Niche Markets, High Impact: Leading the Charge in Early-Stage Credit Facilities

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You are listening to Leaders in Lending
from Upstart, a podcast dedicated to helping

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consumer lenders grow their programs and improve
their product offerings. Each week, here

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decision makers in the finance industry offer
insights into the future of the lending industry,

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best practices around digital transformation, and
more. Let's get into the show.

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Hi. This is Lynd Suterbil of
Upstart, and welcome to Leaders in

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Lending. I'll be joined today by
Jillian Murrish, who is the CEO and

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co founder of pere Asset Management,
a private credit investment firm focused on niche

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jales and specialty finance. Jillian has
a deep background on both the buy and

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sell side and the private credit markets. Let's get started. Hi Jillian,

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and welcome to podcast. Hi Alinn, I'm so happy to be here.

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Thank you for having me on great
Well. To start off, can you

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tell me a bit about what role
pere Asset Management plays in the market.

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Absolutely so. We are a capital
provider in the specialty finance space. Specifically,

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what we do is provide senior secured
credit facilities to early stage loan originators,

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so we lend against their loan book. They use our capital to go

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out and originate ones. And then
second and we act as a buyer in

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the secondary market of these long portfolios. So, you know, if a

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fund is winding down and they need
liquidity, or a you know, loan

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originator is winding down and they need
to sell their long book off, or

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they just have some need for liquidity, they need to clear off their warehouse

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line, they'll come to us.
We'll put in a bid on that portfolio

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and buy it after it's ben well
seasoned. So those are really two roles

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we play as a capital provider.
Great, well, I know you and

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and kinter New co founded Peer in
twenty seventeen. Was this your first time

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being a co founder in a real
way? Yes, I had. My

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first company was in college and it
was a consumer goods companies selling cell phone

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cases, and I was the sole
founder of that firm, but ended up

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bringing on a business partner later.
But in my adult career, this is

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my first time co founding a firm. Sure, sure, So what I

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would say, you know, what's
been one of the most kind of surprising

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lessons that you've learned since twenty seventeen
is being a a co founder of a

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of a new company. Well,
first, and foremost, I'm so glad

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I'm not at this alone. I've
learned that I loved having a co founder.

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It's especially someone who compliments me so
so well. So people who know

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Connor and I know that we're opposite
in demeanor. So I'm more dynamic.

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Lou would love to be social.
You know, Connor is a bit more

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reserved and quiet, and so that's
an outward you know, easy to notice

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difference in our personalities, But when
you dig deeper, I get down to

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the things that we like to spend
our time doing. You know, what

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are we good at, what are
we the best at? It's generally the

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opposite, and so it makes it
really fun to run a company with someone

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like that, because I'm doing a
lot of what I love and very little

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of what I don't love. So
I think that's really the real reason why

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having a co founder who's just you
know, likes doing opposite things it's fantastic.

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And then, you know, something
I didn't think about when we started

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the firm, but I started to
develop a sense for why the partnership has

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worked so well, and it really
comes down to, I think the fact

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that we have the same risk tolerance, so when we have very different views

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on various aspects of our business of
the market in general. We generally approach

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problems in different ways and identify different
risks, but at the end of the

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day, it's a go no go
decision on various things with the business and

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with investments we make. And having
someone who has a similar level of risk

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tolerance of things, you know,
imperfect information or no, we actually need

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perfect information on this, but not
on this. I think it's allowed us

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to make decisions in a seamless way
and run the company in a relatively frictionless

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way since inception, which I'm so
grateful for. He's been an incredible co

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founder. Well good, that's good
to hear because I know, I'm sure

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that's a very very closely tied relationship. And just you know, having work

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tear at Upstart from the time when
we were smaller and pre public and now

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a public company, you spend a
lot of time kind of in the trenches

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with people. So how did you, I think, how did you encounter

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meet and then what really led to
the idea of starting peer asset management.

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So we minted a conference in I
think twenty thirteen or twenty fourteen. We

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haven't mailed down the exact exact date
or which conference it was, but we

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met in person through mutual industry participants, and I remember kind of my first

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conversation and hearing about him from others
that he was a pioneer in investing in

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specialties nance. You know, at
the time, it was really called marketplace

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lending, and I was running the
capital markets practice at an online originator,

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so I was producing loans and selling
them off into the capitol market's ecosystem,

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and Connor was on the other side
running a suite of funds buying these loans.

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So you know, he had actually
bought one of the first whole loans

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at Funding Circle, you know,
it was one of the first loan buyers

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lending club. And when I was
building out our loan whole loan sale program,

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he was one of my first calls. It was, Hey, he

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was innovative in the space. You
know, amendment a conference, maybe he'll

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buy my loans. And it was
a real estate originator and his bread and

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butter was consumer and small business.
So he came in for a meeting and

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very quickly said, you know,
I don't think I'm going to get comfortable

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in this space, but was curious, wanted to hear you out. And

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so within the first meeting we realized
we weren't going to transact, but we

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were opposite on opposite sides of this
market, and we were opposite participants.

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And quickly we started providing value to
each other in terms of kind of under

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the hood, know how, from
the other side of the trade, which

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started providing me a lot of value
in my work at that time. You

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know, he would share warehouse lenders
to the funds or requiring XYZ. When

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you're putting together programs, you know, managed them this way. You know,

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I would say, hey, a
lot of firms are using you know,

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sub servicers and farming out, you
know, servicing even below what you

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would have imagined, and so ask
about you know, these specifics. And

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so it became an interesting working relationship
where we get together probably once a quarter

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and just share insights, talk about
the space, see if we could be

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helpful to each other. And in
twenty sixteen, I have to give Conor

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the credit. We got together for
one of our catchups and I walked in

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the door, sat down at the
table at Pete's Coffee in Westwood. I

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remember like it was yesterday, and
he said, I want to spin out

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from from my firm and form a
new asset manager. I think we'd make

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great business partners. Will you do
it? And whoa? And you know,

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it was actually perfect timing where I
was ready to go back out and

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do something on my own. You
know, I had been that young entrepreneur

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and then went and worked in and
helped build firms, but it was really

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ready to go out and strike out
on my own again. And so the

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timing was perfect. And so we
started talking through our thesis that we had

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on the space that we really had
been developing over the course of a few

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years. And really we're seeing that
the primary market in the space was quite

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saturated and there were big institutions and
banks buying the loans from all the platforms,

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yields it compressed, and so we
were really getting creative as to where

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where was the alpha, like,
where could we generate alpha? How could

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we deliver better returns for investors?
And for me that was sitting within the

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ecosystem delivering loans and see where was
there less liquidity? Where were the fewer

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investors when I was bringing things out
out to market, And for Connor was

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where was I competing against fewer people? And really that was how we identified

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the secondary market, just not having
active participants or consistent participant and that was

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really kind of the genesis for Peer. And then also the early stage credit

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facilities just weren't weren't really serving loan
originators in a great way. And I

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had experienced that as an operator and
talking with the CEOs and CFOs of all

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the other early stage originators. It
was a common problem across the board for

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kind of fifty million dollar warehouse lines. It was, you know, I'm

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using a logic puzzle to fund my
loans, some with a partner of capital,

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some with my bank line, some
of my family office line, and

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you know, I ended up with
one large line from a family office that

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funded all my origination flow. And
even though it was more expensive, it

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was a great product and it was
better for operational ease. So that was

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when I looked at Connor and I
said, if we can solve that early

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stage or early stage warehouse facility problems, there's a lot of demand for it,

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and we could make you know,
pretty penny doing it because nobody is

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and it's such a value to these
early stage firms no, that sounds it

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sounds like you guys definitely have a
really kind of complementary skill set. I

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think sometimes you see people go into
business or hire people or work with people

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who have they look for people who
have very similar sales skill sets and then

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they have those kind of gaps there
that they don't know about. It sounds

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like the two of you have complementary
skills and experiences on the market that's really

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helped help kind of term my charge
what you're doing. So what else you

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know? I know you mentioned you
you worked in an online real estate lender.

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What as you kind of built and
scaled with that company? What are

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some of the biggest things I mean, obviously that helped you identify the market

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you wanted to go into, But
what are some of the biggest kind of

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lessons you learned that you brought to
peer to help help shape what you're building?

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There? Say, first and foremost
smaller, earlier stage a loan originators

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require a very different credit facility product
than large mature originators. And in the

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early days, you know, not
kind of twenty thirteen to twenty fifteen or

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twenty twelve to twenty sixteen, the
large warehouse providers like the mcqueries of the

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world's areas. You know, we're
trying to come in and serve that market

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and you know, being great participants
in doing so. And I saw there

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were a lot of challenges you know, using the same structure and the same

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type of terms for a small firm
versus a mature firm. And really,

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in my view at that time,
I developed, you know, a very

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strong view that early stage originators the
priority for their credit facilities should be that

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it preserves flexibility, optionality, and
has ease of operational use. When you're

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an early stage originator focusing on growth
in those early credit co words, the

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operational friction that a larger, larger, more structured facility can bring can really

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tank or create bigger challenges than a
lower cost of capital would make worth.

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Furthermore, you know, again,
cost of capital at that size just isn't

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as important because again the growth,
the proof of concept, focusing on credit

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quality out was more important. And
then lastly, like the multi year lockups

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of the more traditional warehouse facilities,
we're not providing the flexibility that the early

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stage originators needed around product, like
product would evolve and change within the first

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year or two or three. You
know, one thing I was working well,

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one product wasn't, and having that
flexibility of product mixer being able to

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kind of change that barring based subtly
based on what products are working or not

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would be most critical for success.
So I think it was really identifying that

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it was kind of two very different
products later stage mature warehouse lines versus early

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stage lines, and the needs change
over time, where you know, larger

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mature originators really care about cost of
capital for good reason, and it starts

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becoming a profit center for them,
whereas early stage that's not really the focus.

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So being in the trenches building that
capital markets practice from forty million to

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three quarters of a billion, I
really saw that internally and what was working

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at what stage of the business.
And surprisingly some of the more structured and

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sophisticated facilities created risk on both sides
for being too structured. So like,

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for example, I received a term
sheet one time from a kind of quasi

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bank, and I remember they had
plattal reportings. It had to be on

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Wednesdays, and we would sell all
of our loans off our book on Tuesdays.

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And so the barring base, which
shows you would have no loans tied

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to it every Wednesday, and it
balance all the cash, and so that

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lender would have almost no insight into
what was platteralizing them in between those interim

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reporting periods. And so you know, really my viewshade to A, it's

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just a different product, and then
B, the facility does need to be

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built around the early stage originator versus
a product as a credit facility being served

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to them. So that was probably
the most important learning from from my time

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there. And I think you when
you when you and I've talked before,

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you described that as kind of more
of a solutions oriented capital provider like that,

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Yeah, the capital provider is kind
of meeting the originator at the at

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the place they need to be met, and I could I can see that

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with those sorts of kind of very
specific restrictions where maybe the person who is

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drafting that isn't actively involved in more
of the business side of what they're drafting,

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and the the timing of that doesn't
exactly exactly make sense. So you

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know, I do think you have
a really interesting, unique perspective on that

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path to funding for early stage fintech
originators, and you kind of talk through

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it at a at a high level
that maybe you know, kind of more

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detail of of what are those sources
of funding like you know, helping our

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you know listeners understand, uh,
you know, whether that's partner or personal

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capital, family office, kind of
what that path looks like and what those

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capital providers can offer and maybe some
pros and cons as they as they go

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through that path. As a founder, sure happy to talk through this.

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So for early stage originators who just
started out, you know, you've been

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building a product and you've originated zero
loans, like, no loans have gone

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through your pipes yet. You know, what we see as most typical source

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of funding is usually equity capital.
So maybe the firm has raised a few

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million dollars of equity capital. They're
using that to build out their tech and

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their infrastructure and you know barber acquisition
channels, and then they reserve maybe five

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hundred thousand dollars for that first cohort
of loans other founders, which I think

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this is a very smart move.
What they what we've seen happen often is

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the founder will actually go out to
either friends and family or they'll also seen

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those venture partners personally do this where
they'll give a one hundred thousand, two

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hundred thousand dollars unsecured promisory note to
the operating company, and the intended purpose

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is to be used to fund loans. And you know, it's a fixed

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coupon. Generally it used to be
twelve for then it's probably higher now,

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and and they use that capital to
fund the first five hundred thousand or a

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million dollars of loans. I think
that's a fantastic model. You're not using

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your equity capital, which is the
most extensive capital, to fund your loans.

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But you're also not trying to structure
something and get into covenants and you

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know, creating SPVs because at that
point it's too small. You have to

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prove the concept that you can actually
originate and get loans through your pipes before

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you go through all that headache to
actually set up something as structured. So

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from there, I think, you
know, once you have five hundred one

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thousand, two million dollars of loan
volume, generally the next step is dependent

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on how fast your loan product shows
performance. So very short duration products you

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could have a full revolution or revolution
of that credit product within three months.

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Longer products that have you know,
maybe it's student loans with five year term,

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you have to start showing early performance
data, but that is a larger

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challenge and you're going to have to
stretch out that time really to see performance

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before you're going out for this next
facility. So just bear that in mind

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and keep that in mind for the
pace of growth from kind of zero to

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one million. It depends on how
quickly you can kind of show any sort

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of performance. So from there it's
really approaching firms like ours and potentially family

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offices to get a ten to fifteen
million dollar first credit facility. This is

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unique compared to the first promise promisor
re NOOTE structure, and that an SPV

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is generally required to be set up
which is a subsidiary of the operating company

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and it's a bankruptcy remote spe that
houses the loans that the loan originator originate.

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Usually a credit facility provider of ten
to fifteen million will want to refinance

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and own whatever loan or put in
whatever loans are already on your book into

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that SPD and then you can draw
down capital and grow from there. So

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really there's only a few institutional providers
that will do warehouse lines that small you

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know, we're one of them.
There's probably three or four others that we

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know of that are quite active.
And then other options we've seen are you

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know, it's a family office.
We know that we're close to the founders

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that identified that will do that first
smaller credit facility. Sure, So what

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do you I mean? It sounds
like the path can be can be varied

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and depends on size. And I
you know, as you were talking about

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the duration of the loans that they're
offering here, it almost made a case

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for some of the press releases Upstarts
had around our parallel timing curve and how

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we think about testing a model over
time and even though the duration's long,

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particularly as you look at products like
like mortgages or or very long duration duration

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products. So you know, when
you think about kind of then graduating to

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the capital markets, like what is
that? Is it just a function of

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size of the lender of the originator? Is there some sophistication like how do

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you think about a firm being ready
to really access institutional capital money versus more

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of the you know, a family
office VC backing. Sure, So I

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think it's really that next step beyond
firms like ours is the more traditional institutional

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capital markets they'd be accessing. And
I think it's a function of two things.

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One loan book size, so how
much of you originated? And two

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is there any sort of performance indication? Like you said, really long dated

252
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assets can do you show month over
month performance and really get kind of a

253
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show show a similar loan product that
has longer credit history that you can kind

254
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of show your performance curve agains and
start giving a picture to what performance is

255
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going to look like. So when
I say size, generally that means fifteen

256
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million dollar book. You can start
having those conversations and they'll come in when

257
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the book is maybe twenty million in
size, and at that point you're reaching

258
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for a fifteen million or one hundred
or one hundred and fifty million dollars.

259
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Credit facility is usually that next stutter
step, and that's coming from the firms

260
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like the Cross Rivers that out of
lie is the aries, the larger,

261
00:19:07.720 --> 00:19:12.920
more well known institutional asset managers who
are doing those facilities. They're usually a

262
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multi year term instead of shorter duration. It's usually and three year terms is

263
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what we see. Often some sort
of kind of lock up for a period

264
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of time to make it worth their
time to do those deals, and that

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generally the cost of capital becomes more
effective because oftentimes we see those types of

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firms use leverage on the back end
for their source of capital so they can

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provide lower costs and still make a
return that makes sense for the commensurate risk.

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So it's a function of those two
things. And one thing I just

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realized I missed on the previous stage
of growth before you access these institutional capital

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markets is some firms actually launch their
own internal fund, so they go raise

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a fund that's ten million dollars and
go make their loans out of that.

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That is I would say the most
complex, riddled with challenges that I would

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recommend, But you know, some
folks are really successful doing it, and

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oftentimes the yield you have to pay
in that type of vehicle can be lower

275
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than accessing a credit facility from a
firm like ours or our competitors. Yet

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again there's a lot of complexity,
compliance risk, legal risk in doing so,

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but we see it a few times
a year that that's kind of the

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option that that stage kind of some
fifteen million uses sure, and I could

279
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see that where that would be a
pretty resource intensive thing to do internally at

280
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a company where you have to hire
a lot of expertise. Hey there,

281
00:20:41.200 --> 00:20:45.000
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282
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283
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289
00:21:15.839 --> 00:21:21.960
Again, that's upstart dot com slash
AI Certification. Thanks, and now back

290
00:21:22.000 --> 00:21:26.480
to the show. What are some
I think kind of common missteps you may

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00:21:26.480 --> 00:21:33.039
see originators make going through this process. Whether it's not hiring the right expertise,

292
00:21:33.119 --> 00:21:37.400
whether it's not really understanding terms of
various deals. But what sort of

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00:21:37.400 --> 00:21:41.839
mistakes do you see you get made
in this space? So to detail on

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what I was just talking about,
I would say making things too complex too

295
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early and there's a variety of categories
and buckets I can talk about for what

296
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too complex means. But generally,
the more complex and complicated you're making your

297
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funding source and funding structure early on, the more pitfalls you can make so

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simpler the better, trying to use
one funding source instead of many, and

299
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trying to keep the structures light.
So that's why that promisory note suggestion for

300
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the five hundred k a million dollar
first part of the loan book is very

301
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simple in structure. You know,
there aren't many covenants you could trip or

302
00:22:18.400 --> 00:22:22.039
mistakes you can make in how you're
managing that capital. It's just kind of

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here's here's the charter of what you
can do with the money, and beyond

304
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that, it's a very light touch. So trying to keep things simple for

305
00:22:30.000 --> 00:22:34.240
what a simplest for the stage of
your business. More specifically, some examples

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of complexity I've seen that cause pitfalls
are generally around giving up optionality too early.

307
00:22:42.039 --> 00:22:47.559
So you know, maybe the ten
million dollar lender who signs a three

308
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year deal with a large institutional lender
and they have signed a deal with a

309
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very specific loan product and there's no
flexibility for you know, criteria in that

310
00:22:56.960 --> 00:23:02.400
facility where is that problem no longer
works and they want to do another product

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00:23:02.519 --> 00:23:06.440
or pitch that to the firm,
There's not as much flexibility there, and

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they can end up slowing growth or
just being hamstrung entirely. So we've seen

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that happen other things like equity,
you know, giving up structured equity alongside

314
00:23:17.640 --> 00:23:22.160
your credit facility too early. With
control rights, we've seen where, you

315
00:23:22.160 --> 00:23:26.000
know, very early, if one
of these lenders get stars in their eyes,

316
00:23:26.039 --> 00:23:29.880
we can get one hundred million in
depth from one of these large firms,

317
00:23:30.319 --> 00:23:33.599
and we're going to give up ten
percent and a board seat and you

318
00:23:33.640 --> 00:23:38.160
know consent on XYZ for M and
A for this and that, and you

319
00:23:38.200 --> 00:23:41.519
know, a Series A or even
seed stage company doing that, it's just

320
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leaving so much equity value on the
table for their business by giving up that

321
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optionality and flexibility. So I think
again, preserving optionality, preserving flexibility,

322
00:23:52.960 --> 00:23:56.839
keeping things simple as you're smaller generally
are the keys to success. Yeah,

323
00:23:57.359 --> 00:24:00.759
that's a great point. As I
think about I've been at Upstart a little

324
00:24:00.759 --> 00:24:03.759
over four and a half years,
but the company has been around since twenty

325
00:24:03.799 --> 00:24:08.160
twelve. You know, we've certainly
made a lot of changes on our product

326
00:24:08.160 --> 00:24:14.640
suite. So the first iteration of
loans that were made by the company is

327
00:24:14.680 --> 00:24:18.000
not what the personal loan product looks
like today. And now we've added on,

328
00:24:18.200 --> 00:24:22.160
added on new products, and I
think if we had been constrained from

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00:24:22.480 --> 00:24:26.119
R and D and really developing,
that we wouldn't be the same company we

330
00:24:26.160 --> 00:24:30.559
are today. Do you think that's
a is it A part of it is

331
00:24:30.680 --> 00:24:33.680
just the excitement of growing too wanting
to grow too fast, that there's somebody

332
00:24:33.680 --> 00:24:37.240
here who wants to give you a
lot of money and you want to say

333
00:24:37.279 --> 00:24:40.720
yes, and you want to access
that and you want to experience that rocket

334
00:24:40.720 --> 00:24:44.240
ship. So you may put blinders
on a little bit to what you're giving

335
00:24:44.279 --> 00:24:48.119
up as part of it. I
think it's probably the twofold you know one

336
00:24:48.920 --> 00:24:53.559
many of the early stage firms may
not have capital markets expertise on the founding

337
00:24:53.640 --> 00:24:57.799
team and may not be able to
afford that higher. It's an expensive higher

338
00:24:57.880 --> 00:25:03.039
if it's not and know how of
an existing founder, so you know,

339
00:25:03.079 --> 00:25:10.200
in that instance there may they may
not know how how restrictive that those equity

340
00:25:10.400 --> 00:25:14.920
rights could be, or they can't
you know, they's you know, hey,

341
00:25:15.000 --> 00:25:18.880
locking in a roafer with this large
one firm and only having one capital

342
00:25:18.880 --> 00:25:22.240
funding source. You know, maybe
they don't have the experience or understanding that.

343
00:25:22.359 --> 00:25:25.519
In COVID, some of these,
you know, some firms pulled their

344
00:25:25.599 --> 00:25:29.039
funding and said, hey, material
average change, no more funding. So

345
00:25:29.319 --> 00:25:32.720
it's just a lot of know how
in that seat that can be expensive to

346
00:25:32.759 --> 00:25:36.000
buy and founders don't have it.
I think that could contribute to making that

347
00:25:36.079 --> 00:25:41.359
decision. I think also fear of
not finding other good options for capital,

348
00:25:41.680 --> 00:25:45.240
Like it's scary to choose a twelve
month facility that's fifteen million and have to

349
00:25:45.240 --> 00:25:49.720
go get your next facility a year
later. That is that those are two

350
00:25:49.759 --> 00:25:52.799
deals you have to get done instead
of one, maybe even three deals you'd

351
00:25:52.880 --> 00:25:56.839
have to get done instead of this
one multi year deal. So and then

352
00:25:56.839 --> 00:26:00.160
again they're you know, they're if
it's a venture company, growth is the

353
00:26:00.200 --> 00:26:04.119
number is one of the number one
metrics, and the that can seem to

354
00:26:04.160 --> 00:26:08.799
be a clear path there, Yet
if you've seen it happen a number of

355
00:26:08.880 --> 00:26:15.039
times, there there can be pitfalls
with making that choice. So sure,

356
00:26:15.079 --> 00:26:18.200
and I think we you know,
we certainly saw and during during COVID,

357
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the funding markets changed very rapidly for
in a almost in intra day, very

358
00:26:26.160 --> 00:26:30.759
fast early and early in twenty twenty. I know you you had mentioned we

359
00:26:30.759 --> 00:26:37.759
were talking previously that you're seeing more
opportunities and where there's kind of distress sales

360
00:26:37.759 --> 00:26:41.519
happening across some originators. So just
tell me more about that and what what

361
00:26:41.720 --> 00:26:47.960
is happening to some of those uh
like distressed sales, what what preceded that,

362
00:26:48.079 --> 00:26:52.039
and kind of where those originators ended
up having to to sell in the

363
00:26:52.039 --> 00:27:00.759
secondary. Sure. So really there's
a whole cohort of finn specialty finance loan

364
00:27:00.759 --> 00:27:07.240
originators who were founded pre COVID and
had to go through that period. And

365
00:27:07.359 --> 00:27:11.440
the COVID period was good for some
and very hard for others. And there's

366
00:27:11.480 --> 00:27:15.559
this cobort that it really did not
serve well. And the reason is twofold

367
00:27:15.599 --> 00:27:21.720
one. There was so much stimulus
that origination volume for certain segments of lenders

368
00:27:21.960 --> 00:27:25.000
dried up completely. You know,
for consumer lenders, it was tough.

369
00:27:25.079 --> 00:27:29.480
There was tons and tons of stimulus. Borrowers weren't needing to borrow because they

370
00:27:29.519 --> 00:27:33.559
were receiving a stimulus check. And
then second, you know, as stimulus

371
00:27:33.599 --> 00:27:38.440
who were off certain loan originators had
gotten more aggressive with lending criteria to be

372
00:27:38.480 --> 00:27:42.279
able to actually put loans on the
street, and then when stimulus dried up,

373
00:27:42.559 --> 00:27:45.680
performance suffered. And so there's a
cohort of borrowers that kind of sit

374
00:27:45.720 --> 00:27:51.000
in that narrative and struggled through that
kind of twenty twenty to twenty twenty two

375
00:27:51.279 --> 00:27:56.359
period and have some black marks in
their credit quality or origination volume history.

376
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And what we're seeing is those firms
are not able to raise the series A

377
00:28:00.920 --> 00:28:03.319
v r C. And you know, the adventure community seems to have,

378
00:28:03.640 --> 00:28:07.480
you know, really turned their back
on those types of firms. You know,

379
00:28:07.519 --> 00:28:11.279
it's if the story wasn't up into
the right it's you know, hey,

380
00:28:11.880 --> 00:28:15.440
we're not interested. So a lot
of those firms are burning through their

381
00:28:15.519 --> 00:28:18.160
runway. Now in the last year, there's been a number who've had to

382
00:28:18.160 --> 00:28:22.279
shut down, and as they're shutting
down, one thing they need to clean

383
00:28:22.400 --> 00:28:26.599
up is selling their loans off whatever
credit facility they have or wherever it's sitting

384
00:28:26.599 --> 00:28:29.640
on their balance sheet. And so, you know, again for our business,

385
00:28:29.640 --> 00:28:32.240
we're a secondary market buyer, so
we come in, we try to

386
00:28:32.240 --> 00:28:37.319
get active on those deals and buy
those lung portfolios on the flip side,

387
00:28:37.319 --> 00:28:41.039
it's interesting. So there's this whole
cohort of of VC back companies that have

388
00:28:41.160 --> 00:28:45.400
kind of been abandoned to had black
marks through COVID and aren't getting funded and

389
00:28:45.440 --> 00:28:49.599
or shutting down. But on the
opposite side, we're seeing companies that were

390
00:28:49.640 --> 00:28:55.400
launched twenty twenty two and later who
are showing you know, great performance,

391
00:28:55.799 --> 00:28:59.319
showing great growth, and are getting
funded left and right by the venture community.

392
00:28:59.440 --> 00:29:03.359
So it's the kind of divergent path
where we're seeing a lot of the

393
00:29:03.440 --> 00:29:08.880
new great originators tackling very specific borrower
segments and really thoughtful ways we're responsibly and

394
00:29:08.920 --> 00:29:12.599
doing a great job. They're getting
equity funded. Those firms are in need

395
00:29:12.640 --> 00:29:15.960
of credit facilities to grow and scale. And then on the other hand,

396
00:29:17.000 --> 00:29:21.720
these originators who started and probably have
bad luck with timing are not getting funded,

397
00:29:21.759 --> 00:29:26.039
and so it's it's hard to see
you know, the flame out happening

398
00:29:26.160 --> 00:29:30.839
more often and more often. And
but then on the other side, there's

399
00:29:30.880 --> 00:29:34.000
all this happy, happy growth and
story for the newly formed firms sure,

400
00:29:34.119 --> 00:29:41.640
and and honestly for firms like yourself, some of those uh distressed situations for

401
00:29:41.839 --> 00:29:45.480
other that where they were hit by
bad timing or opportunities for other players in

402
00:29:45.519 --> 00:29:48.759
the market. And that's that's true
everywhere, so across the market that there's

403
00:29:48.960 --> 00:29:52.240
there's always opportunity. It just depends
which which side of it you're on.

404
00:29:52.759 --> 00:29:59.640
So I think that the timing pieces
is important and obviously not something that those

405
00:29:59.640 --> 00:30:03.799
found could have known in advance.
That maybe just a little bit of being

406
00:30:03.799 --> 00:30:07.519
a victim of bad news. And
you know, similar to the bank failures

407
00:30:07.559 --> 00:30:11.880
last year, none of us really
had that on our on our BINGO card

408
00:30:11.960 --> 00:30:17.839
for twenty twenty three, So a
surprising, surprising event that had a lot

409
00:30:17.839 --> 00:30:21.240
of downstream impacts. So you know
that you mentioned the green shoots that there

410
00:30:21.240 --> 00:30:26.480
are some originators who are are able
to access and start to get into series

411
00:30:26.519 --> 00:30:30.079
A, Series B, anywhere else. You're seeing really like opportunity for originators

412
00:30:30.119 --> 00:30:34.799
on that side of the type of
work you do. Yes, again,

413
00:30:36.000 --> 00:30:42.279
to reiterate I briefly mentioned in my
last answer. The originators who are finding

414
00:30:42.720 --> 00:30:51.279
very specific borrowers segments and serving those
in a really unique responsible way are finding

415
00:30:51.319 --> 00:30:53.319
a lot of traction in the venture
community, is what we're seeing. So

416
00:30:55.079 --> 00:31:00.359
the more hyper niche a lender can
get in the problem they're solving well,

417
00:31:00.400 --> 00:31:04.359
we're seeing more success with venture rounds
getting done. Okay, that's interesting.

418
00:31:04.400 --> 00:31:08.559
So trying not to not trying to
like boil the ocean with solving the problem

419
00:31:08.599 --> 00:31:14.039
for every person, every market,
every asset class. But focus, do

420
00:31:14.079 --> 00:31:18.880
you have a preference as you think
about loans like secured versus unsecured? Does

421
00:31:18.920 --> 00:31:23.119
your firm get involved in any secured
loans as well, or are you going

422
00:31:23.160 --> 00:31:29.240
to focus specifically on one or the
other. I like talking about this question,

423
00:31:29.480 --> 00:31:34.640
so I think the definition of security
and unsecured has really has changed over

424
00:31:34.680 --> 00:31:41.279
time since probably twenty fifteen. And
my first question is, you know,

425
00:31:41.519 --> 00:31:45.920
it's obvious that hard equipment like chapters, trailers, or real estate would be

426
00:31:45.960 --> 00:31:51.359
in the secured market, But would
lending against a music royalty stream where the

427
00:31:51.400 --> 00:31:56.240
capital is paid directly from the streaming
firms like Spotify, Apple YouTube into your

428
00:31:56.240 --> 00:32:00.480
own bank account as the lender,
is that secured lending or unsecured. And

429
00:32:00.559 --> 00:32:06.759
so we're in this unique situation at
peer where we're lending to these originators who

430
00:32:06.839 --> 00:32:12.759
have found the most ingenious quarters of
cash flow to lend against that may or

431
00:32:12.839 --> 00:32:16.000
may not be tied to a physical
hard asset but is that cash flow stream

432
00:32:16.039 --> 00:32:21.160
that they have their hands wrapped around
a secured asset, So, you know,

433
00:32:21.200 --> 00:32:25.240
a peer, we certainly do deal
with the most classic unsecured consumer loans

434
00:32:25.279 --> 00:32:30.599
where there is no clateral there,
it's an unsecured personal loan. And then

435
00:32:30.640 --> 00:32:32.759
we have this gray area of things
like the music boral, these cash flow

436
00:32:32.799 --> 00:32:38.160
streams, and then we have the
most crystal clear secured things like equipment or

437
00:32:38.200 --> 00:32:44.039
real estate or auto and so that's
a spectrum to us. And we used

438
00:32:44.079 --> 00:32:47.960
to look at our our firm and
look at deals in that way, and

439
00:32:49.000 --> 00:32:52.000
we you know, we classify to
secured or unsecured in the way we were

440
00:32:52.039 --> 00:32:55.519
thinking about it presenting it internally,
and we actually pulled that off of our

441
00:32:55.519 --> 00:33:00.200
criteria years ago of how we how
we view them. It's just it's a

442
00:33:00.240 --> 00:33:04.920
gray area and there's differences and good
things about you know, one versus the

443
00:33:04.960 --> 00:33:07.319
other. So we do it all
at pure as the answer. Okay,

444
00:33:07.359 --> 00:33:12.480
well that's a good point because I
think that secured could be a physical asset,

445
00:33:12.480 --> 00:33:15.160
but in your case, it's a
stream of you know, talking about

446
00:33:15.160 --> 00:33:19.680
like music reyalties as an example,
like, it's not a physical asset at

447
00:33:19.680 --> 00:33:22.319
the end of the day, but
there is a recurring revenue stream there driving

448
00:33:22.359 --> 00:33:29.119
it versus just a just a kind
of an installment product. What are some

449
00:33:29.160 --> 00:33:32.680
of the most I think is you're
thinking about those like niche opportunities where people

450
00:33:34.000 --> 00:33:38.599
are creating companies that are originators,
that are lending to very specific areas.

451
00:33:38.880 --> 00:33:43.440
What are some of the most interesting
things you've seen are the most most niche

452
00:33:44.119 --> 00:33:47.839
opportunities there. So a day we
did as a past here that I learned

453
00:33:47.960 --> 00:33:53.440
was to a small business lender who
would lend and be clatteralized by a license

454
00:33:53.839 --> 00:34:00.599
to the small Businesses Data asset.
And before diving into this lender, I

455
00:34:00.640 --> 00:34:07.160
was unaware of the amount of liquid
marketplaces there are for various data sets.

456
00:34:07.720 --> 00:34:12.400
And you know or there's also vast
broker networks for certain types of data sets

457
00:34:12.400 --> 00:34:15.519
that can be liquidated quite quickly as
well. And so it's everything from a

458
00:34:15.559 --> 00:34:21.719
healthcare company who has a trial data
that they can sell that can be the

459
00:34:21.719 --> 00:34:25.480
piggyback jumping point for another healthcare trial. It could be a sneaker company who

460
00:34:25.960 --> 00:34:31.039
packages and sells the data for the
number of times a consumer clicks on shoe

461
00:34:31.119 --> 00:34:37.400
options before buying, and how many
clicks resulted in what sort of cart value

462
00:34:37.880 --> 00:34:42.480
and those sort of you know,
various both data sets can be sold in

463
00:34:42.719 --> 00:34:46.920
lots of different ways and liquidated quickly. So fascinating firm that's doing, you

464
00:34:46.960 --> 00:34:52.320
know, small business data lending where
I think during COVID everyone heard about the

465
00:34:52.400 --> 00:34:58.519
large deal where the airlines were selling
customer lists or information about their loyalty programs

466
00:34:58.840 --> 00:35:02.199
and that is helping these uh these
airlines day afloat during COVID period, and

467
00:35:02.239 --> 00:35:07.079
so it was it's that but on
a very micro scale and with this liquid

468
00:35:07.239 --> 00:35:09.880
data. So it's an interesting deal. In the book, we really like

469
00:35:09.960 --> 00:35:14.960
that lender. Fun the fun things
that we've seen that we haven't done.

470
00:35:15.119 --> 00:35:19.960
You know, there is one lender
who was like leasing pets, like actually

471
00:35:19.960 --> 00:35:24.360
the physical animal and we've been out
adult concerns about like buffer they repossessing a

472
00:35:24.440 --> 00:35:28.679
dog, and it was we were
too busy in the time to dig in

473
00:35:28.679 --> 00:35:31.360
and so perhaps this firm is great
and it's a wonderful lender, but at

474
00:35:31.360 --> 00:35:34.480
the time it was just a quick
like, oh, we're too busy with

475
00:35:34.559 --> 00:35:38.519
other things. That move on.
So we see, we see really things

476
00:35:38.559 --> 00:35:44.000
across the board. I would say
another another one that we we liked is

477
00:35:44.400 --> 00:35:46.920
a lender who lends to students going
to software coding camp. It's a very

478
00:35:46.920 --> 00:35:51.159
specific niche lender. They can really
understand that bar and what they do,

479
00:35:51.480 --> 00:35:54.320
what the placement out of the school
is. Yeah. I think the lending

480
00:35:54.360 --> 00:36:00.840
for pets one has actually come up
anecdotally here as we've been talking about other

481
00:36:00.000 --> 00:36:05.159
other companies and what they do.
And there's a company not just the leasing,

482
00:36:05.239 --> 00:36:08.079
but the loans for the pet stores
where it's a you know, really

483
00:36:08.079 --> 00:36:14.599
an overpriced animal in many cases and
to somebody who probably is not should not

484
00:36:14.639 --> 00:36:19.360
be maybe borrowing to buy a puppy
what maybe a puppy mill dog. And

485
00:36:19.760 --> 00:36:22.920
it's always interesting like what could the
consumer consequences of that? And and and

486
00:36:22.960 --> 00:36:30.440
who regulates a company that does that
that sort of business? So certainly interesting.

487
00:36:30.800 --> 00:36:31.920
Yeah, and I think the you
know, how do you think that?

488
00:36:32.079 --> 00:36:36.320
It kind of raises a really a
last question for me then, like,

489
00:36:36.679 --> 00:36:43.039
as you're thinking about about other companies
like that where you're you're gonna set

490
00:36:43.119 --> 00:36:46.880
up a facility for or or even
buying secondaries from how do you think about

491
00:36:46.880 --> 00:36:52.559
things like privacy, reputational risk,
so not just kind of the quantitative parts

492
00:36:52.559 --> 00:36:58.679
of the deal, but the more
kind of subjective risks in evaluating who you

493
00:36:58.719 --> 00:37:01.000
do partner with or who you work
with in the future. That is at

494
00:37:01.039 --> 00:37:07.079
the forefront of our decision making before
even getting into the qualitative aspects of a

495
00:37:07.159 --> 00:37:10.480
product. So things that may resemble
payday lending, you know, are where

496
00:37:10.480 --> 00:37:15.679
it's the bar doesn't have a great
path to success in paying off a loan,

497
00:37:15.719 --> 00:37:19.519
where it's you know, loaning stacking
and that sort of thing. You

498
00:37:19.559 --> 00:37:22.440
know, that's a big no no
for us at peer you know, again,

499
00:37:22.960 --> 00:37:28.920
challenges with usery rates across states that
can raise flags for us. You

500
00:37:28.960 --> 00:37:31.800
know, we were fortunate that there's
such a wide swath of great businesses to

501
00:37:31.880 --> 00:37:38.079
work with that are serving really useful, really productive purposes that it's quite clear

502
00:37:38.119 --> 00:37:42.760
and easy to pick those off the
top and say those are the ones we

503
00:37:42.800 --> 00:37:45.880
want to pursue. And anything that
has a sort of ick factor, you

504
00:37:45.880 --> 00:37:51.639
know, we don't need to reach
for or spend time on. Consumer lending

505
00:37:51.679 --> 00:37:55.840
products obviously have a greater compliance environment
than commercial loans, and so we have

506
00:37:55.880 --> 00:38:00.960
to have a greater scrutiny when we're
getting involved with consumer lunch and sumer lending.

507
00:38:00.000 --> 00:38:04.559
We do a lot in the space, and it's really just about understanding

508
00:38:04.559 --> 00:38:07.639
it, making sure your your counterparts
have the correct licensing, have a great

509
00:38:07.679 --> 00:38:13.159
compliance environment internally, and then you
can be funding great products that are helping

510
00:38:13.239 --> 00:38:19.559
people in fantastic ways. So it's
yeah, it's it's it's I think it's

511
00:38:19.599 --> 00:38:22.159
one of those things where it's like, you know when you see it to

512
00:38:22.280 --> 00:38:27.119
stay away, and our space is
so small, the specialty finance corner of

513
00:38:27.119 --> 00:38:31.400
the world that we all live in, and it's it helps in both directions.

514
00:38:31.440 --> 00:38:36.320
It's very easy to work with great
companies and great people because you know,

515
00:38:36.400 --> 00:38:39.559
you can triangulate with contacts that you're
close with to get great references,

516
00:38:39.800 --> 00:38:43.199
and then on the flip side,
you know you can also learn about firms

517
00:38:43.239 --> 00:38:45.760
who may not be doing things so
well in a quite quick way with a

518
00:38:45.800 --> 00:38:50.719
few phone calls. So it's I
think it's helpful being in such a niche

519
00:38:50.760 --> 00:38:54.760
space with a number of close people
who've been at this for about a decade

520
00:38:54.840 --> 00:39:00.360
now. Sure, sure, And
I do think the the uh, the

521
00:39:00.360 --> 00:39:07.519
good players will self regulate absolutely,
absolutely, and and and collectively there's a

522
00:39:07.639 --> 00:39:13.440
there's a lot of industry associations that
are dedicated to really like helping us share

523
00:39:13.440 --> 00:39:16.679
that guidance, provide the guidance,
and and some of the larger companies who

524
00:39:16.760 --> 00:39:22.119
may have more resources and have more
experience in the market, can help provide

525
00:39:22.119 --> 00:39:25.880
that to some newer originators as well. So I think there's a lot of

526
00:39:25.920 --> 00:39:30.840
partnership happening across the across the fintech
industry goes in. It's better for everyone

527
00:39:31.480 --> 00:39:35.880
when people are, you know,
originators are doing things the right way.

528
00:39:36.199 --> 00:39:39.960
So it's it's really great to see
firms like like yours who are providing that

529
00:39:40.079 --> 00:39:44.840
guidance and and getting out there and
being the leaders and examples and compliance.

530
00:39:45.639 --> 00:39:49.920
Absolutely so well, thank you,
definitely, thank you for for joining us

531
00:39:49.960 --> 00:39:53.440
on the podcast. Certainly interesting to
hear about the work that you've done and

532
00:39:53.800 --> 00:39:59.519
are doing it. Pere and any
any last uh kind of hot takes or

533
00:39:59.559 --> 00:40:05.840
thoughts to leave us with, ooh
fun question. Oh very specific to what

534
00:40:05.880 --> 00:40:12.920
we do. But the other early
stage credit facility providers or firms seem to

535
00:40:13.119 --> 00:40:15.960
or really like to take equity or
invest in equity and the firms that they

536
00:40:15.960 --> 00:40:19.960
work with, I think it makes
a lot of sense because they're providing a

537
00:40:19.960 --> 00:40:24.000
lot of equity value. I really
disagree with that because I think it makes

538
00:40:24.039 --> 00:40:29.000
you a bad predator. So that's
my hot take against a lot of what

539
00:40:29.039 --> 00:40:31.880
the general tie thinks and does.
So I think as a creditor and doing

540
00:40:31.880 --> 00:40:36.599
credit facilities, you should not own
the equity in the companies because then you

541
00:40:36.639 --> 00:40:39.880
can really enforce your rights. Is
that senior security lender and you're not conflicted

542
00:40:39.920 --> 00:40:44.079
by owning the equity in a business, And that seemed to be quite a

543
00:40:44.079 --> 00:40:47.360
common practice, but we I say
no to that. Great, well,

544
00:40:47.360 --> 00:40:52.079
good. It sounds like being a
founder is the right place, so you

545
00:40:52.159 --> 00:40:55.920
can kind of branch out on your
own with those new ideas. But it

546
00:40:55.960 --> 00:40:59.880
makes a lot of sense, right
the conflict of conflicts of interest. If

547
00:40:59.920 --> 00:41:01.719
you are kind of on both sides
of it, it's a little bit harder

548
00:41:01.760 --> 00:41:06.480
to draw a line in the sand. Exactly. Yeah, that's my hot

549
00:41:06.480 --> 00:41:09.000
take. That awesome. Well,
thank you, thanks again for joining us

550
00:41:09.400 --> 00:41:13.519
here on leaders Lending. Thank you
for having me, Lynn, I really

551
00:41:13.519 --> 00:41:17.000
appreciate it. Up Start partners with
banks and credit unions to grow households and

552
00:41:17.079 --> 00:41:22.360
expand consumer lending through its leading AI
lending platform. Upstart powered banks and credit

553
00:41:22.440 --> 00:41:29.199
unions leverage AI to offer higher approval
rates and experience lower loss rates while simultaneously

554
00:41:29.239 --> 00:41:34.440
delivering the exceptional digital first lending experience
that consumers demand. Whether you're looking to

555
00:41:34.480 --> 00:41:37.920
grow and enhance your existing personal and
auto lending programs, or you're just getting

556
00:41:37.960 --> 00:41:43.760
started, upstart can help. Upstart
offers an end to end solution that can

557
00:41:43.800 --> 00:41:49.039
help you find more credit worthy borrowers
within your risk profile with all digital underwriting,

558
00:41:49.360 --> 00:41:53.039
verification, loan closing, and servicing, It's all possible with Upstart in

559
00:41:53.039 --> 00:41:59.079
your corner. Learn more about finding
new borrowers, enhancing your credit decisioning process,

560
00:41:59.119 --> 00:42:04.119
and growing your business by visiting upstart
dot com slash Lenders. That's upstart

561
00:42:04.159 --> 00:42:06.119
dot com slash lenders