Won’t You Be My Neighbor

While discussing the paradox confronting today’s fixed income allocators, we thought of Mr. Rogers and his famous invitation to everyone.

In one established, traditional neighborhood, you find fixed income investors clamoring to purchase 10, 30, 50 and yes, 100-year sovereign bonds at rock bottom coupons.  Earlier this week, Spain sold €5 billion in a 50-year bond with a 1.45% coupon…against orders of €65 billion!  Last week, Portugal sold €3 billion in a 10-year bond with a 1% coupon… against orders of €40 billion.   Yields on Italy’s 10-year bond are heading for the zero line.  Yields on the U.S. 10-year are hovering around 1.2%

A few streets over, a new neighborhood has emerged where fixed income investors enjoy a different proposition.  Coupons and yields – net of expected credit loss – are higher. Terms are much shorter; the lexicon is months, not years or decades.  Individual balances are orders of magnitude lower, mitigating the impact of single-issue default risk.  Most of the time, the debt is amortizing; that is, it pays back principal and interest at least monthly, sometimes more than once during a month.  And, the underlying credits are tied to the real economy, not government printing presses.

New financial companies powered by technology and data anchor this neighborhood.  They have become the “go-to” credit source for individuals, families and small businesses.  These companies embrace rule-based underwriting, efficient servicing, and transparent reporting…all of which lead to a better credit experience for both borrower and investor.  The neighborhood is up and coming:  By market cap and as of this writing, PayPal is the second most valuable financial services company in the U.S., and Square is worth as much as Goldman Sachs. Recent public offerings have given marketplace lender Upstart, point-of-sale credit provider Affirm, and student loan pioneer SoFi aggregate market caps of about $50 billion.  LendingClub became a bank a few weeks ago.

Some folks have accepted the invitation and ambled over to explore the risk-adjusted return profile of this neighborhood’s credit assets.   At a time when the quest for yield – seemingly any yield – is in full throttle, we believe more should accept the invitation.   We recognize there is a need for clearer advertising and better education.  For example, how does a prospective investor compare different offerings?  What are the risks and potential pitfalls and how does an investor spot them easily and quickly?  What are the key due diligence questions?  It is the local residents’ (i.e., professionals in the industry) responsibility to meet this challenge and provide the education.

Credit allocators should expand their horizons in order to understand the promise of digital private credit.  Break tradition, come to our neighborhood, and take a walk on what we see as the sunny side of the street.  Returns from short duration, small balance, amortizing credit have significantly outperformed most credit indices, with a fraction of the volatility.

Won’t you be our neighbor?

 

 

Confidentiality and Non-solicitation: No information herein constitutes an offer or a solicitation to buy or sell any securities or any interests in any product or investment strategy managed by HCG Fund Management LP (“HCG”).  Any offer or solicitation relating to any such investment will be made only by means of confidential offering documents and only in those jurisdictions where permitted by law.

Reliance: This presentation may not be relied upon for investment decision-making purposes. It does not contain all the information necessary to make an investment decision, including the risks, fees, and investment strategies of investment funds advised by HCG. Eligible investors are described in official offering documents, all of which must be read in their entirety and will supersede the information contained herein.  No offer to purchase any securities or interests by a prospective investor will be made prior to receipt of all official documents, and no offer to purchase any securities or interests will be accepted without receipt of all official documentation that has been completed to HCG’s satisfaction.

Opinions — No obligation to update:  The information contained herein represents the views and opinions of HCG.  It is intended solely for informational purposes and is not intended to constitute investment, legal, tax or accounting advice.  The views about digital finance investing and estimated future investment opportunities expressed herein reflect those of HCG management as of the date herein and are a reflection of our best judgment at the time.  They are subject to change based on market and other conditions, and we have no obligation to update.  Actual results, however, may prove to be different from our expectations.  No warranty is given to the completeness or the accuracy of the information contained herein.

Suitability and Risks:  Any such investment is appropriate only for financially sophisticated investors capable of analyzing and assessing the associated risks fully disclosed in the Private Placement and/or Information Memoranda. Investors should consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The Private Placement and/or Information Memoranda contain this and other information about the investment. A prospective investor should have no need for liquidity with respect to its investment and should view it as long-term and not a trading vehicle.  Additional risks are disclosed in the Private Placement and/or Information Memorandum including, including, limited liquidity and restrictions on transfer of the securities, dependence on HCG’s principals, and short operating history of certain products. As with all private investment funds, investments are deemed speculative and involve risk of loss.

Third Party Data: We do not verify third party data used in certain calculated metrics shown here.