Venture Debt Financing - The ins and outs

​Debt Financing for FinTech Lenders and Embedded Finance platforms in Emerging Markets – Market Outlook

• ​Macro-economic backdrop (recessionary fears, rising rate environment, impact on loan portfolio quality, sovereign debt issues impacting FX)

• ​Demand for debt financing generally / liquidity and depth of capital available to the market

• ​Local capital markets versus off-shore private markets

​Sources, Uses and Types of Debt Financing

• ​Sources

  • ​Commercial banks and other large regulated institutions (such as pension funds, insurance companies, etc)

  • ​Private Credit investors (funds, lending platforms, marketplace platforms)

  • ​Development Finance Institutions

• ​Uses

  • ​Opex financing

  • ​Loan portfolio financing

• ​Types

  • ​“on-balance sheet”

    • ​Lender Types:

      • ​Venture Debt

      • ​DFIs

      • ​Certain Private Credit Funds

      • ​Certain banks (including local banks)

    • ​Typically secured against assets on the balance sheet of the entire company

    • ​Sometimes includes personal guarantees or share pledges

    • ​Working Capital / Opex OR loan portfolio financing (depends on lender mandate)

• ​“off-balance sheet” (i.e., securitization)

  • ​Lender Types:

    • ​Private Credit funds

    • ​Regulated institutionals such as banks, insurance companies, pension funds

  • ​Secured against loan portfolio that is segregated / separated from FinTech’s balance sheet (structured into a special purpose vehicle)

  • ​Sometimes includes corporate guarantees despite loan portfolio collateral pool

  • ​Only finances loan portfolio (although for FinTech’s prior to such financing using equity to fund loan portfolio, provides equity “release” back onto the balance sheet of the originator)

​Pros and Cons of either approach:

1. ​Pros

   • ​On-balance sheet:  less complicated structure therefore quicker to close, better for smaller size deals / earlier stage platforms with one product

   • ​Off-balance sheet:  infinitely scalable with flexibility to bring in multiple lenders in different structures for different loan portfolios, deeper and more liquid capital markets longer term, possible secondary market trading, less likely to require corporate guarantee, better suited for fintechs that have multiple business lines / revenue streams that are not just direct lenders (i.e., embedded finance platforms) or multiple lending products

2. ​Cons

   • ​On-balance sheet: scalability a problem, multiple lenders a problem, “bleeding” between OPEX and loan portfolio financing

   • ​Off-balance sheet:  complicated structure that takes longer to execute and costs more to stand up (and therefore also isn’t suited for smaller deal sizes / earlier stage platforms with one product

​FX hedging and Interest Rate considerations

• ​Why is this important? 

• ​FX hedging costs and types of hedging commonly used

• ​Floating versus fixed rate debt financing and its implications

​The due diligence process / timetable – Nothing like raising equity

• ​Key considerations include:  Underwriting criteria scoring methodology, risk management and collections/recovery of bad loans, fraud/kyc risk mitigation, operational risk mitigation, likelihood of loan portfolio scalability (and the removal of manual processes automation), operational capacity to manage credit facility.

• ​Data analytics platforms for (a) underwriting, (b) risk management and (c) on-going reporting and credit facility compliance 

​The Role of various service providers

• ​Data Agents

• ​Capital Markets Advisors

​Building a proper Finance and Risk Management Function

​Q&A