We Study Billionaires - The Investor’s Podcast Network - TIP588: Lucrative Opportunities in Private Credit w/ Nelson Chu

Starting point is 00:00:00 You're listening to TIP. On today's episode, I'm joined by Nelson Chu. Nelson is an experienced serial entrepreneur and the founder and CEO of Percent, the modern credit marketplace. After witnessing the inefficiencies in the private credit markets, Nelson was inspired to transform this industry for the better by offering investors a path to investing in the private credit space. During this chat, we cover why we may continue to see the decline in the use of the 6040

Starting point is 00:00:27 portfolio, how private credit fits into the bigger credit market picture, what has led to the massive growth of private credit since the great financial crisis, how a typical private credit deal is structured, default rates in private credit, how Nelson's company percent is helping satisfy the high demand in the private credit market, the most important things to know prior to investing in a deal, and much more. In my own learnings about the private credit markets, I discovered Nelson in the work his team is doing in offering investors access to deals with interest rates as high is 15 to 17%. And then this also seems to have shockingly low default rates,

Starting point is 00:01:02 which we touch on in this discussion as well. I find private credit to be a fascinating space, and I think you're really going to enjoy this episode. With that, here is my discussion with Nelson Chu. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected.

Starting point is 00:01:31 Welcome to the Investors Podcast. I'm your host, Clay Fink, and today I am super excited to be joined by Nelson Chu. Nelson, first time on the show. Thanks for coming on. Thanks so for having me. Great to be here. So Nelson, Barons, they recently had a headline that stated, it's time to buy bonds. And this tells me that people are either speculating that, you know, the inflation

Starting point is 00:02:00 dragon's been taken down and the Fed's going to be lowering interest rates or potentially we enter some sort of recession. and then they're forced to lower interest rates regardless. But I wanted to mention the I-Share's ETF, TLT, it's a commonly used barometer I see that people use to judge the bond market. I mean, that's down just shy of 50% since 2020 when interest rates were practically zero. So the bond market, at least on the longer end of the curve, is just getting hammered. And then I wanted to tie in here a point you made, I heard you make last year.

Starting point is 00:02:32 It was that essentially you said, we've seen the death of, of the 6040 portfolio. So in light of what's happened recently with the bond market, I'm super curious to hear your thoughts on why you believe this 6040 approach is inappropriate going forward. Yeah, absolutely. And I think 6040 was made a very, very long time ago. Let's be perfectly honest here.

Starting point is 00:02:54 And I think the entire premise of financial market efficiency is that you're going to see more and more products come to market naturally. So before it was just individual instruments and then you can invest in mutual funds. and then it became ETFs. And now there's a slew of private market activity in terms of just investing in things that aren't nearly quite as liquid, but can give you a lot of premiums that you couldn't really get anywhere else. And so with that as the backdrop, the reality is that I think 6040 has been dead for

Starting point is 00:03:22 quite a long time, actually, especially I think in light of, even like ETFs, for example, you can get some really weird, esoteric concentrations into like certain commodities or certain sectors or certain geographies that just change the game, I think, in terms of how. how you do asset allocation. And so if you just were to buy like S&P for your 60% and the 40% of like corporate bonds and call it a day, you'd be missing out on so much alpha and you would have for the last, you know, I would say several dozen years or so, give or take. So with that in mind, I think in this new world that we live in today where you have

Starting point is 00:03:55 a lot of different financial services companies, fintech companies, really pushing the envelope on providing access to what once was considered an alternative investment. you're seeing a world where I think optionality has never been higher for all these different investors and the ability to essentially diversify across a bunch of different things has never been easier than ever before. And so if that's the case, why stick with 6040, given all those things in the back of your mind? And you mentioned like corporate bonds, obviously, yeah, the long-dated corporate bonds are

Starting point is 00:04:24 going to get hammered. They're going to continue to get hammered in this type of market. And market volatility on the public market side is going to continue to remain very, very high. And all that being said, then I think it's time to look at alternatives, it's time to look at private markets to really bolster the portfolio to find things that are either countercyclical or just in general uncorrelated to the broader market. That's a great place to be. And it's really interesting how investors have had this 60, 40 sort of playbook.

Starting point is 00:04:50 After the great financial crisis, we saw interest rates essentially go to zero. I just checked the U.S. federal funds rate. Today, at the time of recording, it's sitting at 5.3%. It's slightly higher than what we saw in 2007, and it matches the federal funds rate we saw all the way back in 2001, 22 years ago. Economic theory would suggest that as interest rates rise, investors are going to start looking for those other options that you mentioned there, especially, you know, if a lot of their money parked and say stocks, you know, they want to go and find yield elsewhere, you know,

Starting point is 00:05:25 bonds, corporate bonds, or other types of fixed income securities being an option. Do you think that dynamic has played out to the degree that many would expect? Because it doesn't seem like equity markets have really moved all that much over the past year or so in light of interest rates increasing at the pace they did in the degree they did. Yeah, it's an interesting time. I think, especially in the equity markets, they don't really behave the way you'd expect it to. And so it's never been harder to just try and predict where the general bond. public markets are going to go. And you're seeing that. I'm not the only one that said that. Some very intelligent people that are far more successful than me have also said that that it's

Starting point is 00:06:02 becoming a very choppy and unpredictable market just in general across the board. So I think that's really more indicative of sort of where people's heads are at, especially since you have this like retail trading population that definitely doesn't abide by 6040, definitely doesn't abide by buy and hold. They're actually causing a lot of ruckus in the market, which is I guess kind of their intent. That's what they wanted. But it makes for a more conventional investors, it's a much more difficult path for them, and which means that it's all the more important to find yield and alpha from somewhere else. When this game that they used to play, it doesn't really, the rules aren't the same anymore. A while back on our show, I wanted to mention

Starting point is 00:06:38 global macroeconomist Richard Duncan. He explained that we don't live in capitalism anymore. The rules of the game have kind of changed. He actually explained it that the world more so resembles a world of creditism, which essentially means that the economy lives and breathes on the availability of credit. And it's hard to disagree with that. So given where we are in the world of credit, how things have changed over the past 10, 20 years as we described here, how would you say the state of credit is today, given where you're at and this and what you're seeing? So the consular credit has changed a lot over the years. There's always been like waves, I guess because you had the high yield market that really transformed how things were done in the 80s.

Starting point is 00:07:22 I think you had obviously CDS's derivatives and those types of products coming out to market, which changed a lot of things. But those weren't necessarily, I think, like retail oriented in some respects. It was very much like institutional paper trading hands among institutions, which is fine. And they became very, very big markets in their own right. It really took the global financial crisis in 08 to really kind of change the way credit is perceived in a lot of different respects. So, back in the day, pre-08, there was a whole lot of banks and bank activity around small business loans, consumer loans.

Starting point is 00:07:53 That was sort of their bread and butter, right, ultimately? And now, ever since the OA crisis came into effect, the regulations came in as well, they basically said you've got to stop lending the way you did. We're going to make it super expensive just to keep the activity that you had before because it obviously got you in trouble. And with that in mind, then we had all these banks saying, all right, you know what, can't do it anymore, going to pair back. But the demand from these small businesses and consumers didn't change.

Starting point is 00:08:17 So you have a huge gap in the market. And so what became what originally was a very, very institutional solution with institutional lenders became almost like anybody could actually become a lender if you have a lending license. And you had all these non-bank lenders come to market and face the consumer, which means that you had a lot of fintech startups. You had a lot of VC-backed companies really kind of coming front and center for consumers, which changed the way access to credit was essentially made.

Starting point is 00:08:42 Right. So everyone knows now, by now, pay later, you're seeing it all these different checkout things online. You can get a student loan not from the government. You can get it from like SOFi. So all these different things are making credit feel more accessible to the consumer. And it definitely is because there's never been more optionality than ever before. And so all that has made for a very interesting time where the consumer has relied upon credit more than ever. Small business have relied on credit more than ever. And they're getting it from all these different places that used to be reserved for banks and is now kind of any random place can actually be a lender and provide them the credit they need. And so inherently,

Starting point is 00:09:14 it doesn't surprise me that I think credit has taken such an important role in people's lives these days, maybe to the detriment of their own financial health in some respects, especially in tough times for sure. But it is something that I think is very much here to stay. And it's going to be, I think, a bellwether for the general economy as a whole. You start to see delinquencies tick up, default rates tick up. That's a leading indicator. I have like, what's to come? Because there's going to be other shoes to drop. Usually like the house. So the mortgage or the car is going to be the last thing that people basically stop paying. And so they'll stop their credit card first before they do that.

Starting point is 00:09:46 And that inherently means that if credit cards are having trouble right now, then you're going to see then a lot of things also start to change for the worse in the near term future. People love to focus on the Treasury market with the U.S.'s massive fiscal deficits and whatever the Fed is doing with their interest rate policy. But I think one overlooked asset class is exactly what you're mentioning, which is private credit. And I think this is a good transition point to. to talk about private credit because this is the epicenter of the work you're doing at percent. So how about we start with just talking about the key characteristics investors need to understand

Starting point is 00:10:21 about private credit to get a better grasp of this asset class? Yeah, for sure. So that's like I gave a little bit of a primer for it because, you know, banks stopped lending, private credit, non-bank lenders came in. That's all well and good. But what exactly is it, I guess, right? Because it is sort of a catch-all for all things credit that I would argue, I think powers a lot of the global economy. It just doesn't get a lot of credit for it, no pun intended.

Starting point is 00:10:43 So you have things like small business lending. You have things like consumer loans. You have things like factoring invoices for a granola bar company at Whole Foods. You have equipment leasing for could be like aircraft engines. It could be like heavy equipment, heavy machinery. You have litigation finance. So all these things touch so much of the broader population. They just don't realize it ultimately. And so it used to be done by banks. Now it's being done by these non-bank lenders. And because non-bank lenders in their name don't have a balance sheet because they're not a bank, they have to raise this money from other places. So historically, there's been a lot of different lenders that actually provide capital to these non-bank lenders in the form of like credit

Starting point is 00:11:24 funds or it could be like asset managers or even like insurance companies. But slowly but surely in recent years, there's been the ability to kind of access this asset class through startups and other kind of alternative investment platforms. And so consumers, regular retail, accredited investors, family offices, can get access to private credit through these types of platforms that just really wasn't possible before. So what do they look for? I think it's more complicated than a traditional corporate bond, that's for sure. There's a lot of bells and whistles associated with it. But the bells and whistle associated with it are almost like a necessity because you're investing in a pool of different assets, right? You could be have a pool of student loans,

Starting point is 00:12:00 a pool of consumer loans, a pool of small business loans. So the natural diversification from a pool means that you'll be able to actually ensure that hopefully the product performs that you invested in because if one defaults, you're not totally out. But even still, there's ways to essentially protect investors through, for example, like advancing them a lower percentage than the total amount that's outstanding. So for example, if there's one million in loans outstanding, they could only provide $800,000 worth of capital. The other 200 has to come from the lender. So there's things like that that you can control. So think of it as like a very, very structured heavily, I think financially engineered product to be able to better protect

Starting point is 00:12:38 the person who's providing the capital. That's kind of the best way to look at it. Do you know how big the private credit market is? Yeah, it's about a trillion in change. I think about last time it came out was like 1.3, 1.4, somewhere around there, but growing very quickly. It was only a couple hundred million pre-global financial crisis, so you can kind of see how fast it's accelerated.

Starting point is 00:12:57 You can thank the likes of KKR, Apollo, Blackstone, Aries, and bringing a lot of attention to the space, and they've been doubling down on private credit because especially in this market, whereas this hard and difficult to get returns, private credit has been almost like a safe haven or safe harbor in terms of just being able to find yield in places that is arguably slightly more predictable than the broader markets. Would you say the great financial crisis, you know, the kind of stricter regulation on the banks, that's been the primary driver of this growth ever since then, or is there other factors that need to be considered here too?

Starting point is 00:13:32 No, that was definitely 100% the largest driver of the growth. You're seeing it, too, even more recently with the demise of SVB and sort of that whole debacle earlier this year. The fact that the regulators are now looking at their activity and their behavior and saying, yeah, you can't really do that anymore. You can't, you know, for example, tie the interest rate that you're giving someone for a loan to the fact that they give you deposits. That is quite a bit of conflict of interest there.

Starting point is 00:13:57 You don't want to make sure it doesn't happen again. Whenever regulators come in and regulate the banks, you're going to have a natural reaction from the private markets that tries to fill that need. And so you're going to see probably another wave of private credit comes through in terms of interests, in terms of capital flowing into it. And it's going to be a really interesting time to be in the space. And it's pretty easy to see why investors would be interested in private credit. One, it offers higher returns than a lot of other credit markets.

Starting point is 00:14:26 and to some, it's probably a good sort of risk return profile, and it tends to be shorter duration. So that can give you a bit of uncorrelative returns. So I'm curious to get your take on just the overall benefits of what else has led to this growth and, you know, people seeing private credit as a viable option in their portfolio. Yeah, I think it's everybody wins in many respects, right? Because the borrower actually also wins. Everyone knows going public is very complicated on the equity side, right? There's a lot of work involved. There's a lot of cost involved, things like that. The same is true on the debt side as well. Issuing a publicly rated instrument is not as taxing, I would say, as like trying to go IPO, but it's still a lot

Starting point is 00:15:08 of strings attached to it. Why not just do it on the private market? And so a lot of borrowers are saying, why would I issue a public bond when I could just do it on the private markets, raise it faster, don't have to go through all those challenges and essentially get what I need from a very, I think, liquid market that's becoming even more liquid by the day, right? in terms of just demand. So borrowers naturally see that as a great option. And they're seeing it as a great option, which means that investors are also seeing that they've had more diversification capabilities than ever before.

Starting point is 00:15:34 But in terms of what makes it so interesting, it's an asset class that historically has generally been quite uncorrelated to the broader markets, if only for the fact that it's pooled or it's anchored by a bunch of collateralized assets underneath it, right? Could be small businesses, could be consumer loans, could be student loans, you name it. And much of that can be essentially directly, indirectly or almost not at all associated with public market activity, which is great. If the assets perform, if you picked great small businesses to lend to, whether the macroeconomy goes down or up, it doesn't really matter.

Starting point is 00:16:04 You'll still be fine, right? So they like that level of uncorrelation. On top of that, the protections afforded by this is actually pretty interesting. So even for us, like we provide products that have almost like 52 different levers an investor can choose from to be able to actually structure a product in a way. that suits what they're looking for. People have different risk thresholds. People have different size thresholds.

Starting point is 00:16:26 People have different just in general demands for what they expect. And so when you give them that optionality and that customization capability to do it the way they want it, it becomes supremely powerful. So all those things tied together is really, really helpful and interesting for an investor. And you hit on duration as well. Public market bonds, super long duration generally. Private market bonds are way shorter duration. So you can go as low as a couple months, really.

Starting point is 00:16:49 And so that in of itself is interesting. But it also means that because it's so short duration, it actually reacts faster to general market changes, right? Because it's going to have to reprice in a few months' time. At that point, then, the private credit market ended up spiking their yields significantly faster than the public markets did, because most of the public market just held on for dear life and said, I'm not going to go back out to market right now because it's to be more expensive than the last time I did it.

Starting point is 00:17:13 So let's just sit tight. Private markets don't have that luxury. They got to go. And if that's the case, then you've seen the yield spike, I would say, you know, several hundreds of basis points as a result of Fed raising rates. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is.

Starting point is 00:17:45 From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year, bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history. This is where you hear firsthand stories from people using Bitcoin to survive currency collapse, using AI to expose human rights abuses, and building technology under censorship and authoritarian pressures. These aren't abstract ideas. These are tools real people. are using right now. You'll be in the room with about 2,000 extraordinary individuals, dissidents, founders, philanthropists, policymakers, the kind of people you don't just listen to, but end up having dinner with. Over three days, you'll experience powerful mainstage talks, hands-on workshops on freedom tech, and financial sovereignty, immersive art installations,

Starting point is 00:18:37 and conversations that continue long after the sessions end. And it's all happening in Oslo in June. If this sounds like your kind of room, well, you're in luck because you can attend in person. Standard and patron passes are available at Osloof Freedom Forum.com with patron passes offering deep access, private events, and small group time with the speakers. The Oslo Freedom Forum isn't just a conference. It's a place where ideas meet reality and where the future is being built by people living it. If you run a business, you've probably had the same thought lately. How do we make AI useful in the real world? Because the upside is huge, but guessing your way into it is a risky move. With NetSuite by Oracle, you can put AI to work today.

Starting point is 00:19:21 NetSuite is the number one AI cloud ERP, trusted by over 43,000 businesses. It pulls your financials, inventory, commerce, HR, and CRM into one unified system. And that connected data is what makes your AI smarter. It can automate routine work, surface actionable, insights and help you cut costs while making fast AI-powered decisions with confidence. And now with the NetSuite AI connector, you can use the AI of your choice to connect directly to your real business data. This isn't some add-on, it's AI built into the system that runs your business. And whether your company does millions or even hundreds of millions, NetSuite helps you stay ahead. If your revenues are at least in the seven figures, get their free business guide, demystifying

Starting point is 00:20:07 A.I. at Netsuite.com slash study. The guide is free to you at Netsuite.com slash study. NetSuite. com slash study. When I started my own side business, it suddenly felt like I had to become 10 different people overnight wearing many different hats. Starting something from scratch can feel exciting, but also incredibly overwhelming and lonely. That's why having the right tools matters. For millions of businesses, that tool is Shopify. Shopify is the commerce platform behind millions of businesses around the world and 10% of all e-commerce in the U.S. from brands just getting started to household names. It gives you everything you need in one place, from inventory to payments to analytics. So you're not juggling a bunch of different platforms. You can build a beautiful online store

Starting point is 00:20:56 with hundreds of ready-to-use templates, and Shopify is packed with helpful AI tools that right product descriptions and even enhance your product photography. Plus, if you ever get stuck, they've got award-winning 24-7 customer support. Start your business today with the industry's best business partner, Shopify, and start hearing sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify. All right, back to the show.

Starting point is 00:21:36 And when we say shorter duration, give us an idea of the typical time frame, a private credit deal is structured. Yeah, it depends on the segment of the market that you play in. So the larger, this is, I think, pretty intuitive, but the larger, the size of the deal, the larger, the size of the issuer, whatever you want to call it, it tends to be longer duration for a lot of reasons, right? The issuer doesn't want to keep doing this over and over again, since they're so big, so it makes sense. The lenders they attract also don't want to keep doing this over and

Starting point is 00:22:03 over again. And so it is inherently going to be longer duration. For the lower middle market, which is the space that we play in, it's significantly shorter to the point where we do have stuff that's just a few months. And that's by virtue of the fact that oftentimes these are growing companies. And so inherently, they want to also grow as well. And the only way they can grow is to not have this loan sit out there for forever. Instead, they can refinance it, raise more money, and they keep continuing their path. So all that together makes for basically an easy way to think of it as like the smaller the deal, the smaller of the issuer, the shorter duration, longer the deal, longer the duration, and larger the issuer.

Starting point is 00:22:37 I'm also really curious to get your take on the primary players in this space. On the one hand, I can see, you know, this is a higher interest rate credit line. Why, you know, not just use like a line of credit at the bank? You know, that's probably easy to tap into, has a lower interest rate. But on the other hand, I can maybe see the flexibility that private credit offers in terms of not having to deal with the bank, maybe not have to do as much paperwork. So I'm curious to get your take, just to better understand where the product market is here for a business and what segment of the market it's addressing and maybe how that fits

Starting point is 00:23:13 into their corporate structure. I think it used to be easier to get it from a bank. It used to be easier to get at a level at the bank that was meaningful for you, right? These days, way, way harder, just in general. And the regulators made it a lot harder intentionally. So it's much, much easier to get it from a non-bank lender. They're going to be more, I think, loose in terms of their covenants and restrictions and things like that.

Starting point is 00:23:37 So it really is actually much more beneficial, even if it's going to be, to your point, more expensive to do it privately, that optionality, that choice, that flexibility is definitely something that I think the private markets will benefit from. So from an issuer's perspective, it's definitely usually more advantageous to go to a private market lender. Having said that, everybody who's on the private markets, who has taken capital from private markets knows that their end goal, their holy grill, their dream is to raise money from a bank in time, basically.

Starting point is 00:24:06 So they know that I want to start here. It's going to be expensive. It's going to get a little bigger. It's going to be less expensive. And we get bigger and bigger until finally a bank comes in and says, hey, I'll give you the lowest cost of capital you can possibly ever imagine. And that's going to be a great day for them. But because the banks don't do it on the smaller side anymore, they have to go to somewhere

Starting point is 00:24:23 else. And they're basically unbankable at the outset. And that's sort of where private credit has stepped in very nicely to fill that void. Used to be bankable, not bankable anymore. Now, one surprising, well, I should say really surprising aspect of private credit is the interest rates that investors are able to get on many of these deals. So talk to us about how interest rates are determined for private credit and maybe how those interest rates have been affected over the past couple of years as well. It's like pretty simple supply and demand, right? I think it's, and that's how generally things are priced.

Starting point is 00:24:58 If the tradeoff from an investor or lender perspective is that I can earn 5% nowadays or whatever it is for doing absolutely nothing, then any risk I'm taking better be way worth it, basically. That's the math that's going on in their head. So the smaller you go, similar to just kind of piggybacking off the last thing we talked about, the smaller you go, the higher risk it is, the more that investors are saying I need get paid significantly higher for this return. And because the duration is so short, they can demand that very quickly.

Starting point is 00:25:28 And so as much as we are a marketplace that offers private credit, we're also a data company. And so we see this, right? So you saw the original rates used pre-fed rate hike was hovering around like 11, 12% for all these different lenders looking for private credit. And then because the Fed raised rates, it's now at 17%, 18%. So you can almost pretty much see that like investors are looking for. for the math is the same, about 12 to 13 percent higher than the free rate they're getting,

Starting point is 00:25:55 right? That's almost like the norm here, specifically for retail, at the right least. Institutional investors definitely don't expect quite as much. And the large you go, like, for example, Blackstone's private credit fund is definitely not printing those types of rates. So it's just, it comes with the territory of how small you are, how large you are. But a good proxy is, you know, if the risk free rate is X, then I want significantly higher than X for private credit. Yeah, totally makes sense. The retail exposure, you mentioned 10, 11 percent prior.

Starting point is 00:26:24 Now it's in the 17 percent range. So just running the quick numbers, if a company that's taking on private credit loan at 10 percent a couple of years ago, if they're rolling that debt over and not really paying it off, they're issuing a new private credit deal issuing it at 17 percent, then their interest expense is up 70 percent, just looking at the interest, say, year over year, whenever they're rolling over that debt. My question is, are you seeing higher default rates in light of that? You are. Absolutely. And it's almost like a, it's a waterfall, right? Where if the original

Starting point is 00:26:58 source of capital is now more expensive, the lender then who needs to extend the capital out, the private credit lender, needs to raise the rates on their underlying borrower, the small business or a consumer or whatever. And the underlying small business or consumer is going to feel the crunch in their profit margins or whatever may be. They may raise prices to offset things. and you see the underlying client or customer that, like, for example, one of us going to buy something is going to see prices go up, right? So it is like a direct correlation across the board and you'll see it flow all the way through. So you have seen for sure the lenders themselves try to raise their rates to the underlying

Starting point is 00:27:31 borrowers and the reaction has not been great. So because we track all this information, definitely you're seeing repayment rates go down from these borrowers. You're seeing delinquency rates go up. You're seeing days past due of a loan increase and kind of get further. further out, right? So this is all happening. Now, there is just a question of how long it's going to be for, how long it's going to take. But the Fed has, I think, signals predominant pretty much that they would want to see material recessionary indicators before they try and drop rates again,

Starting point is 00:28:01 right? So there's going to be, I think, a world or hurt for at least another few quarters before it starts to come back again. And since you have this marketplace giving investors the opportunity to invest in these various private credit deals and a bit later, I want to get into the blended products, but I want to stick now with maybe just like looking at an individual deal. How do investors go about judging the risk in investing in a deal? And then what sort of due diligence do you think needs to be done prior to making that investment? Yeah, we try and basically give investors as much information as they would need.

Starting point is 00:28:34 And we try not to rush them either, right? So there's a lot of platforms that are first come, first serve. Definitely not the case with us. You do have pretty much ample time to look at anything and understand it really well. But we almost took like a public market lens to these private market transactions with, for example, like setting up a comparisons table where you can actually compare it against another deal that's on the platform for its structure, for its credit enhancements, for its asset modeling assumptions, things like that. You don't normally see that in private markets. And we've kind of pushed for that standard. We also do reporting every week and every month on the underlying assets as well within potential borrower's portfolio. And so to that end, they can see reporting from historicals and see how it's been trending. That's something of interest for them. And then we also have the obligatory private placement memorandums to be able to kind of basically see how we've looked at the risk associated with it.

Starting point is 00:29:24 And so I think the answer to that is for us, at least, and this is not the case for everybody, we offer a little bit of something for everybody, right, based on what they're looking for. We have high risk, high yield stuff, which you can make your assumption around yield versus risk to low yielding stuff that some would argue is potentially a little bit safer. It really is their call. we have asset-backed offerings, which means that there is a pool of loans associated with that essential product versus corporate debt offerings, which you're essentially betting on the success of the single company and its single obligor risk.

Starting point is 00:29:54 So all that's made available and fully disclosed, and it really just becomes a asset allocation strategy and approach, right? I will say, we have some very savvy investors and retail investors on the platform. I've seen some of them pretty much bank on the fact that I go for the highest risk stuff, whatever issues may happen where if there's a default, if there's a workout, I'll have made enough money where it comes out to be okay. I've also had retail investors say, give me like the lowest yielding stuff possible in this environment because I don't like the way the macro environment is trending. And so give me the stuff that probably will never default, right? So there's a wide

Starting point is 00:30:26 mix there. It really just depends on a investor appetite. And as all as we have something for everybody and give them as much information as we know, then they can make their best decision. And then what does the underwriting process look on your end? I'm sure everything doesn't doesn't make it onto your platform. So I'm curious on that aspect too. No, it rarely makes it. So we actually effectively stopped the bulk of the underwriting this year. So we actually have relied upon other underwriters who are extremely savvy in the space to be able to bring their products to market, which is not a bad thing, right? Because if you think about it, let's say I'm a credit fund. I had like a $10 million position. I don't want

Starting point is 00:31:04 to keep all 10 anymore. I want to kind of downsize like $7 million or $6 million. I I can then syndicate out that remaining position 2%, and they can essentially have investors get access to things that they definitely would not have been able to get access to without the platform. And so everybody wins. The investors are investing alongside an established credit fund who did the underwriting, and then also the underwriter themselves, the credit fund, has the ability to get to redeploy the capital into something else and bring down their balance sheet exposure.

Starting point is 00:31:32 So it is a win-win for everybody. And we have definitely a lot of those on the platform, but it really just, yeah, it depends on sort of how it works, but we still do credit review for all these transactions to ensure that they meet our level of standardization around deal structure. It meets our level of reporting requirements on a weekly and monthly basis. Those things are all kind of table stakes that have to be adhered to. Otherwise, we can't do a deal, essentially. And you guys opened up in 2018, might have went public to the market in 2019. Since then, what sort of default rates have you guys scene? Yeah, it's been over, slightly over 1% in terms of total default rate on the call

Starting point is 00:32:11 at $1.5 billion that's been issued so far. So I think not bad in general across the board. I would caveat that to say that I think the default rate was higher earlier on in our company's life. And then, you know, we've learned along the way in terms of how to change our structure, how to better protect investors, adding more credit enhancements, things like that, which is natural and just I think you grow up, right? You mature and then you learn. And the recent defaults that we've had is less about default and more about recovery rate or just total loss rate. We've had the last three transactions all essentially either get to a full recovery

Starting point is 00:32:45 or on path to a full recovery, essentially, which is great. That means that everything we learned and the structure itself is in fact working. And we hope to kind of maintain that streak going forward as well. That's amazing. I was going to ask about how investors should think about spreading out their bets, diversifying a bit within these deals. But, you know, if generally investors are getting their money back, it might not be as important as, say, diversifying across 500 companies in the stock market and such. I'm curious to get your take on how investors should, you know, spread themselves

Starting point is 00:33:17 out if they're getting into private credit. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving. Instead of chasing spreadsheets and screenshots, VANTA gives you continuous automation across more than 35 security and privacy frameworks. Companies like Ramp and Ryder spend 82% less time on audits with Vanta.

Starting point is 00:34:04 That's not just faster compliance, it's more time for growth. If I were running a startup or scaling a team today, this is exactly the type of platform I'd want in place. Get started at vanta.com slash billionaires. That's Vanta.com slash billionaires. Ever wanted to explore the world of online trading, but haven't dared try? The futures market is more active now than ever before, and plus 500 futures is the perfect place to start. Plus 500 gives you access to a wide range of instruments, the S&B 500, NASDAQ, Bitcoin, gas, and much more.

Starting point is 00:34:42 Explore equity indices, energy, metals, 4X, crypto, and beyond. With a simple and intuitive platform, you can trade from anywhere, right from your phone. Deposit with a minimum of $100 and experience the fast, accessible futures trading you've been waiting for. See a trading opportunity. You'll be able to trade it in just two clicks once your account is open. Not sure if you're ready, not a problem. Plus 500 gives you an unlimited, risk-free demo account with charts and analytic tools for you to practice on. With over 20 years of experience, Plus 500 is your gateway to the markets. Visit plus500.com to learn more. Trading in futures involves risk of loss and is not soon.

Starting point is 00:35:26 for everyone. Not all applicants will qualify. Plus 500, it's trading with a plus. Billion dollar investors don't typically park their cash in high yield savings accounts. Instead, they often use one of the premier passive income strategies for institutional investors, private credit. Now, the same passive income strategy is available to investors of all sizes thanks to the Fundrise income fund, which has more than $600 million invested and a 7.9% percent, 97% distribution rate. With traditional savings yields falling, it's no wonder private credit has grown to be a trillion dollar asset class in the last few years. Visit fundrise.com slash WSB to invest in the Fundrise income fund in just minutes. The fund's total return in 2025 was 8%, and the average annual

Starting point is 00:36:18 total return since inception is 7.8%. Past performance does not guarantee future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income funds perspective at fundrise.com slash income. This is a paid advertisement. All right.

Starting point is 00:36:42 Back to the show. I think it's still important, to be honest, because at the end of the day, anything that's in private markets is inherently more opaque than public markets, right? And it's also more illiquid than public markets. So the last thing you'd want is a situation where, you know, even though you invested in like two things that you thought were very good, you're now in a workout. Workouts take a long time. Like it, you know, you could be stuck there for two years, three years, right? And yes, you could be getting money back every single quarter, but still, there is a opportunity cost to, you know, what you could have done with that money

Starting point is 00:37:13 somewhere else, right? So I think diversification is 100% still the strategy here. And we do help people with that. It's been something that we've seen a lot of family offices. and investment advisors want naturally because they definitely want more of a set it and forget it mentality versus a, I'm going to manage every single thing and look at every single product and make sure that I like all of them. Like, that's definitely not their approach, right? So with the standardization that we've been able to create at the structural level, we can actually have family offices come to us and say, I want these specific criteria

Starting point is 00:37:43 and then everything that meets that criteria, I want you to algorithmically allocate into it up to a certain limit so that there's no one borrower that takes up, you know, a ton of the portfolio. right? And that's been a great success. And so you get that diversification, you get to penetrate a market or access to a market that you normally wouldn't be able to do yourself. And you get returns that are materially better in the broader market. But having said that, it's going to be lower than if you just went, you know, all in on the highest yielding stuff we have on the platform, obviously, because you are spreading yourself out a little bit wider just to be able to ensure that you have that diversification. You mentioned the family offices and then I know

Starting point is 00:38:19 registered investment advisors are also interested in private credit. How are they thinking about, you know, adding this to a portfolio? Is it a part of their, you know, what was their 40% bonds? Or how are they viewing the asset class generally? They're growing to like it more and more. I think the latest, we actually did our own research on this with alongside Coalition Greenwich. But the latest numbers we had was like 63% of family offices, asset managers and investment advisors want to increase their exposure to private credit 2024.

Starting point is 00:38:49 So that's pretty telling the grand scheme of things. And they want that because they feel that private credit is going to either match or outperform every other asset class on the street. So that's a great situation to be in. They, I think in many ways, they're looking for probably more access, better liquidity, things like that, which private credit can do under certain circumstances. But they're also looking for more transparency into it as well, just because, you know, it's normally a black box where you put money in and then you get a statement every month or every

Starting point is 00:39:16 quarter and you call it a day. It's like, what did I just put my money into? They're hoping for more details. on that. So from a timing standpoint and from an interest level standpoint, I'd say private credit has never been higher, especially for the institutional investors whose business it is to manage money, they haven't seen, I think, something like this in a long time where you can provide that level of uncorrelated alpha that you normally couldn't get access to before. I also think about just like pension funds, endowments that just have these massive amounts

Starting point is 00:39:45 of capital at their disposal. And just thinking about like so many pension funds just, you know, they're not going to hit their returns they need in order to pay out their distributions in the future. So I'm curious if you've seen any interest there or maybe there's sort of a regulatory barrier that they're not able to cross. No, not necessarily. I mean, so insurance companies is different. Insurance companies generally need to invest in rated instruments. And so that inherently leaves out a lot of the private credit market because much of it is unrated. But they also don't want to miss out on the party. They're trying to find ways to essentially invest in rated deals that aren't necessarily by the big rating agencies, the big three. And so they're trying to find ways

Starting point is 00:40:24 around it. There's definitely interest, but they just haven't been able to deploy it en masse like they probably thought they would. From pension fund standpoint, they got to put a lot of money to work, right? So we're talking about a 1.3 or 1.4 trillion dollar market and change, there's a lot more pension money than that. That's for sure. So there is actually right now, I think Bloomberg just came out with this article, which was like there was a $500 billion private credit problem because there's not enough place to put the money, essentially. So that inevitably means that, you know, I think if they need to deploy at scale, you're going to leave out or ice out a lot of the pension funds and insurance companies who need to deploy much larger sizes than what the private credit

Starting point is 00:41:00 market can handle as of right now. Not going to be forever, right? I think the answer is if there is demand for it, then supply will naturally kind of emerge. And I do expect that to be the case going forward. And I was also in preparation for this interview, seeing some barriers to the potential sort of growth of, you know, the market has grown over the past decade, but there's been some hurdles that still need to be overcome to enable further growth going into the future. So could you talk more about those barriers you're seeing? So it's always going to be low liquidity, high fees. I think that is the tailor-made attributes of a very, very nascent and opaque market.

Starting point is 00:41:40 And part of the research that we had done as well was literally everyone was saying the fees in private credit are way too high as of right now. So, I think, to be honest, if the market is truly efficient, you are going to see the ability for getting more liquidity out on a quarterly or monthly basis. You are going to see the ability to actually drop the fees because you want to be competitive. And so that all comes with, I think, just in general, a maturing market across the board. That's not going to be the case. You know, what you're seeing right now is not going to be the case forever.

Starting point is 00:42:09 That is for sure. And you are seeing more and more entrants into private credit across the board who are competing on price. And so it's going to be a race to the bottom at the end of the day. I fully expect that to be the case. In which case, it's really going to come down to who has the better deal flow, who has the better underwriting, and who has basically the better know-how to kind of be competitive and differentiated in the space. One of the things I like to do when judging any particular asset or, say, a individual company is look at how it did during very tough time periods and the great financial crisis is, you know, it's been 15 years now. since that time period. So it's been quite some time. A lot of companies haven't been tested to a similar degree until March 2020. So could you speak to the robustness of this asset class,

Starting point is 00:42:56 you know, how it performed in periods like the great financial crisis like the COVID crash in March 2020? I think it's actually been countercyclical in many respects, right? It grew the most during the global financial crisis because they solved liquidity need for a lot of different borrowers. It grew a lot during COVID as a result of the fact that, you know, everyone was absolutely scared and the only people still providing capital was private credit lenders, which is a great position to be in. Now, was it cheap? Definitely not. Absolutely not. But was it still kind of keeping the economy going? For sure, right? Like even to kind of put an actual statement on it, the PPE that people needed to kind of get into the door, right? Very few people have the

Starting point is 00:43:38 ability to say, I'm going to essentially drop a couple million dollars up front to basically get this stuff manufactured, get a distributed ship back to me, and then I can then actually use it. You would take a private credit lender who could factor the invoice that or purchase order that you have and then advance you the money to be able to get that PPE into the door, right? So you're not out all that money and all that risk. So it did well during COVID. That's for sure. And not just on the things that are on the healthcare side. There was a bunch of growth that we saw in e-commerce, that we saw in mobile gaming and all the mobile apps. And you saw a bunch of private credit lenders step up and basically factor and advance

Starting point is 00:44:16 a lot of money to e-commerce merchants, right, because they couldn't even meet their inventory demands from consumers. You had a lot of companies that were saying, yeah, I'll take your Apple and Google invoice risk, because obviously that's like a zero percent default rate effectively, just to be able to help you finance your growth, right? So great during that time. And then And when SVB went under, who had a huge venture debt portfolio and who had, you know, a lot of relationships in the space, you had a lot of people step in and basically say, I will take you, right? I will help you out.

Starting point is 00:44:44 And it became something of a, that was very interesting to observe that as someone who's kind of in the industry, that in times of need and in times of crisis, private credit tends to step up to the plate just because it is far easier to get a transaction done than it would be with a conventional bank and institution. During this episode, we've talked mainly a lot about private credit and the credit markets in general. So talk more about what percent is doing and how the sort of deals you're offering and the essentially all these opportunities to invest at these high rates that you're offering to accredited investors, these institutions and such.

Starting point is 00:45:19 Yeah, I think obligatory disclaimer, this is not financial advice, obviously, but we're going to try and give you as much context as possible here. So we provide a private credit marketplace. that allows for investors to get access to, what we like to think are pretty esoteric and interesting opportunities, they wouldn't really find anywhere else in the private credit space, right? So you can get access to Latin America consumer credit. You can get access to factoring of mobile app gaming companies.

Starting point is 00:45:46 You can get access to, you know, a lot of small business loans that are out to quality, small businesses in various different parts of the country. Like, it's all very, very available. And it really comes down to sort of what you're looking for at that. that point, right? You can say I want to invest in only things that are high yielding because that's a small portion of my broader portfolio, but I need this one to earn a lot of return. And that's going to be almost like a barbells, like alternatives, high yield strategy. You could say that I'm looking for things that are shorter duration, right? Because I actually value liquidity.

Starting point is 00:46:18 I have a big financial event coming up, whether it's to buy a house or whatever it may be. I just want to kind of make sure this earns something along the way while I'm waiting. We've seen people do that as well. We have a lot of different places and people that say, I don't want to manage this at all. And so just, you know, make a theme and I'll invest it that way. And then I never want to see this money again for 36 months, right? So there's lots of different ways to play it. And our job is really just to provide access, to provide information, and to provide diligence capabilities to make the best decision that's suitable for you as an investor. And it really just comes down to risk tolerance, appetite, size, things like that.

Starting point is 00:46:52 And we've seen a lot of people invest in different ways. There's one poor fellow before we actually launched this kind of like blended product where you get diversified exposure. He put, I think, like $500 in every single deal we ever launched, pretty much. And so that was his way of getting diversification, essentially. So props to him, but in my mind, I was just like, I'll just give me a little bit. I'll launch you a diversified product that you can then, you know, not have to do this anymore.

Starting point is 00:47:16 So it's something for everybody, really, is the way we look at it. Yeah, I want to talk about that blended products you just mentioned. I think one of the best developments in financial markets in general is Vanguard sort of pioneering this way to give rise to ETFs. And it really just gives people broad exposure to the stock market. So just investors can, you know, take on that exposure, get the returns and not have to, you know, risk their life savings in one or a handful of companies. And I think this ties well in. into your blended product. So talk to us about how this blended product works. What are the options and what's inside some of the more popular offerings you have? So there's two types of blended

Starting point is 00:48:00 products. One is one that we essentially created on behalf of the regular retail credit investors to get access to. And that could be basically $25,000 minimums essentially. And then we also have what we like to call bespoke products. And the bespoke products are created for individual family offices or investment advisors who want to kind of customize it their way. But that has like a $500,000 minimum, right? So it obviously makes sense. It's more work to do something fully custom. And for the ones that we create for the platform for the regular accredited investor, those are thematic. And so we have things that are like total market. Every single deal that goes out, it's going to go into it. That is that guy who invests a $500 every deal, great product for him.

Starting point is 00:48:39 We have the senior only ones. So a senior is just sort of where you are in the capital stack. And so you're ensure that you're basically the first to get paid back in the event of something going south. Senior only is obviously a little bit safer than junior or senior and junior mix or anything like that. We have high yield only. We have US only. We have all these different things, right, that are like basically themes that investors are going to get access to.

Starting point is 00:49:01 And we've seen definitely a lot of people invest in multiple different themes that just kind of fit their criteria. Or they invest in one theme that they know is going to anchor the portfolio. That's the bulk of their money. And then they have like a almost like a play account where they're, they kind of invests a lot smaller stuff in things that they find interesting. That could be like African credit or Latin American credit or the leasing company for consumers, for auto loans for consumers in Peru.

Starting point is 00:49:25 We got a lot of interesting stuff on here. The bespoke side is where it's a lot of control afforded to the investor, but those tend to be more sophisticated investors who have almost like an investment mandate. And if it doesn't meet that mandate, they can't invest. So they tell us what that mandate is based on all those levers that we have at our disposal to create a custom product, and then we just essentially automatically the algorithm that we allocate as long as it meets the criteria, and then they're done, right? They don't have to worry about anything. So it just comes down to how much size you want to put to work. The more you want to put to work,

Starting point is 00:49:55 the more we can actually create something much more custom. But to be able to provide diversified exposure for the average investor is fantastic. And then are the interest rates, the expected returns, are those still in the high teens for these blended products too? Mid-teens, naturally. Once you diversified down, you're going to get mid-teens, right? Because the weighted average APY of the platform right now is about 18 and change roughly. And that's being, I think, skewed slightly by corporate debt. And so corporate debt risk or obligor of single obligor risk. And that means that they're going to be in like the 20s right now.

Starting point is 00:50:28 We have a lot of family offices who said, I only want the asset back deals. That's going to be closer to like 14, 15 percent roughly. Right. So mid-teens is kind of where you can expect a lot of the basket products to shake out at because there's just so much diversification underneath it all. My next question here is the liquidity aspects. Once someone invests in a private credit deal, do they typically have to hold it to maturity? Or is there some liquidity there for them?

Starting point is 00:50:54 There's not traditionally much of a secondary market, to be frank, on the smaller side of the market. There's definitely a secondary market that happens in the larger institutional side. A lot of those transactions definitely have secondaries associated with it. Once certain lockup periods expire, on the lower middle market segment that we play in, investors obviously would love liquidity. And we kind of build in inherent liquidity by the fact that there's a lot of refinancing capabilities from the borrower. There's a lot of shorter duration products.

Starting point is 00:51:24 So while you can't get out of positions, if you know you invested into a deal that is, let's say, 24 months, but there is a refinancing option within three months, you're probably going to be able to see opportunities to get in and out of that through that time frame, basically. And I think a lot of investors, they don't want to spend their days and nights sifting through details of an individual private credit deal. So what do you think are some of the most important things to know prior to investing in a deal? And maybe some of the important things just to sort of look out for as you guys have learned and seen what's worked with some of these companies, what hasn't, and some of the red flags. I would say you should not make private credit the only thing

Starting point is 00:52:07 your portfolio. I think that goes without saying, right? But at the very least, there's a lot of information out there these days on these opportunities, especially on platforms like ours and others as well, that we try and make it as transparent as possible so you can better understand what you're investing into. I would encourage most investors to understand the structure behind it, because that's going to be essentially what protects them. There's a lot of terminology there, like DACA accounts, advanced rates, over-cloudization levels, like trailing 12-month default rates, like things like that. Some of it's, I think, second nature to some people and definitely brand new for others. Understand what that means. Understand what the impact is on your

Starting point is 00:52:42 potential returns as a result of that. So just really kind of getting better well-versed on that front would be super, super important. And on the corporate side, there's a lot of different like covenants. You have like leverage capabilities, whatever it is. Those are all things that, again, might be new terminology for a lot of people. So just really trying to try to understand that. I would not invest in any platform that doesn't provide recurring reporting capabilities around the underlying asset performance. We try and provide that, again, weekly, monthly, where possible. But look at those reports and see if you can understand, you know, how is the actual

Starting point is 00:53:14 underlying assets performing as a result of that. You understand the trends that have happened and, like, you know, be able to spot that and see where it's headed. And then in many ways, private credit, because it's so broad and diverse, is a bit of a blessing and a curse. But at the same time, you can actually then have almost like a, like a, like, a bet on it, right? Like, do I have a macro bet here? So we had a lot of investors that doubled down on e-commerce financing and a lot of factoring of, you know, digital transactions during

Starting point is 00:53:41 COVID, like peak COVID, right? Because that was their macro bet. We had a very, very hard time with small business lending during peak COVID, which I don't blame investors, right? Like, if all businesses are shut down and there's no cash flows, why would you invest in it? But those ended up performing extremely well for the investors who took that risk. But, you know, they didn't want 10, 11, 12%. They want it 17, 18%, right, to make it worth their while, which makes total sense, even in a zero interest rate environment. So it really is, I think, just be able to educate yourself on sort of how it's been structured, be able to have your own DCs around where the economy is headed and pick a sector that's interesting for you. I'd also like to just ask for

Starting point is 00:54:22 resources if people just want to learn more about private credit. Maybe aren't ready to invest themselves, but they are interested in this kind of a trillion dollar market, still somewhat small. If they want to go to learn more, just like resources that come to mind for you, I'd love for you to share those. We definitely try and educate as best we can. So there's a lot of education material on our site alone. But I think just keeping up the news, you'll start to see a lot of different things. And obviously, you know, it is KKR, Blackstone, Aries, most frequently in the news, which is understanding the types of transactions that they're doing,

Starting point is 00:54:54 understanding where they're placing their bets. that's all going to be super, super helpful. But I would say most platforms have some sort of like research capabilities or resource capabilities and just dig into it, understand the terminology, understand sort of why things were structured a certain way, and then you'll be better off because of it, and you can start to make your own decisions. But yeah, it's never been easier, I would say, to invest in private credit. It's also never been easier to learn about private credit given how much it's been in the news recently. Yeah, such a fascinating space. It's something I'm definitely going to keep an eye on, see what's happening when markets are going to haywire

Starting point is 00:55:27 and investors get nervous about, you know, providing that liquidity to businesses that need it. And, you know, COVID is just a prime example where I'm sure so many people just didn't have the money. It was a liquidity shock and those investors that step in, it's just can be a huge opportunity at certain points. And then especially just during kind of more normal market period, it's just the interest rates you can get just seem to be incredible. So Nelson, this is a really informative chat. I really appreciate you coming on the show. I want to give you a chance to give a hand off to the audience, how they can learn more about you and check out Percent if they'd like. Absolutely. It is. Thanks so much for having me. I love these types of spirited conversations.

Starting point is 00:56:06 So we are pretty easy to find. It's just percent.com. And so like I mentioned, there's a lot of educational resources on there. Our customer success team, always happy to chat with you. And that's just at hello at percent.com. Or you can always use a little chat bot on the bottom right. and I'm pretty easy to reach as well, Nelson at percent.com, if you ever want to learn more and hear from me directly. Always happy to chat with anybody and everybody who's interested in me and what we do. Wonderful. Thanks so much, Nelson. Thanks so much. Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com.

Starting point is 00:56:50 show is for entertainment purposes only. Before making any decision consult a professional, this show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP588: Lucrative Opportunities in Private Credit w/ Nelson Chu

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.