Nelson Chu is Founder and CEO of Percent.
What trends are getting underway that people may not know about but will be important?
While AI itself is a trend that people may actually know about, it hasn’t quite fully come of age yet as many companies are working to figure out how best to leverage it. Generalist AI is the current trend, but I believe sector-specific AI is coming next. The potential AI has to ultimately improve access to banking, credit, and financial products will be remarkable. The rapid advancements in AI, and deep learning, have meant that there will be an opportunity in 2023 for groundbreaking new technologies, such as OpenAI and other competing offerings, to be used and applied to fintech. Whether it’s smarter underwriting for loans, faster processing of large data sets, or the customization of financial products, all of it could be enhanced with what AI can do. The potential is limitless in many ways.
What are your expectations for 2023?
These next 24 months are going to be challenging to navigate for most, and it’s too early to tell which sectors and companies will be able to survive and thrive. Those that will excel will come from sectors that tend to be recession resilient. In order to better predict which are best positioned to thrive, it’s best to follow where the capital is flowing. Public equities are going to continue to be volatile and retail demand will be limited until markets stabilize. Private equity and venture will likely have some of their best vintages ever in this downturn for those brave enough to deploy capital in a downturn. Public debt returns are going to pale in comparison to private debt as new issuance volume will remain depressed for several years until rates are no longer as elevated. As a result, it’s likely that we will see a resurgence of private debt, similar to what happened post global financial crisis, and one needs only to look at what Blackstone, KKR, and other large institutional asset allocators are doing to see where the opportunity lies in the coming years.
Specifically, for private credit, 2023 will start similarly to how 2022 is ending, with interest rates still rising and inflation persistent. The year overall should be one of transition, as the tightening cycle comes to an end and the impact of the monetary tightening of 2022 hits the economy in a manner it hasn’t thus far.
Expectations for recession in the next year remain very high. Nevertheless, as rate hikes come to an end and inflation recedes, private credit investors may actually find a mild recessionary environment more familiar than that of 2022. If familiar risks can indeed be priced efficiently, the new year may still prove more conducive to deploying capital in private markets.
We also expect investor preferences to change in 2023 as the economic and interest rate outlooks evolve. If the economy enters a recession, better quality credits may see stronger demand. If 2023 sees the first rate cut of the new cycle, longer-term fixed rate deals may regain their appeal. Through Covid-19 and the inflation story of 2022, the Percent platform has facilitated successful transactions through both high rate and low rate market environments. Though deal structures, price, and terms may change, the fundamental need and demand for private credit 2023 will be no different.
What was the highlight of 2022?
The first half of the year was indeed a tumultuous time for the public markets, but at Percent we maintained a strong and steady growth trajectory across all of our business lines, as our platform was designed to offer investors solid opportunities for yield in any market environment. Then came the second half of 2022 where we entered times of uncertainty. But in a way, because of that, our private credit ecosystem is better suited for offering rattled investors a private-market alternative option that is known in the industry for having shorter-durations and higher-than-average APYs. To date, we have closed over 375 deals and powered over $1 billion in investments on our platform since the company launched its first deal in 2019.
Private credit as an asset class is having a moment although there’s still much education to do. Unlike the equity capital markets where deal volume has dried up (and deals that have gotten out have performed very poorly) private credit is an asset class that companies around the world use to power their businesses. There are still a lot of companies out there that need financing, so we are seeing a tremendous amount of liquidity and interest on our platform. And from a macro perspective, rates are rising — and while that may be painful for equity investors — the departure from the “free capital” environment means credit investors can actually be rewarded for lending capital. More than anything else, Percent is a platform where borrowers, investors, and underwriters come together.
It has also been great to see venture debt finally receiving greater attention. Historically, venture debt has been viewed as an add-on to equity but is now being considered a savior in lieu of equity. Here at Percent, we offer corporate loans, allowing VC-backed startups to access venture debt financing options quickly and with minimal dilution, and we have seen tremendous demand for it. The increase in demand for private credit also has highlighted how broken and inefficient the market currently is, showcasing the desperate need for technology, which our platform is providing.
