Really enjoyed this conversation about Cadence and the Private Credit offerings on their platform. Private Credit is a catch all for alternative assets – not including real estate – including things like: Small Business Lending, Consumer Loans, Factor receivables
Nelson Chu is the Founder and CEO of Cadence, a digital securitization and investment platform for private credit.
Best described from their website: Cadence is unlocking access to exclusive high yield, short term investments traditionally reserved for institutions. Earn up to 10% APY on your investment in as little as 1 month with a low minimum of just $500 to get started.
Really enjoyed this conversation about Cadence and the Private Credit offerings on their platform. Private Credit is a catch all for alternative assets – not including real estate – including things like: Small Business Lending, Consumer Loans, Factor receivables
This Market has a $1T market size and rapidly growing with about $400B sitting on the sidelines.
Cadence is a very interesting alternative investment platform and I’m loving the offerings that they’ve been offering since their launch.
Enjoy this conversation with Nelson Chu of Cadence Alternative Investments.
0:00:00 Welcome and context
0:01:52 Can you tell us a little bit about you and your background?
0:04:16 What inspired you to start Cadence?
0:05:20 What is Cadence and what it does?
0:07:00 What private credit are you focused on?
0:08:45 What is the most attractive thing in private credits to you?
0:12:01 Why are these companies that seek investments denied by banks?
0:13:53 What do you do to help mitigate the risks of lending?
0:17:55 What is your process for finding new FinTech lenders?
0:20:31 Are the rates you are offering through your platform sustainable?
0:22:05 What inspired you to do the Dutch Auction?
0:24:44 What is the most unique asset that you are offering?
0:26:50 How do you structure your team to keep track of all of your placements?
0:29:30 Risk scoring of investment opportunities
0:31:02 What other crowdfunding platforms you’d consider as your competitors?
0:33:09 What kind of institutional investors are investing?
0:35:07 Democratization of product offerings
0:36:01 What excites you for the next two or more years?
0:37:09 How are you using Ethereum?
0:42:31 Can you talk about the round that you closed this May?
0:45:35 How has COVID impacted the underwriting process?
0:47:07 What is the ideal investor for the Cadence Platform?
0:49:44 Where can people find out more about you and Cadence?
Cadence Alternative Investments
Ben: [00:00:00] Welcome to the alt asset allocation podcast, exploring alternative investment opportunities available to the everyday investor. Here’s your host Ben Lakoff.
Hello and welcome to the Alt asset allocation podcast.
Today’s interview is with Nelson Chu. Who’s the founder and CEO of cadence. So cadence is an alternative investment platform.
I’ve known about them for, for a while now. And it’s best described from their website. So cadence is unlocking access to exclusive high yield short term investments. Traditionally reserved for institutions, earn up to 10% APY on your investment in as little as one month. With a low minimum of just $500 to get started.
I really enjoyed this conversation about cadence and the private credit offerings on their platform. So private credit is a catch all for alternative banks, not including real estate, including things like small business lending, consumer loans, factor receivables.
All the things you want to get access to. This is about a $1 trillion market size and rapidly growing with about $400 billion sitting on the sidelines. So cadence is a very interesting alternative investment platform and I’m loving the offerings that they’ve been offering since their launch.
Don’t forget to like, or subscribe to your podcasts anywhere that you digest your podcast, or even on YouTube. This really helps. Please enjoy this conversation with Nelson Chu.
Hi Nelson. Good afternoon.
Nelson: [00:01:30] Nice to meet you. Finally
Ben: [00:01:31] Nice to meet you as well. So I’m here with Nelson who’s CEO of cadence, which is an alternative investment platform offering accredited investors access to short term investments with as little as 500 bucks.
So I’m really excited to have you on today and talk a little bit
more about this.
Nelson: [00:01:49] Yeah, thanks for having me excited to share more about everything we’re working on. Yeah.
Ben: [00:01:53] So as, as we were just saying before I started recording, I’ve been following you guys for over a year now, before you were even public.
So it’s been, it’s been really awesome to see this expand and grow and excited to see what’s come.
So I wanted to start off today just a little bit about you and your background.
Nelson: [00:02:12] Sure. Absolutely. I do have a traditional finance background. I think going into this space, you need at least a little bit of that.
so I spent three years at Merrill Lynch, for the last two months of Merrill Lynch’s life. it became bank of America. So about a year and a half there, and then BlackRock about a year in there as well. so bouncing around between wealth management and portfolio management and whatnot. before I ultimately decided, you know what, this is not the life for me.
I’m never going to do finance ever again. I’m going to start my own thing and. Famous last words. so bounced around during the time that I quit finance two worlds, they landed on, which was launching my own strategy consulting firm, which helps startups built the ground up. so we talent, we targeted really talented founders who usually had exited companies before, and, were working on ideas that they would, that we actually would personally be interested in investing in.
And so it fit those two criteria. We’d actually work with them. So that naturally narrowed the field down from like a hundred companies to like two. So we never really had that many clients at any given point yeah. Time. We kind of gave them all the resources they need to be successful. these are essentially idea based companies at that point.
Now that’s the stage that they’re at. And so they could really benefit from a product marketing and branding and engineering team. It’s really accelerate and get them off the ground. that company did pretty well. we helped them. The clients that we work with ended up raising us $200 million in venture capital funding.
So not a bad outcome at, of all this, but realize that, you know, if I keep giving these founders advice on what to do and not just that, but I’m also kind of introducing them to the VCs money from, probably should be doing this. And that’s really how Caden’s came to be. So we were founded in mid 2018.
really kind of got off the ground with our private beta in January, 2019 and went live for the public in July of 2019. So it’s about a bit a full year since we’ve been up and running. It’s been a fun ride so far.
Ben: [00:03:58] That’s interesting. I didn’t realize the startup, Process there. So I’m curious, it sounded like you left finance and didn’t want to go into finance, but one it’s your own company.
And then now you’re still very much within the finance realm, alternative finance, deep in finance now. Yeah.
But, what, what kind of inspired you to go with something like cadence?
Nelson: [00:04:18] Well, it’s funny because the, the startup consulting firm that I had, as much as I was trying to shy away from doing finance startups, like trying to go into DTC or just other things that were trying to be at the time, I kept getting inbounds from finance, startups and FinTech startups at the time, simply because my background lends itself very well to that.
we helped them with all things that they couldn’t do at that point in time. Like. Figuring out the P and L helping figure out the pitch deck, things like that. And so beyond just products, we can help them on the financial side of things. So that naturally just kind of predisposed towards a lot of FinTech startups reaching out to us.
so very naturally cadence came to be at a point in time when, you know, I saw a real gap in the market in a sector that I understood at least decently well in alternative investments. and that’s really where we decided to say, let’s put a stake in the ground. We’re going to focus on, on FinTech, alternative messaging platforms.
Ben: [00:05:11] Yeah. so just giving a brief overview of cadence, what it is you do high level.
Nelson: [00:05:17] Sure. we are a FinTech securitization platform for private credit. So private credit, spans anything from small business lending to consumer loans, to factor receivables. It’s kind of a catchall for various different alternative assets that don’t include real estate, infrastructure, or anything of the sort private equity, VC, et cetera.
so it’s. Probably the fastest growing asset class in all of private markets. it’s got about a trillion dollars in market size at this point, and about 400 billion sitting in cash waiting to deploy and opportunities. and that’s a really good problem to go after someone has $400 billion burning a hole in their pocket, you should go after that market.
And that’s really how we decided to focus on this specific space. the biggest challenge of private credit is really around transparency. Yes. There’s not a lot of visibility into underlying asset performance. And we thought we could actually make a change to that and fundamentally change transform how all of that is supposed to work.
so cadence was founded on the belief that we could by providing transparency and visibility to underlying it performance and attractive, innovative securitized products or investment products, you can put that $400 billion to work. And we’ve made our small dent in the university here, with the first year of business with about 120 million on the retail side.
And about 40 million on the institutional side. I didn’t
Ben: [00:06:32] realize it was that much bigger on the retail side. Actually, I was thinking they were more, more close. interesting. So private credit, I mean, this is, this is a broad growing category, right? Is there certain areas within private credit that you’re. focusing. So you said not real estate, but that’s actually kind of separate, right. And the reason why you’re not focusing on that as a little bit longer term, maturity sort of thing. Or kind of, if you can explain within private credit where you’re, where you’re at, real estate is definitely longer term. and beyond that, it’s actually just really crowded.
Nelson: [00:07:08] So there’s a lot of different platforms out there that kind of hung their hat on real estate, and that’s exactly what they want to do. And only thing they’re going to do, we want to see a little bit different offer, more diversification, more optionality, and that’s why we focus on with the things that we focus on.
Our mantra is really, as long as there are cash flows there to support. Creating a product off of it. We can probably do it. things like small business lending. there’s interesting paid out on a monthly, if not weekly basis or daily basis. there is, consumer loans, same concept, factor receivables or something that’s coming new will always be paid within 30 to 45 days.
We can focus on that as well. So anything that has a cash flow oriented nature to it, we can create a product around that. And that’s really what we focus on. Geography. Doesn’t matter, you know, we have United. States we have Columbia, we have Mexico, sector or asset class. Doesn’t matter. We have small business lending.
We have, Amazon merchant lending. We have mobile app developer lending. So it’s a really wide mix, but as long as again, those caseloads are there, we can create a product for it. and that really gives us probably the most flexibility out of any other platform out there. Yeah, and this
is what really interests me about cadence one.
I mean, I’m extremely attracted to alternative investments, but then the fact that it’s so geographically diversified
Ben: [00:08:22] products themselves are very diversified. So different types of tequila, cash flows, different risk spectrums on all of them. And they’re all short term. So, I’m curious. Why, why did you, what, within this private credit, what makes it so attractive to you? to focus on it?
Nelson: [00:08:39] Yeah, I think it’s really what powers the global economy. Like you, you think like the stock market and all these public companies, you know, that’s, what’s making the world go round. The truth is there is so much more or to be had on these small and mom and pop shop side of the world, right?
Like this. This is main street. This is the bulk of the population, this country. so when you have the ability to give them capital, in a, in a time when banks aren’t lending to them and finding ways to continue to keep the growth of the country going, that’s actually really, really fun and really rewarding to be a part of.
we saw that during COVID at the right, at least, right? And during that timeframe, every other major institutional lender cut back, they, they cut their credit lines to these lenders. They said we’re not giving any money. As a matter of fact, You can’t extend any more loans. I, I physically borrow you from doing that.
And from our perspective, this is sort of where our short term note program really shined. we have, you know, 30 days, 90 day, invest in products predominantly. so during Kobe you had a lot of cycles in terms of these products where, you know, one of them came due and then we. Had to reprice them, resize them.
so in, in really volatile times, the short duration program helps both the lender and the investor in that instance, the investor has the ability to pull money out, which they definitely did during that timeframe. everyone wants to cash one liquidity, every dollar they want to come on our platform.
We let it out for our platform. there was the, we didn’t hold anybody up. and at the same time, we helped, lenders continue to get capital from these investors by repricing it. In a way that it would be attractive enough to get capital in. So you’ve obviously used our platform for a little bit.
You should be seeing the emails, the Dutch auctions coming out, and that was something we launched as a result of COVID. How the Dutch auction works is basically, at a, we come up with a range of prices that we’re willing to go out to market with. It could be anywhere from 10 to 14%, for example. Right.
so in a normal situation, you would say, well, I’m interested in putting 10010%, 15,000, 11%, 20,000 at 13, it’s all presented, et cetera, and so on. And, if we’re looking to raise, let’s say a million dollars, we weekend of demand for a million dollars. That’s 11%. I’m going to go out to market at 11%, during COVID we saw everyone taking the high end, but the only way we’re going to close deals is that we get 14% effectively.
And that was the, the market clearing rate, for example. but as COBIT kind of settled down as these lenders showed that they could continue to. Form and deliver on these returns. The yields also started coming down. So now that benefits the lender. And so this hyper efficient market that we’ve created that lets the market set.
The price itself allows for lenders and investors, both reap the benefits because they’re kind of have both have a seat at the table and can meet in the middle. And that’s something that’s been really fascinating to watch. but that’s the only reason why, you know, to bring it back to your question, we’ve been able to continue to power the growth of small businesses in this country, because of what we’re focused on and being able to provide capital in good times and bad, which,
Ben: [00:11:26] which always just baffles me.
Right. I mean, money is at an all time lowest rate. It’s seems very plentiful throughout the economy. So these. These companies, the type of person that is getting money, getting a B is this private credit they’re denied by banks? Why would this be the
Nelson: [00:11:46] case? Yeah, generally, they don’t have a big track record.
They don’t have a lot to fall back on. There’s probably not a lot of cash in their bank accounts to begin with to offer us collateral. There’s a lot of reasons why, but the biggest reason why honestly is 2008, the banks just pared back. They became very, very risk averse. they realized they could make more money off of big companies and they could off of small companies and small businesses.
And so, you know, fewer then you’d say, yeah, might as well double down on the things that I know I’m going to make money on and this stuff. Let it go. so that’s really where the rise of non bank lenders came in and these are FinTech companies that it’s still that gap and have done a really good job of it, honestly.
but the problem is FinTech companies have the same problem with FinTech companies and FinTech lenders also need to get capital from somewhere. so they source from, you know, if at an early stage like private investors, high net worth investors who were willing to take a flyer on them, they source when they get a little bit bigger from.
these credit funds that like to do this type of stuff, but again, it’s still really expensive. so we have been emerged as a really viable, very attractive alternative to everything that’s out there, because we essentially provide capital on their terms. They can, you know, there’s a flexibility there with a duration of these notes, with the ability to reprice these notes, from the lender side, that is just really good for them because our incentives are all aligned.
We want them to grow. If they grow, then we do well. Right. and so they can succeed on our retail platform. They can succeed on the institutional side. They can succeed in more than that, beyond that. That’s only good for everybody, on board. And so we have a software or servers or solution for every single phase of a FinTech lenders growth.
Ben: [00:13:20] Yeah, that makes a lot of sense. So, I mean, traditionally these would be seen as, too risky for banks that are doubling down on the, the, their bread and butter. So if these are too risky, what can you do to help mitigate these risks? What kind of default rates do you see in these, lending?
Nelson: [00:13:36] Yeah, I mean, this is where, our short term program.
becomes even better. Right. And it really kind of proves itself here in addition to all of the transparency and the data collection that we have to help do better underwriting on our side. so we have a lot of levers that we can fall, during, during COVID. we can obviously, you know, reprice, the notes so that, higher yields.
Is convinced with higher risk generally. Right? So we want to make sure investors are aware of that. And it’s going to be more expensive for these lenders, but probably at least they can still get capital when no one else is giving it to them. you can resize it. so if there’s over the course of a month, for example, there’s not enough cash flows to collateralize the opportunities that are there.
We can downsize it. is we can downsize the note. They have to pay back whatever the Delta is. and that again, also protects investors. there is the ability to restructure it. so prior to COVID, we were pretty much doing like bullet and interest only. So bullet meaning it gets paid all at once.
At the end, your principle and interest interest only means that every single month you can get paid interest and then your principal comes back at the end and we flipped almost everything to an amortization structure. So an amortization structure means that you’ll have principal and interest paid back on a regular basis.
So that was really, really good for investors that feel comfortable. That look, I’m not just waiting for all the principals, come back at the end. If that even happens to have a constant steady stream of income coming in through principle and interest is very attractive to them. So those are the things that we can do at an immediate surface level.
Beneath that it’s really all about the data. so you’ve kind of around with the platform. I would argue we’re probably the most transparent out there out of any other alternative investment platform on the market. So we, for seven out of 12 of our lenders today, we provide daily, if not weekly surveillance reports around the underlying performance of the portfolio, we show you the pre COVID vintage, the postcode bit of vintage.
We show you which ones are days past, how much days past due what sector it’s in. And it’s an unbelievable level of transparency. And beyond that, we also have, the ability to show you every single loan in the portfolio and how it’s doing. And under the asset performance tab, these are all things that other platforms don’t offer.
And it’s, you know, it’s how we underwrite the products. So we’re comfortable with it. You should be comfortable as well. And we show you how we got to where we were in terms of making this. Just products offered to them as an investor. These are all the things that we look at that ultimately at the end of the day, the bank stepped back.
Not because it was too risky, per se, cause risks can always be mitigated. it came down to, you know, where can I make the most money and how much is it? How much effort is it worth for me? So to do underwriting on a specific small business takes a lot of work. And so their actual margins on that are really, really low.
but we’re a FinTech lender who is using technology like the latest and greatest. They have the ability way more efficient. On that front and they can leverage platforms like ours. So also be more efficient in sourcing capital. so all of that together plays well in their favor and banks, as a result of COVID have taken another step back in, not lending anymore to this side of the market.
so we’re going to see, I’m excited about what we’re going to see coming up, with again, more FinTech lenders coming through. We speak to them all the time and there’s new ones popping up by the day with an innovative model that does things even better than it was before. Four. So it’s all just, you know, pushing for more innovation, this space that desperately needs it we’ll have our role to play it.
And then there’s a role to play. But all in all, it’s just going to make a more efficient market that banks will probably feel bad for relieving their call.
Ben: [00:16:50] Oh, you can’t focus on everything. Right. And this is a very niche product. And like you said, it takes a lot of time to do your due diligence on these and your surveillance reports.
I’ll link to them in the show notes. I mean, if I can, I suppose I can, but, yeah, they’re very, very. Extensive so well done on that. That’s for sure. What’s,
Nelson: [00:17:09] what’s the process of,
Ben: [00:17:11] I mean, in your,
Nelson: [00:17:13] in your,
Ben: [00:17:13] update, you said that you have 500 million plus assets available for security securitization in the pipeline.
Nelson: [00:17:21] So what is your process look like for
Ben: [00:17:23] finding these new FinTech
Nelson: [00:17:24] lenders?
Ben: [00:17:25] You know, what niche, what category geography,
Nelson: [00:17:28] what does that kind of look like? Yeah. I like to say that we are a, VC’s a best friend when it comes to their portfolio companies. they invest a lot of these FinTech lenders. It makes up a predominant part of their portfolio if there were a FinTech VC.
and so we have the opportunity to give them the most attractive capital at a very early stage of probably the most critical period of their growth. And that has been, you know, it’s been a great way to source good high quality originators on that front. So BC is talking to them and also on top of that, it’s good for us, but we need to raise money for our next round because you know, we’ve helped them so they can help us.
So that works out. It’s a symbiotic relationship there. but beyond that, we’ve found that the private credit market is honestly very small. you know, there’s only a select group of law firms that work in this space. There’s a slight group of trustees and backup services and custodians, et cetera.
And so when you get to be friends with them, because you’ve done deals with them before you leveraged them as part of transactions that you do, they were very keen to help other clients. As well, cause they ultimately wants to be seen as adding value for their customers and their clients. So we get a lot of intros that way.
And just from a pure like acid or something basis, once we go into one asset or one sector, we get inundated with calls from other people, editors in that sector because they’re saying, well, that person got really cheap capital and flexible capital than I wanted as well. so we have not had any shortage of trying to get originators, up and running and into our pipeline.
the challenges in this environment, we have to be very careful as to what, which ones we’re bringing on board. So we were slated to add on additional four. We really only added one to one to see. He’s our technology, the ability to have their portfolio stabilized during COVID before we kind of made a move.
And so we’ve seen that it’s made good progress on that front, and now we’re slowly but surely starting to move forward again. But right now, as you saw, you know, notes pretty quickly, there was definitely a excess demand and not enough supply problem. It’s a good problem to have. but we’re not going to sacrifice credit quality for the sake of just getting investors on board.
because ultimately, you know, we treat every dollar that investors invest as if it was our own. so we are, our incentives are all aligned there. We want to make sure that continues to be right.
Ben: [00:19:33] And I see, I see that you invest actually in all of your offerings as well alongside investors. So talking about eating your own dog food, which is always a good sign.
Nelson: [00:19:43] so I’m curious,
Ben: [00:19:43] it sounds like there’s a
Nelson: [00:19:45] mass supply of
Ben: [00:19:47] people looking for funding at these rates. The rates that you’re offering through your platform are. What eight to 15%, probably something around there.
Nelson: [00:19:57] yeah, so. Are these rates
Ben: [00:20:00] sustainable longer-term if more and more people are, I can’t, I can only imagine more FinTech lenders are going to be popping up.
It fits in with my narrative of, you know, you’re not getting any yield anywhere else. So you’re looking at other places to put your money. yeah, just touch on that. If you don’t mind.
Nelson: [00:20:19] Yeah, it’s going to be up. So the Dutch auction, right? So if we have enough, there’s willing to take, call it 6% then of 8%, but we’ll close at a 6%.
I mean, that’s, you know, the, the lenders need their capital at a certain size. And if we can meet that size at a lower yield, then that’s, investors are happy. Cause those were willing to put in a 6% are going to get it at 6% and they want to take that. And lenders are happy because they. Drop their cost of capital down.
so letting the market decide is really our best answer here. I will say that, at the stage of company that we focus on on the retail side of things, their alternative cost of capital is in the range of call it 16 to 20% ish, if not more. so, you know, it’s, we will always be better than that. but I don’t think if the rest of the market is offering 16, I don’t think we’ll be the offer six.
so it’s. You know, it’s, it’s a supply and demand. It’ll meet in the middle of some work. And as long as we can figure out how to be a market maker, in that instance, we’ll have done our job.
Ben: [00:21:14] What inspired you to do the Dutch auction?
Nelson: [00:21:18] Honestly, we got a lot of feedback from, investors saying that, Hey, like you guys are setting the price and you know, the yield keeps dropping because originators are performing and they’re doing well.
But you know, what if, I don’t want to invest at this price anymore. but the truth is if there’s enough people investing interest in investing at that price, then. You know, w the easiest way is to let the market decide at the end of the day. we don’t want to be the one that kind of sticks our finger in the air and says, yeah, this feels like 12% of this feels like 11% this time around.
if we can justify, we show the data to prove it, then you know, everyone’s satisfied and you know, those who aren’t, or don’t feel like that’s the right rate, there’ll be other products for them to invest in as well. That kind of feed that meet their criteria. Right.
Ben: [00:21:58] And you said that these, the alternatives are 16 to 19%.
Where are they hearing this financing for these alternatives too?
Nelson: [00:22:06] Yeah. There’s so they’re really small. Let’s say they’ve been doing balance sheet lending for, you know, the first, like six months though their life, which is very common. they probably have a angel investor or high net worth family that says, yeah, I like private credit.
You know, if you want my money, I’ll give it to you tomorrow, but it’s gonna cost you. so it’s just this lack of transparency and lack of ability to really. Can I get your offering out there in front of the broadest audience possible has limited their options, right? Cause they want to be, they want to build their book.
They want to do their day job, their actual job rather than constantly keep fundraising for additional balance sheet capital to lend off of. so these, individuals have the ability to take advantage of that information asymmetry and just charge them whatever they feel is right. But the risk they’re taking at that stage kind of funds also invest in this type of space as well.
They tend to be going after a little bit of a later type company or lender. but they’re, they’re cheaper than call it 20, but they’re not, you know, they’re still in the 16 range. and what we’ve found is that retail in general has a. lower bar in aggregate what they want to get in terms of returns.
And the truth is the way we’ve structured is on par. If not better than what a credit fund we’ll be able to structure here. we just have the ability to, because of the team that we have do it in a much more scalable and efficient way. Wait a that a credit fund is hyperfocused on sourcing and diligence and underwriting and investing.
They just don’t have the resources to do that. I have that luxury here, that allows us to pass on these efficiencies, the savings on to investors at the end of the day. Yeah, it makes
Ben: [00:23:35] sense. I mean, in a world, start for yield these a 10 plus percent people just salivating. And as you said, right, you throw it up and it’s instantly filled up all the way.
So a lot of these different, products that you’re offering, what’s the most unique
Nelson: [00:23:51] asset that you’re
Ben: [00:23:53] securitizing for these things.
Nelson: [00:23:55] Yeah, I would say the ones I appreciate the most. It’s really a, we like to call asset formation financing. so these are a very underserved part of the market, but it makes total sense.
so oftentimes if you’re a credit facility or a bank or a fund or whatever, the. You will only take over, an asset or bring the asset into the facility when it’s considered fully formed or realized. So for example, it could be like a solar panel on the roof, just as a reference point. So when there’s construction being done, if there is physical panel on a roof, I cannot take that into my facility.
It doesn’t work. It doesn’t exist. As an asset. So the construction needs to reach a certain point before it’s acceptable to be able to take it in. so we can finance that bridge when I get call it like 90 days where the homeowner has signed beliefs, or assign the, the contract for installation.
Contractors are come in, they’ve started to build it. And then once it reaches that, call it 75% completion. The credit facility and take it over. But the 90 day period that not many people actually cover and the bridge. And so a lot of these lenders are actually using our balance sheet to finance that gap.
Even though if the panel meets a certain percentage, it’s almost guaranteed to be taken out by the facility. So the default rates are very low and it’s a really interesting opportunity to arbitrage that. you know, there’s just really, no, not a lot of people focusing on that at the moment. So, you know, we can slot ourselves in there and we liked that type of esoteric, unique opportunity that we can make available for, for our regular retail credit investors as well.
Ben: [00:25:23] So it’s almost like work in progress financing kind of thing, right?
Nelson: [00:25:27] Yeah. Yeah.
Ben: [00:25:29] Interesting. And then, I mean, even there’s a there’s. Crypto loans, which is a very different type of collateral, a highly volatile digital currency, you know, help custody custody by another third party. So there’s a, you have a very wide range.
How do you structure your team? I mean, different due diligence groups, like. This, this requires a depth of industry knowledge for each one of these placements doing the due diligence I would imagine, right?
Nelson: [00:25:59] Yeah. Yeah. I think, our team is, we’re very fortunate. The extraordinary talents that most of them have come from traditional finance or waiting things seems a little like, and they can be very nimble and adaptable in these situations.
the truth is. like I mentioned earlier, cash flows or cash flows. Right. So even when you talk about crypto, thinking about it, it’s technically a fully, relatively, fully liquid asset. you have the ability to get margin calls on the way down if there’s significant drops, right. if they are tech enabled, which if you’re in crypto, I would hope your tech enabled, you have the ability to, kind of algorithmically and automate a lot of that manual effort that normally a bank would be dealing with.
Right. So. All of that coming together means that it’s, it’s a standard loan, right? I mean, there’s underlying collateral, which is the cryptocurrency. There is cash flows to me out of it on a monthly basis to coming from interest. It’s not that dissimilar at the end of the day. and that’s the reason how we got comfortable with it.
And we really liked the fact that those guys have a ton of data coming out of it, that we can actually see underlying performance and all of that, that gets us comfortable with the product as well. And you know, there’s been. Massive fluctuations on cryptocurrencies over the last call it six months or seven months or so, where it dropped from 10,000 to 5,000, like Bitcoin.
and these lenders have a spotless record in that timeframe. Like no issues, nothing at all. so it’s one of the safest, it’s probably one of the safest asset classes out there, but a lot of people don’t want to invest in crypto. And so we can give them exposure on the other side, through our products like this.
so they don’t get the wild potential upswings of Bitcoin, but they also don’t get the downswings. They just get kind of nice, steady cash flows coming out of it. but our team is, pretty much, heavily capital markets. obviously given the, the retail and the institutional side of our business that needs coverage on both fronts.
a lot of engineering to kind of bolster the technology that we have and build out the various sort of platforms we’re working on and rounded out by, Marketing operations and executives at that point. so it’s a pretty well rounded team. We’re 20. Now at this point, back when you were checking us out in February of last year, I think we were four.
so it’s been a, it’s been a nice, run-up so far.
Ben: [00:28:00] Yeah, I think it was on your quarterly report, that there were only two deaths devs, like, you know, when you launched in July last year and now you’re able to fully staff up and, I’m expecting big things. That’s for sure.
Nelson: [00:28:13] So I’m curious with all the different types of asset
Ben: [00:28:15] classes, I don’t see any sort of, I may not see it.
is there any sort of risk scoring on the different investment opportunities? Obviously
Nelson: [00:28:23] the
Ben: [00:28:24] interest rate is indicative
Nelson: [00:28:25] of.
Ben: [00:28:26] The amount of risk you’re taking, but you know, there’s different term periods. So do you have some sort of,
Nelson: [00:28:32] for the average investor that logs in, like,
Ben: [00:28:35] this is a B rated risk based on these premises?
Nelson: [00:28:40] Yeah. So we have internal risk metrics that span well beyond just like an overall score. It goes into every single various criteria that we go through. Our due diligence actually has 130 different data points that we look at to be able to get comfortable around an underlying originator and asset. we don’t make it available to, our investors on the platform simply because the truth is if it can even go out on our platform, we stand behind it at the end of the day.
If it doesn’t. Pass muster on our side, we would never let it get out. so everything is effectively the same. The difference is really around sort of the, the yields based upon, you know, default rates and things like that that are factored into it. but that doesn’t change the fact that we fully believe in the underlying products, we’re securitizing and syndicating out, which is why we haven’t found a need to offer that as of yet, something we definitely look at, but, you know, it’s not something that we feel is pressing at the moment.
Ben: [00:29:33] Okay, that makes sense. So to transition into a cadence as a whole, what you guys are doing, I mean, you’re working with all of these originators. You’re very selective with them. Who, who else is playing with it, then the space of securitizing, suffocating out these sort of investments that you see competitors.
Nelson: [00:29:53] Sure. I mean, I think there is no shortage of crowdfunding platforms out there for alternative investments. you know, there’s yield street, pier street, Cadray, kind of the list goes on for various different asset classes. I would say that we have a cooler little mouse trap we’ve got going on here.
so short duration investments is always a good thing. things that are one month, three months, six months, give investors inherent liquidity, which is always great. our minimums are extraordinarily low. so it’s $500 and we’ve seen. Plenty of investors putting in $500 for a month, get their $5 of interest back, withdraw the money to make sure the pipes work and intuitive.
Now they do a thousand dollars and then suddenly, you know, three months into it, they put a 25,000, $50,000 in monster platform just to get, because they can get comfortable with it. So the ability for us to provide that level of flexibility is kind of true to our nature. Yeah, transparency, flexibility, all of that stuff.
so I think definitely on that front, we compete with everyone else that’s out there, but we aim to continue to provide the most diversified offerings, the most attractive products and the most optionality and transparency around the underlying assets. that’s really, I think where we can stand out, beyond that, you know, as we get bigger and bigger and as they move towards the, The middle market side of the world.
you know, we’re competing with, investment banks at the end of the day who also kind of put money in fines. investors to deploy capital and seize opportunities. but again, I think our ability to have tracked the underlying asset performance, to have done these securitizations, even if there are micro securitizations over the course of the lender’s life, all of that bodes well for us to be able to not just, win the deal, but also close the deal and that’s equally as important.
so I like our chances at the end of the day, but we have a pretty broad mix of competitors here that are going up against, the best thing we can do is. just, you know, stay nimble, stay in, be innovative, and create a product people want. And at the end of the day, that will work out well for us.
Ben: [00:31:42] startup school, YC combination, like
Nelson: [00:31:44] build stuff people want,
Ben: [00:31:45] you know, it’s pretty simple at the end of the day,
Nelson: [00:31:48] a lot, a lot harder, pretty simple in theory on paper, it’s really easy,
Ben: [00:31:52] right?
Nelson: [00:31:53] So
Ben: [00:31:54] you have a number of retail and institutional investors that invest in the deals that you’re offering.
What kind of institutional investors are investing in these? are you actively searching both retail and institutional?
Nelson: [00:32:08] Yeah. So we did 120 million on the retreat tell platform so far, which is what you see in our website, which is our website, as you see it today. and that is comprised of probably 48% institutional, 52% retail capital.
but in terms of total numbers, like institutional numbers of investors make up less than 10%. so they obviously deploy bigger tickets. but you know, the benefit is. The retail investors can invest alongside institutional investors. They, they’re treated exactly the same. There’s no preference on that front.
so the deals they invest in are the same ones that institutionals got comfortable with, which should give them a lot of comfort as well, because they do much more thorough diligence. the, side of the world, I think we’re, you know, Having bigger chicken investors, close deals quicker is always helpful.
But at the end of the day, our model and mantra is democratization providing more access. We want to make sure that retail always has a seat at the table. so we are pursuing them pretty much equally, I would say. but institutional is definitely the only thing. Player on the bigger ticket side, when it comes to doing the full blown call, it, you know, rated deals that we do.
at that point, honestly, the yield is so low that retail is not interested because we’re offering other stuff that is significantly more attractive and significantly more liquid, in terms of restoration.
Ben: [00:33:18] Gotcha. Well, investors are family offices, hedge funds. Pensions.
Nelson: [00:33:23] Yeah. The like, yep, exactly.
Pensions are a little bit, a way further down the line for the future.
Ben: [00:33:30] One, one day pensions will be in Bitcoin and all these, all these other alternatives, you know, I’m confident. so I’m curious the democratization of these, Product offerings. Does that mean at some point in your roadmap, you’d like
Nelson: [00:33:43] to offer
Ben: [00:33:43] something for non-accredited investors as well?
Nelson: [00:33:47] Yeah, I think, if from a regulatory standpoint it was easier. We would’ve done it already, unfortunately. there’s definitely a lot of pains that, that happen to be able to make that possible. we have our eye on, or we’d love to see it. Definitely makes up a lot of the inquiries that we get or inbounds that we get from potential users that they want to make available.
so on our roadmap, I would say until we see significant improvement from the regulatory front, in terms of just the lowering the bar to make that possible, it’ll be tough for us because, there’s just a lot that needs to go into it for the returns of effort on our side. It’s not necessarily worth it.
but you know, we’re thinking about you, we’re working on it. and we’ll see, hopefully in the near future, not an impossible thing. Awesome.
Ben: [00:34:27] And then speaking of a roadmap, like what excites you over the next two years, et cetera?
Nelson: [00:34:34] Yeah, I think, really the, the SAS side of our business is very exciting.
so obviously right now we make a lot of our, our revenue from. Deal driven opportunities. but we like chemistry really. We aim to provide a software solution for every single phase of a lender’s growth. Right? So that’s really, the software side of things is where we can shine. and all of that, it’s just designed to ultimately benefit everybody involved in transaction will benefit the lender because there are more, it’s more efficient for them to get capital it’ll benefit the investor.
They get more transparency that they’re looking for. Or we can do it in a much more automated way than we do it today. It’ll benefit us because it’s just been a lot faster for us to do what we need to do. so when we can really kind of proved that workflow from start to finish, that’s when we’ll say, wow, like when you take a step back and say, we really did something here, that’s truly remarkable, that, you know, no one’s really done in a, in a really scalable way.
Ben: [00:35:24] I love, I love your commitment to transparency with all of that and with everything that you’re doing. And perhaps this is a good transition into, at risk of going too far down like the crypto rabbit hole, but you guys are using Ethereum. Could you briefly explain how you’re using a public blockchain like Ethereum?
Nelson: [00:35:45] Yeah. Sure, absolutely. So there is a world where all of securitization can be done on chain from start to finish, right? The assets get originated on chain. It gets structured on chains, invested on chain and then ultimately settled and all that good stuff on chain. We are so far away from that being a reality simply because there are so many different transaction parties involved in a deal that they all need to buy in on it.
Every single one of them, otherwise, one break in the chain means the whole thing just doesn’t work anymore. It’s becomes a. you have to now trust that counterparty. so we have taken the step of saying, you know, we will push the envelope on transparency on leveraging blockchain technologies without forcing anyone to adopt it.
And so if you want to get the benefit of it and you can tinker with it, you can see it and you can play with it. but you don’t actually physically need to adopt it. So how that manifests itself on our platform is that we issue a digital security ERC, Ethereum token for every single transaction that we’ve ever done on the retail and institutional side.
On the retail side, you can see effectively how many investors invested in that deal, because it’s one for $1 for dollar, right? You can see, how much they put in just anonymized. And you have obviously through either scan in that wallet, the ability to trace every single transaction they’ve ever done on cadence.
So as a $25,000 investor in a $5 million deal, you can go on to the uranium address and see that there was an investor who put in $2 million and he’s in bed. They’ve invested 20 million or 20 deals with us before over a certain period of time. And you can get comfort in the fact that I’m investing alongside that person.
Right. So that level of transparency around a public anonymous cap table is super powerful. We think, and it could lead to towards the future where people are more interested in it and more willing to adopt, potentially they’d rather transact in stable coins. Like USB-C, now we can kind of move the ball forward, but until then, No one’s asking for it.
So we’re not gonna do it. Cause we got to make a product people want on the institutional side,
Ben: [00:37:40] infinitely, complicate what you have already
Nelson: [00:37:42] by doing this. Yeah, exactly. On the institutional side, we did a $40 million public company, whole business securitization rated by DVRs morning star for a NASDAQ listed restaurant franchise.
very difficult deal to get over the line. Probably one of the hardest securitizations you can do. And we decided to make that our first one, obviously. So that one was the first, Securitized product that had a digital asset associated with it. That was also rated. So it was in the DVRs morning star ratings report.
it was published on a bunch of different publications, like Forbes and global capital and all that stuff around how unique this actually was. So this is a standard what’s called a one 44, a transaction. So in a one 44, a transaction, you actually never know how many messages were in there or how much they put in, like nonexistent, no idea.
It just know that a deal happened and that’s kind of. So because of what we do, we created a mirror transaction on chain as well for that. So you have the ability to see the issuer, which is a public company, creating $40 million worth of securities. You have the investor with $40 million worth of cash, and you have all the different counterparties involved trustees, backup, servicers, et cetera, all with their own little addresses.
And the trustee has like reserve accounts. They need to fill as part of the payment flow of, you know, interest gets paid out. It goes in that account goes back out to the investor, et cetera. So on settle and on, in, in early March, you could see that the $40 million from the, the investor went to the trustee once the reserve accounts and they got siphoned out and then moved over the issuer and exist securities, go from the issuer to the trustee.
And the over to the investor as well. And it all happened kind of simultaneously and nothing moves until it’s all in the trustee’s hands, where they can decide what they want to do with it. And the interest is being recorded every single month as it comes through. And you can see it in the reserve account.
So, and you can also see now, like I mentioned earlier that you normally one 44, you’d never know how many investors, there’s only one investor took down both traunches, and you can see how much money they’re making off this deal. so this is a level of transparency at the institutional level that was literally never afforded before.
And we make that available. As well, and again, pushing towards a future where securitization can be on chain, but we’re not going to force the issue until the investors clamoring saying, I want this all to be settled on chance. Like, okay, well, time to flip that switch and we can do that. But until then, not that much of an interest.
So why don’t we just add value in our own way? It doesn’t require anyone else to adopt it. Really like that. I
Ben: [00:40:05] mean, obviously public blockchains offer this transparency and traceability and all of these benefits, but you don’t want to complicate the thing that you’ve got already, but I love the idea of like almost running this in parallel in the background.
So at some point you can easily. Yeah. Yeah. We’ve basically been doing this the whole time, so we’re just going to change it a little bit. and then, you know, that offers all sorts of wild alternatives of. Instant settlement, instant liquidity in these deals. So secondary markets,
Nelson: [00:40:35] all
Ben: [00:40:35] securities issues, obviously, but, eventually one day someone very, very interesting opportunities.
Nelson: [00:40:43] So I,
Ben: [00:40:44] you, you touched briefly on. Some of your investors. it sounds like you just closed a, an additional funding round in may. Maybe if you talk
Nelson: [00:40:54] briefly about those things. Yeah. We did a code round, which I think some other people definitely were trying to do as well. so we had raised our first round of financing in January of last year, from a very wealthy family office based in China, who I had, I had advised for for years.
but the, probably the most notable investor in that round was, Argo. Public insurance company. and so the insurance companies are very frequent buyers of our products at the institutional level. So that’s a logical natural fit. And we also had Coinbase invest in us at that point in time, because we were definitely much more blockchain centric at that point.
At that point, the most recent price round was in January of this year. That was led by rebel. We had a lot of institutional backing at that point in a traditional finance space. So Morgan Creek, obviously they have a digital asset fund and a regular hedge fund. we had, the founder of passport capital, which is also another well known hedge funds and their family office invest through nimble ventures.
we had Dick Parsons, former chairman of Citi. Invest. and so he kind of lived this world in Oh eight Oh nine through Citi, and he can understand the difference that we’re making in terms of bringing transparency and efficiency of securitization. He really appreciated that, Tuesday Capitol generalist, VC fund based down in the Valley, and Manette our securitization council.
It’s always good to have a legal counsel on your cap table cause they can drop your fees. Now, outside of that, just some strategic angels we’ve always wanted to get on board. So January or March COVID happens and, you know, we weren’t hurting for cash. We definitely did not burn through $4 million in two months.
So it was just a matter of thinking to ourselves, Hey, if this goes on for awhile, we should probably, you know, get better capitalized. And we were very fortunate in that the whole business securitization closed in March, and we were able to go out to market with a very, very, company friendly, safe note, in may of this year, which we originally wanted only a million dollars were over subscribed in three days.
We’re up to 1.5, close that out in five days. So. Well, legally, we were only allowed to offer two millions. We settled on 2 million as our final amount that we raised and in that a bunch of our insiders, continuing to put money in. So love the fact that they, they believe in what we’re doing, continue to support us, even though they invest in January.
And we brought on board several other strategic strategic angels that we had wanted to, again, In that round as well that weren’t available in January. Cause we didn’t have enough room. so we’re well positioned to take advantage of the back half of this year. I’m excited for what we have to offer a lot of movement happening on the retail and the institutional fronts.
and it’s going to be a good all in all a good 2020, I think, we have returned to pre COVID levels in terms of issuance volume demand has never been higher. and the markets are opening up again, just from a liquid the standpoint. So that all bodes well in our favor for now. We’ll see how coven goes in the next, like two months or so, but yeah.
Ben: [00:43:38] Yeah, this being recorded mid July or end of July. And it’s, it’s not looking so good, but congrats on the round. Things will get back to some sort of normal at some point with COVID. Has that drastically changed your underwriting process or due diligence process or are you just a little bit
Nelson: [00:43:58] tighter?
Ben: [00:43:58] like you were going to bring on more originators and less now after looking post COVID. how much has that changed the process?
Nelson: [00:44:06] Yeah, we’ve, we hit that 130 day, the data point Mark for how we underwrite very recently. So we’ve expanded more and more just to be able to account for this new reality that we live in.
We actually just brought on board a head of risk, last Monday, who was the former head of abs at DBRS Morningstar. so that was a great, fantastic hire. That’s going to bolster the side of our business for sure. but even without him joining, we were doing a lot of things as a result of COVID to be able to react very quickly to this.
This world, and you can see it in the way we’ve structured it, right? So we gave ourselves enough levers at the beginning to pull, to be able to protect investors. And we pulled all of them turning COVID. but, the ability for us to do that is the, is the, the benefit of kind of the short duration nature of our programs.
so definitely tightened underwriting. Definitely need more track record to see how these, companies do during something like COVID. And if you can do well in COVID you’ll do well in good times, too. So that’s really kind of the mantra that we’re living by,
Ben: [00:45:08] what sort of investor for the individual side, is an ideal investor for cadence platform.
Nelson: [00:45:16] Yeah. I think someone who’s looking for diversification at the end of the day, I think, you know, every investor should have optionality. Every investor should not be concentrated on one thing. you know, sure.
If you bought, like you’re going all in on Tesla, you probably do have done really well for yourself, but it’s probably not the best portfolio allocation strategy. So the ability for us to, and the desire for an investor to want to diversify into things that. Yeah, generate passive income, recurring income.
that is always there’s one that we’d love to talk to you. I would say, in terms of our user base, it’s definitely people who are a little bit more savvier on the financial services side of things and understand this one a little bit better. but. You know, at the end of the day, if they are coming from well with the fact that they can have some equities, some debt, some private debt, potentially even some, you know, venture investments that they want to do, like true alternatives.
that’s a, that’s a great investor demographic for us. Gotcha. And
Ben: [00:46:07] it sounds like the interest rate is going to fluctuate
Nelson: [00:46:11] with this
Ben: [00:46:13] Dutch. Okay. It’s very difficult for me to say. but the maturity term, I mean, sticking to these, these shorter, you know, max, what’s the max on your platform four months right now,
Nelson: [00:46:23] maybe 12, but it’s very rare.
Yeah. yeah. And we’ve tended to go shorter, in light of COBIT, or we baked in what’s called like a call option, where the originator has the ability to call it a note and then B raise more capital or raise cheaper capital or whatever it is. But ultimately it gives investors the ability to get out as well.
So we do bake the call options, every single note that we have so far, and people have liked that flexibility as well. But, yeah, it’s definitely. Joining Colbert, we went way shorter. and then now we’re starting to go longer and longer again. That
Ben: [00:46:55] makes sense. And is there any liquidity before the maturity is up or you’re locked in for that three month, four month, 12 month period.
Nelson: [00:47:05] Yeah. So our competitors are looking at like three to five year lockups, and we figured if I can give you a one to three month lockups, you’d be okay with that. And we’ve seen that definitely to be, to be the case. So you can’t do anything with that prior to maturity, but hopefully you don’t mind holding it for 30 days.
Ben: [00:47:22] One would hope, right?
Nelson: [00:47:23] Yeah. It’s a
Ben: [00:47:24] little bit different than a VC or private equity
Nelson: [00:47:26] investment price liquidity
Ben: [00:47:27] after two months still high percentages.
Nelson: [00:47:30] Yeah. well,
Ben: [00:47:30] awesome. Nelson. Those are, those are the questions I added. where can people find out more follow you? Follow cadence?
Nelson: [00:47:38] Sure, absolutely.
You can check out our website. It’s a with cadence.io. You can always reach me. I’m happy to chat with every single one of our users or prospective users. I’m just that Nelson at, with cadence that IO and we’re on LinkedIn Twitter with the same, same names, wicked. so yeah, we’d love to have you check it out.
And our customer success team would also love to speak with you as well. If you have any questions. Awesome.
Ben: [00:48:00] And I’ll link all those things in the show notes, but really appreciate it. Nelson, really enjoyed this. And I personally am really interested in cadence and I know my listeners will be as well.
Nelson: [00:48:10] Awesome. Thanks so much for having me. It’s great. Speaking with you.
Ben: [00:48:13] Thank you there. You have it. Thank you for listening. I really appreciate your support. Show notes, transcript links, and more can be found on our
Nelson: [00:48:22] website at all. Asset allocation.com.
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Thanks again, and hope you have a fantastic day. Happy investing.