of equity value. I really disagree with that
(40:24):
because I think it makes you a bad predator. So
that's my hot take against a lot of what the
general tie thinks and does. So I think as a
creditor and doing credit facilities, you should not own the
equity in the companies because then you can really enforce
your rights. Is that senior security lender and you're not
conflicted by owning the equity in a business, And that
seemed to be quite a common practice, but we I
(40:46):
say no to that. Great, well, good.
Speaker 3 (40:48):
It sounds like being a founder is the right place,
so you can kind of branch out on your own
with those new ideas. But it makes a lot of sense,
right the conflict of conflicts of interest. If you are
kind of on both sides of it, it's a little
bit harder to draw a line in the sand.
Speaker 2 (41:04):
Exactly. Yeah, that's my hot take. That awesome.
Speaker 3 (41:07):
Well, thank you, thanks again for joining us here on
leaders Lending.
Speaker 2 (41:12):
Thank you for having me, Lynn, I really appreciate it.
Speaker 5 (41:14):
Up Start partners with banks and credit unions to grow
households and expand consumer lending through its leading AI lending platform.
Upstart powered banks and credit unions leverage AI to offer
higher approval rates and experience lower loss rates while simultaneously
delivering the exceptional digital first lending experience that consumers demand.
Whether you're looking to grow and enhance your existing personal
(41:36):
and auto lending programs, or you're just getting started, upstart
can help. Upstart offers an end to end solution that
can help you find more credit worthy borrowers within your
risk profile with all digital underwriting, verification, loan closing, and servicing,
It's all possible with Upstart in your corner. Learn more
about finding new borrowers, enhancing your credit decisioning process, and
(41:59):
growing your business by visiting upstart dot com slash Lenders.
That's upstart dot com slash lenders
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