Ash Patel interviews Nelson Chu, founder and CEO of Percent, a credit marketplace. Chu discusses how Percent, started in 2018, fills gaps left by banks post-financial crisis, offering private credit lending, including in real estate. He explains how Percent caters to non-bank lenders needing to raise money and highlights the increasing demand for private credit due to banking regulations and changes.
Nelson Chu | Real Estate Background
- Founder and CEO of Percent
- Based in: New York City, New York
- Say hi to him at:
- Greatest Lesson: Previously started a company that failed; business is about timing.
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Transcript
Narrator:
Quick disclaimer, the views and opinions expressed in this podcast are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to bestevershow.com.
Nelson Chu:
If you have someone who is looking to make an acquisition on a single family home or they have a network of homes they want to acquire, then they can actually likely be paired with an underwriter who knows that space well and then we bring the transaction to market all together.
Narrator:
Welcome to the Best Ever Show, the world's longest running daily commercial real estate podcast. Our hosts interview commercial real estate experts every day to get you the best advice ever with none of the fluffy stuff.
Ash Patel:
Hello, best ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I'm Ash Patel and I'm with today's guest, Nelson Chu. Nelson is joining us from New York City. He is the founder and CEO of Percent credit marketplace, providing access to investors, borrowers, and underwriters to private credit. Nelson, thank you for joining us and how are you today?
Nelson Chu:
Good. Thanks so much for having me. I need to match that energy. So yeah, it's going to be a fun conversation.
Ash Patel:
All right, let's do it. Nelson, before we get started, can you give the best ever listeners a little bit more about your background and what you're focused on now?
Nelson Chu:
Absolutely. So I founded this company in 2018 after a very brief stint in finance. Percent is a private credit marketplace, like you mentioned. We provide alternative investment opportunities for retailer credit investors, qualified purchasers, into unique private credit opportunities they can't really find anywhere else.
So private credit, for those who don't know, is the most in demand asset class right now. It covers a lot of things that you probably have experienced, but definitely didn't realize it was private credit. So these are things like small business lending, consumer loans, factoring of invoices, equipment leasing, and real estate, obviously also as well.
So this all happened post global financial crisis, these private credit lenders emerged to fill the gap from the banks and we are here to help transactions happen more efficiently, more seamlessly, and really move this market forward.
Ash Patel:
Nelson, when did you start percent? Was that 2018?
Nelson Chu:
Yes, so a little over five years now at this point.
Ash Patel:
Okay, so post COVID, banks were healthy, everything recovered in 2018. Banks were trying to give people money. So how did you compete with them?
Nelson Chu:
Actually, we got to rewind back to the global financial crisis of 2008 because that was really when the regulator stepped in and said, hey, there's a lot of things that you guys did on the lending side that weren't very good. So we're going to make it very expensive for you guys to lend, higher reserve ratios, all these different rules around reporting, things like that. So the banks just kind of said, you know what? That's it. I'm out. Not going to do it anymore. So you had a lot of non-bank lenders step in to be able to fill that void.
And in the name, a non-bank lender is not a bank, so there's no deposits. So in order for them to fulfill those loans, they have to raise money from elsewhere and they tap into the private credit markets for that. So some well-known names that you may recognize would be SoFi was a private credit student loan lender. Affirm, buy now, pay later, was a non-bank lender. Those are all companies that emerged post global financial crisis to fill the gap and the demand for loans by small businesses and consumers alike.
Take a company like Affirm. Where does their capital come from? Not from their balance sheet, because that's the most expensive capital they can have. It's usually venture capital money. So you kind of want to separate out the equity from the debt. So a firm in the early stages, granted, a firm was founded by one of the PayPal founders. So getting debt capital is probably not the hardest for them, but for the average private credit lender, it is a lot more complicated. But they had to raise money from private credit marketplace participants.
That could be an Apollo or an Aries or a Blackstone at the later stage or a smaller credit fund at the earlier stage, depending on the size of capital they need.
Ash Patel:
Nelson, has your business demand gone through the roof in the last six months because banks are tightening across the board? Even the ones that were the Wild West banks are even settling down and tightening up their books.
Nelson Chu:
I will say that's kind of what happens when regulation happens for the banks. Every time the regulators step in, they watch their activity, especially in light of Silicon Valley Bank going under.
And that leads to a plethora of private credit demand because private credit in general just moves faster. And that is applicable to things like small business lending and also to real estate as well. A lot of people do actually chase after construction financing through private credit because it's faster than a bank. So we have definitely had demand go through the roof. I think Q4 of this year will be on pace to basically do as much volume as we did in a normal year for a full year. So that tells you sort of the velocity of growth to this point.
Ash Patel:
When you saw those bank collapses, did something inside of you cheer because you knew your business was going to go through the roof?
Nelson Chu:
You can't cheer the demise of companies. That's not a good thing. But at the very least, I did say there might be an opportunity here based on what's happening. We've been actually championing private credit since we got started, 2018. And we kept thinking there will be a moment when private credit has its time in the spotlight. I don't know when it's going to come, but it will come. And fortunately for us, it definitely peaked this year.
We leveraged that momentum to be able to raise our series B of venture capital financing, which was great. And obviously, it's led to a banner quarter in Q4 as a result. And that's all, again, coming off the heels of Silicon Valley banks going under and the regulators stepping in and us being able to help fulfill the need that's coming from that space.
Ash Patel:
Nelson, we'll dive into today's climate, but I want to focus back to 2018-1920. Money was cheap. Why would you start a company doing private lending when banks were pretty accessible, SBA loans were out there, interest rates were very, very low? Did you anticipate something in the future causing a windfall, or did you really think this was a sustainable model with rates that were that low?
Nelson Chu:
Sure. Here's the interesting part, and we've learned this having lived through pre-COVID, peak COVID, post-COVID, post-Fed rate hike. It's been a very interesting five years to say the least.
But because of our investor base being more retail oriented, so accredited investors, as well as family offices and investment advisors, they have a different threshold of what they're looking for in terms of yields. And because we are a technology company, we do track all this data, we do standardize and normalize it. Essentially what we've learned is that no matter what the rate environment is, investors who are looking for yields in this type of alternative investment asset class are going to want anywhere between 10 to 12% above the risk-free rate.
So in 2018, 2019, 2020, like you mentioned, the rate was effectively zero. Investors wanted 10 to 12%. That's not unusual. In this environment today, we're recording this in November of 2023. Investors are asking for, retail investors specifically, are asking for 17, 18%, essentially. So no matter what happens with the rate environment, there will always be investors looking for roughly 10 to 12% spread above the risk-free rate.
The challenge is for the borrowers who need that capital, it's going to be expensive. They're going to have to live with this new normal that we're in. But things have changed recently, at least the market's priced in, at least the Fed not raising any more rates from here. And then also probably rate cuts in Q2, Q3 of 24, roughly around there. And that certainty has changed the dynamic with these borrowers to say, okay, we know the end is in sight. There is a light at the end of the tunnel. We just need to get through this next phase and then things will start to look better. That certainty has changed the demand in the market as well because they know that it's not always gonna be more expensive when they come back out to market to raise more money.
Ash Patel:
A 10 to 12% premium above what the market's offering indicates that you are very expensive to borrow from. If I wanted to do a new construction loan, what would today's rates be?
Nelson Chu:
Depends if you can get it or not, I think is the big thing, especially from a bank. But I would say it depends on how the assets are collateralized and a lot of different things that go into that process. But the reality is in most instances, these private credit borrowers are in the private credit market because they can't get financing from a bank. They may be too early stage, they may not have enough history, a lot of different reasons. So they can actually afford the premium because that's kind of the cost of doing business.
Ash Patel:
Well, let's dive into that because right now, banks are not touching office buildings.
Nelson Chu:
Yep.
Ash Patel:
And my opinion is this is a once in a lifetime opportunity to buy office at incredible prices, new construction, new development. Banks are very weary on that. So you might be a great alternative if we come to you and want to buy an office building, want to buy land to develop on. Let's assume we have deep pockets. What would the loan look like?
Nelson Chu:
We've actually done that before. Obviously there's a lot of move towards converting office into affordable housing. That's definitely a push that's happening, especially in major cities. So we actually helped a group raise mezzanine financing to purchase an office property and redevelop it into affordable housing. So with remote work being the thing these days and occupancy rates coming down, this concept of converting distressed properties into housing is definitely more and more of a trend.
And the reality is they'll likely be able to do a cash out refinancing at a lower interest rate once this all gets completed. So a project timeline roughly from acquisition and takeout financing is 18 to 24 months, give or take, based on what we've seen. And private credit allows this deal to move forward way faster than traditional bank financing. And it's basically which is actually more suitable once the property is redeveloped and stabilized. So start with private credit, move to the bank afterwards. That's a very common theme that we're seeing. And we're happy to help out in that process as well.
Ash Patel:
Nelson, I want terms. Give me a term sheet. What does my loan look like?
Nelson Chu:
It's going to be slightly more expensive. I will say that for sure. But especially on the mezzanine side, it's always going to be slightly more expensive. So I think that one price I got to check exactly, but it was going to be in that call it 10 to 12 above the risk-free rate is going to be where we shake out. Realistically, that's just sort of what the appetite is looking for from the market right now. From the investors who have capital.
Ash Patel:
So realistically, we're looking at 17, 18 percent to get the deal done?
Nelson Chu:
Yeah, realistically.
Ash Patel:
Are there upfront fees points on top of that?
Nelson Chu:
Sure, so we kind of bake it all into the process. So the amount that we raise from the platform, either we underwrote it or somebody else underwrote it. We essentially take a couple points depending on the actual underlying assets and that's about it. So just a straight up syndication transaction fee, everything else is yours to keep, interest only generally for the foreseeable future until it amortizes down or you can find a way to refinance it.
So it's all, I would say pretty borrower friendly in the grand scheme of things, as long as you can stomach the rate. But again, this is the market that we're in today. Ask me when rates come down, I promise you it's not going to be nearly as bad. So even if you can't get bank financing then, private credit is still a great option and it'll be a lot more affordable in terms of cost of capital at that point in time.
Ash Patel:
Yeah, I don't know that you should feel guilty for charging this because you're providing a solution.
Nelson Chu:
Correct.
Ash Patel:
So if we have a listener who is looking at a single family house, is that too small of a deal?
Nelson Chu:
It's probably not too small, but we generally would need to see some track record too that they've done this before. And we do actually have a partner network of underwriters who usually take that deal on. So just to recap sort of our history here, but because we were also new to private credit, we actually spent the better part four years underwriting every deal.
We did about 1.5 billion in total volume ourselves on the platform, a couple hundred transactions, and we learned a lot about what it took.
So we then standardized deal structures, standardized ongoing reporting post-close, and brought all the market participants together. And then after that point, starting this year, we basically said, yeah, tech is in a pretty good spot. We are still a tech company at the end of the day. So we opened up the platform to other underwriters. So we have no shortage of credit funds - sell side, buy side, placement agents, investment banks, who leverage the platform to bring transactions to market that are their clients.
So if you have someone who is looking to make an acquisition on a single family home or they have a network of homes they want to acquire, then they can actually likely be paired with an underwriter who knows that space well and then we bring the transaction to market altogether.
Ash Patel:
So the underwriter would be a third party, but the funding still comes from your platform?
Nelson Chu:
Correct. Exactly.
Ash Patel:
Okay. Now let's finish that example. Somebody that just does fix and flips, they want ease of getting their capital. They just want a smooth transaction. What does that look like? Do they jump through a bunch of hoops? Or if they show you their current balance sheet, they show you their track record and they need $300,000 for the next house. What does that process look like?
Nelson Chu:
It's not that different from a bank, to be honest. We expect the same level of information.
I think the only caveat is we actually have a tech portal they can use to upload information and have it be standardized and all that stuff that they don't have to worry about. So technically it should make their life easier in the grand scheme of things. Pairing with an underwriter is going to be the big question mark, but I will say that the first transaction tends to be the hardest and most difficult in terms of time consuming because we're all trying to get to know each other. And then after that, we've had numerous instances of borrowers who add on, refinance, all these things. And those are very, very quick at the end of the day as long as they attest to certain compliance requirements, allow us to actually monitor their portfolio, things like that, then we're fine.
So we had many instances where they start with $300, $500,000 and by the time all is said and done, they grow, it's like $5, $10 million before they start to go towards the more traditional bank route or any sort of credit fund manager route.
Ash Patel:
Yeah, I can feel that you don't love these hypothetical stories, so I'm going to throw another one at you. One million dollar land acquisition, five million dollar flex development. Okay, what do I need down? Is this a draw process? How do I get funding? I found a great piece of land. It's a million dollars. It's going to cost me 5 million to build 100,000 square feet of flex space. How does that process look?
Nelson Chu:
In general, we've done things like milestone financing as well, because you're not going to need the full amount on day one, you're going to reach certain targets. And then you can go from there.
I would say the process of getting that going is effectively us vetting the transaction and seeing if it fits our criteria. That is usually, I would say, roughly a two-week process as long as the borrower moves as quickly as we move, essentially. So it depends on how much they want to divulge. But in terms of the actual syndication period, we can give a lot of guidance around how much to expect in terms of capital on day one because we have so much data of past transactions, current market demand, things like that. If that all goes well, then they'll raise their first tranche and it's all well and good.
And in terms of the draw periods and things like that, we've done delayed draws as well, and that delayed draw can be done on a milestone basis. We do have investors who are familiar with real estate, so they actually are pretty comfortable with that type of concept. It's not new to them at the very least. So this is all part of the process, but it is definitely case by case. We're gonna have to actually see the underlying assets, see the land itself, all those different things, or we will bring in an underwriter who's far more knowledgeable than we are on this in particular, and they would be able to vet this process.
We've also had instances where underwriters essentially have done the deal themselves. So you're talking about $6 million. They'll do the $6 million on their terms, whatever they want. And then it's likely that they probably don't want to hold on to the entire $6 million themselves. They may want to syndicate out a position. They may say, you know what, it's six. I actually only want four of this, so I'll syndicate it out onto the platform. The borrower doesn't need to do anything, to be perfectly frank. They're as is, no difference.
But the credit fund actually in general would have a better time of being able to downsize their portfolio, as well as be able to deploy into new opportunities essentially. So we've had the almost like opposite end of that trade as well, which is deal already done and then we have lots of different credit funds in the real estate space or any other space that leverage the platform for syndication to downsize exposure and rebalance their portfolio.
Ash Patel:
Are you competitive with down payments by putting 20, 30% down on a project like this?
Nelson Chu:
Yeah, the equity haircut depends on the asset, obviously. So we have done as low as 5% down for certain assets or 5% equity haircut, all the way up to 40%, 50%. So it really depends on the asset and that's going to be case by case. I can't really say one way or the other. You'll have to see on the data.
Ash Patel:
You mentioned you also fund small businesses. What's your risk threshold? If I want to start a restaurant, how risk averse are you guys?
Nelson Chu:
We've done corporate loans before and it usually is the flavor of either net income positive companies or venture debt. So for those who don't know what venture debt is, it's effectively a VC or venture backed company and the goal of that is to help them see them through their next round of financing, whatever that may look like. So those are most assuredly not EBITDA positive companies or net income positive companies, but they have a high growth trajectory and they have a good chance of getting there.
So on the one hand, the net income positive companies, that's traditional corporate debt underwriting based on all the metrics you'd expect, your balance sheet, your income statement, your P&L, things like that. And then on the venture debt side, it's almost like equity level underwriting as to do I believe this company has a chance for the future because that's what the VCs are betting on as well. So two opposite ends of spectrum basically, we have done both.
So if you're gonna say here, I wanna start a restaurant one, you would definitely need an underwriter to have stepped in and take over that responsibility of funding it first effectively and then we can see how it performs, whether it makes sense for our platform or not. So we wouldn't be the ones to basically target a singular small business effectively. But oftentimes in that instance, if there is cash flows coming out of a restaurant or a franchise, for example, you don't go down the corporate debt route. You actually go down almost like a whole business securitization where there is hundreds of either franchises or restaurants together.
Those cash flows are actually securitized and packaged up. And that is a much more safe investment for the capital allocator on the other side than a single restaurant exposure effectively. So lots of different ways to play it.
Ash Patel:
Okay, so you're not like the SBA where I can just go with a business plan and a dream and get a ridiculous amount of funding. You're a little bit more logical.
Nelson Chu:
Not to say the SBA doesn't do a good job because I think they serve a very important purpose, but I think we are much more...I would say traditional institutional capital markets minded is the way to think about it.
Ash Patel:
Understood.
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Ash Patel:
Do you take on retail investors if I want to be on the back end and say, Nelson, deploy my capital and give me high returns? Is that an option or is it all institutional grade?
Nelson Chu:
No, no, not at all. I would say retail accredited. Accredited is the only criteria because of regulatory reasons it has to be accredited. So it's going to be 250k net income or a million dollars in liquid net worth that has to be attested and provable. As long as they meet that criteria, they can invest on the platform directly.
So we have two ways to invest. There's lots of investors who like to manage their own portfolio. So they're going to basically say, oh, I like Latin America consumer credit and I want US small business loan exposure. By all means have at it. We have all those different options for you. And then on the flip side, we have some investors who are used to having their money managed, in which case we can create what's called a blended note. So think of that as a separately managed account or an SMA like product, similar ETF in some respects.
You can say, I want real estate only, for example, that could be your choice, US only, in the senior position only, with all the equity haircut of at least 20%, something like that. And then we can algo-allocate into all the deals that come up that meet that criteria. So a bit of a set it and forget it approach, essentially, but very attractive for investors who really don't want to be doing diligence on every single deal and rather just get a basket all at once. It really just depends on the investor and what they're looking for for their portfolio allocation.
Ash Patel:
This is wild. I like this. So I get to play VC essentially.
Nelson Chu:
Technically, yes. Although you didn't hear it from me, but yes.
Ash Patel:
Okay, so realistically, can I achieve 14, 15% returns by doing this?
Nelson Chu:
There is additional fees for the managed product than it's the direct deals. So just to outline the fee structure pretty clearly, it depends on your criteria as well. But on the direct deal side, what you see on the APY is gonna be what you get
less 10%. So we take 10% of the interest that you'd earn. For easy math, if it's a 15% deal, your take-home rate will be 13.5%. Simple math. On the blended product, because there is still a lot of work even though it's algorithmically allocated, you have to meet all the eligibility criteria.
We do go out to market and source opportunities that meet that criteria. So some extra work on that side. We do charge a 1% management fee on that, on an annual basis, aggregated, but taken out monthly. o that is going to add on top of the service fees that we charge at 10%.
So you could have some investors who said, give me the highest yielding stuff possible, AKA the highest risk stuff possible. They are tracking closer to 22% or 20% net of fees. So yeah, achievable. Do I want that to be the only thing in our portfolio? Hopefully not realistically, because high risk, high reward, that's always how it comes together.
But if you're looking for 14, 15 in that range, then you can definitely create a product net of fees that fits that criteria with a diversified pool of ABS products, as well as corporate debt products, as well as real estate products. It really all depends on what you're looking for.
Ash Patel:
What's the highest rate you've charged?
Nelson Chu:
Oh gosh. It has been roughly in the range of 25 to 27% was the ultimate yield on that. It is performing quite well. It was a junior position on the med side. It wasn't on senior. Senior never gets that high. That doesn't make any sense.
Ash Patel:
Nelson, do you have a marketplace for me to trade my holdings? For example, if I want to cash out of everything, do I have to wait for these loans to mature or can I sell my holdings?
Nelson Chu:
Yeah, it's a great question. So initially we would say no, and that was pre us getting our broker dealer approved. Having said that, if you are to directly manage your investments yourself, you can actually see the maturity on there and some of them are pretty short. So we have a lot of stuff under nine months and with the structure that we have, it's very borrower friendly, but in return it's also very investor friendly if they're looking for liquidity. There is what's called a call option built into a lot of these structures where if these borrowers are growing, they're actually incentivized to want to raise more money the next go round.
So they'll take that call option in order to raise more capital and that happens within a two, three month timeframe. So, theoretically, there's almost like inherent liquidity in these structures built into it. On the managed product side, because there's cash drag, you want to make sure it all gets deployed. Those are going to be more in the range of 24 to 48 months. And that doesn't have liquidity as a result of that until recently, at the very least.
So recently, because of our broker-dealer license, we are able to actually affect secondary trades. And that's a standard marketplace. Bidders or buyers are going to want to buy at a discount. Sellers are going to want to sell at a premium. And we find a way to make that market.
So as long as there is a demand for both sides on the bid ask, then we can actually make a transaction happen. And we've done a few already. So it's been pretty interesting to observe and see how it all works out. I think in all these instances so far, the buyers got a discount and the seller took a slight bit of a loss, but lots of reasons for someone to want to sell out of something. And they likely also probably made enough on the interest that it was technically a win in that regard anyway for the seller.
Ash Patel:
Nelson, on the call option, you need the borrower's cooperation. Is that correct?
Nelson Chu:
Yes. So there's no secondary market where I can sell my loan. That was pre-broker dealer. There was no secondary market. Now there is an option to say, if you are looking to sell, let us know what your sell price is, probably at some sort of premium or at par, up to you. And then you can decide whether that's what you want to do. And then we'll see if there's any buyers on the other side for it.
We are just launching this. So we did our first trade. Actually, first trade is happening sometime this week. So brand new, literally hot off the press, but we are going to start building tech around this to be able to facilitate trades in a much more efficient manner.
Ash Patel:
I would have to sell at a discount, not a premium, right?
Nelson Chu:
It depends. There are certain deals that we know for a fact where it was super oversubscribed. Lots of investors wanted it. And if the premium or the yield is already called 15% for easy math.
Yeah, I'm willing to lose 1.5 on the upfront because I know that at least I'm able to get into this deal and it's a very good deal. So there are certainly going to be instances in oversubscribed deals where buyers may be willing to pay up and sellers can just, who got allocation, say, hey, I want out. This is very common in the public markets as well, where a lot of people who in oversubscribed deals, the sellers are actually selling immediately after the deal is done because they got allocation. So the buyers who got kicked out are more than eager to at least pay up a little bit to be able to get access to it. So we are testing a lot of these different strategies to be able to affect the market here.
Ash Patel:
Interesting, is this first come first serve if I want to manage my own capital, deploy in these loans, do I just need to stay glued to the platform and see what's coming out?
Nelson Chu:
Most other platforms are actually first come first serve. We knew that shouldn't be the case because one, we all have jobs, so I don't want you to be sitting in front of our platform all the time, although that does make my metrics look very good in terms of usage rate and daily active users. But the reality is, we model this much more after the institutional markets. So in the institutional markets, it's not first come, first served by any means, and you actually are putting in bids based upon the rate.
All of our deals that go out have different rates. For example, it could be 14, 14.5, 15, 15.5, and 16, and you can say at which rate is the minimum you're willing to accept, recognizing that if it closes above that rate, then yeah, I'll take a higher rate, no harm, no foul. And then we get all the orders that come in as a result and up to the syndication period. Now when we see that, there are prioritizations being made.
So for example, the investors who are in a blended note, that SMA-like product, they get priority allocation because it's part of their eligibility criteria. It meets it, right? So they're going to get there first. The retail investors who are essentially investing directly, are gonna get essentially prorata allocation based on what's remaining. So you don't actually have to be first come first serve. You just need to see how the rate comes together. But we've seen a lot of interesting, almost like game theory dynamics happen here.
So for example, we have had investors, because the order book is public, who say, okay, this deal at the highest rate, as much as I love the highest rate, is 2X oversubscribed. So I'm gonna drop my rate to be able to ensure that at least get into this opportunity.
And because it's so oversubscribed, I'm also going to pad my order because I know I'm going to get prorata proportionally down. So let me just make sure I get as much as I can in this trade. So when deals are super oversubscribed, they become even more oversubscribed at an even lower rate because everyone's doing the same thing, essentially, to ensure they get allocation. And that's actually what you see on the public and institutional markets as well. The same type of behavior happens.
Ash Patel:
Now if there's a delta between what I as an investor am receiving and what you're charging, I'm assuming you keep that difference. On a secondary trade or which? On a primary investment.
Nelson Chu:
No, actually, we just charge a fee.
Ash Patel:
You guys don't keep the spread.
Nelson Chu:
No.
Ash Patel:
Your fees are your fees. If the bid ask is real low and your interest rate that you're asking is high, you don't keep the difference.
Nelson Chu:
It's going to close at a price, basically, a single price. So it's not going to be a variable price across all the investors. So for example, in playing that trade out, between 14 and 16, right, there was like five increments in there. If the maximum demand at 16 was two million, but the borrower only wanted one million, and there was enough demand at 14.5 to get one million, then everybody closed at 14.5. Anybody who put a bid above 14.5 gets kicked out because we're not at the rate that they want, effectively, which is fine. Anyone who put a bit below 14.5, or 14.5 and below, gets in, but having said that, they are going to be parada down accordingly based off of that. So that's really how the dynamic works.
Ash Patel:
All right. So if you initially quote me 20% interest on whatever deal that I have, and it goes to your marketplace and there's investors willing to do it at 14, my rates coming down from that to 14.
Nelson Chu:
Correct.
Ash Patel:
Wow. So you're letting the market dictate what my rate is, which is a free market.
Nelson Chu:
Yeah.
Ash Patel:
Oh, so you're not a loan shark at all.
Nelson Chu:
We are not a loan shark. We're not even a lender. We're a financing provider.
Ash Patel:
Yeah. Okay. This is interesting. You're getting me market rates on my loan.
Nelson Chu:
Yes. And we can actually give you a lot of guidance. So as a borrower, you can actually see how every single deal has closed in the last few months and you can see what the average rates are. You can see the average syndication demand for your asset class. That's all available in the borrower portal because again, we are a tech company. So you have as much information as we do.
And we will guide you towards general sizing, general rates based on the demand. And because we have these SMA blended note products, we already know who meets the eligibility criteria. So if you're a borrower, you're looking for 5 million, for example, there's 4 million in blended note eligible deals that are in there. I can say I'm guaranteeing you 4 million because I already know who they are. And then an extra 1 million is going to come down to how retail comes through. But if you're already 80% of the way there, you're probably going to get oversubscribed.
So you should expect that of the rate range that's here, you could probably come in on the lower end than the higher end is the general expectation.
Ash Patel:
All right, Nelson, you know you're leaving money on the table, right? Because your competitors are probably charging way up here and they're keeping the spread between what they're giving out and what they're giving their investors.
Nelson Chu:
Yeah, but I think this is, I would argue, a fair way to do it. And to be perfectly frank, we actually do, from a revenue standpoint, charge investors and underwriters and borrowers as well.
We just don't gouge any one of them. So I think we are taking a much more Switzerland approach, if you will, much more neutral throughout this entire process. And I think the outcome is that each side actually gets what they want as a result and they're a lot happier too.
Ash Patel:
Yeah. Look, I'm happy with you taking whatever fees you want. If I'm getting a loan at market prices, I wish you led with that. That's a very noble approach, man. Good for you.
Nelson Chu:
I appreciate it. Well, it's worked out so far. And again, it leads to investors not needing to first come first serve themselves, which is great.
Ash Patel:
Yeah. I wanted to not like you because you're one of those finance guys that were out there loan sharking, but you're actually not.
Nelson Chu:
Just to come clean here, I only spent two and a half years in traditional finance and I've been on the tech side ever since. So I am most certainly not a finance guy. The rest of my team, you can pass your own judgment, but yes. I love it.
Ash Patel"
And now let's talk about real estate and the multifamily deals that are out there, and not just multifamily, but a lot of deals that are underwater. Have you had clients come to you saying, look, our cash flow is good, we're getting killed with these higher rates, we know this is temporary, is there anything you can do for those types of deals? Or if the deal is underwater, there's just nothing to collect on, there's no way to get creative enough to make it work.
Nelson Chu:
Yeah, I would say this is not just multifamily across bunch of different asset classes as well. We're not, unfortunately or fortunately, in the business of distressed assets. There is an entire market around that. There's a lot of players in that space as well. Just because of who our capital allocators are on the other side, which is retail, we have to be a lot more careful about how that works. So we tend to only provide assets and offerings that are performing effectively, because retail needs to have a higher bar for what they invest into.
So we're likely not an option for them. Having said that, we are actually still, again, a tech company and our software can be used, for example, by distressed credit funds to be able to facilitate transactions. So that is a growing business. It actually launched a couple of months ago. And so we'll see how it all shakes out. But we are expecting some of the distressed players to come on board, leverage our software, don't need our capital. They're just using it for structuring a deal, syndicating a deal, or monitoring the distressed portfolio after it's done. And that's just straight tech.
And there are opportunities if someone's coming in, multifamily distress property, but cash flows are good to be able to connect them with that. That's part of the sourcing pairing matching element of it that we can do over time. We're just not equipped to do that right now, but yeah, there's a lot of distress players out there that are more than happy to at least talk to them.
Ash Patel:
So can I window shop on your platform? Can I look at the available loans and bid on different?
Nelson Chu:
Oh, absolutely. There is actually no cost to sign up. It's just free. And if it's Google, it's actually just one click. If you have a Google account. And the only time that we actually have to get a credit is we're actually going to make an investment. But to window shop, look at all of our reporting, look at all of our past deals, look at all of our data. That's free. It's very easy to browse.
Ash Patel:
I love it. And what is this website? What's the platform? How can our listeners get on here?
Nelson Chu:
Yeah, we try and make it super easy. We're all about yield. So the website is percent.com. Simple as that.
Ash Patel:
Awesome. This is incredible. Thank you so much for your time today. I didn't know something like this existed for retail investors. Do you have a lot of competition right now?
Nelson Chu:
We are the only ones that only focus on private credit. There's a lot of different, just be honest, very good platforms out there for things like art or things, I would say real estate specific. There's also a bunch of platforms as well. We run the spectrum on multiple asset classes, but just private credit. It just happens to be that real estate is a part of private credit as well to finance things like construction financing or developing of new facilities and things like that. So people do tap the private credit market for that. But yeah, we're the only ones in the space and I would say we're the only ones that have that type of public market style syndication free market philosophy here when it comes to closing transactions at the best price for the borrower.
Ash Patel:
I love this. Nelson, how can our best ever listeners reach out to you?
Nelson Chu:
I'm easy. Our website is percent.com and my email is just nelson at percent.com. N-E-L-S-O-N. I'd be happy to chat with any and all of them who want to reach out and learn more.
Ash Patel:
Well Nelson, thank you again for your time today. You've opened my eyes and a lot of the best ever listeners' eyes to this because I think a lot of us didn't even know something like this existed and it's an opportunity to invest passively into different asset classes that we may not have had exposure to before. So thank you for your time today.
Nelson Chu:
Thanks for having me. It was great chatting with you.
Ash Patel:
Best ever listeners, thank you for joining us. If you enjoyed this episode, please leave us a five star review, share this podcast with someone you think can benefit from it. Also follow, subscribe and have a best ever day.
Narrator:
Hi, best ever listeners, Joe Fairless is here again. And one last thing before you go, would you like to receive a short weekly email with proven tips from experienced investors, free tools and resources and a roundup of the week's most relevant news and best ever content? Well, if so, join the community of nearly 15,000 commercial real estate passive and active investors who receive the Best Ever newsletter. Just go to bestevercre.com forward slash access and you'll get the very next one. I hope you enjoyed this episode and as always, thank you for listening and have a best ever day.
