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Interview with Nelson Chu, founder and CEO of Cadence, the leading digital securitization and investment platform for private credit. The type of investments Cadenance can be structured to provide passive income.
Could you describe the objective of Cadence?
Cadence is building the leading digital securitization and investment platform for private credit. We want to unlock the private credit market for institutional and accredited retail investors alike through unique investment opportunities that the market has never seen before. All of this will be done with a level of transparency and efficiency that can only be afforded through the foundational work we’ve done with our immutable ledger and digital asset issuance platform.
What are the opportunities in short term debt?
There are tremendous opportunities within private credit, particularly when it comes to financing small and medium-sized enterprises. This is an underbanked population that currently isn’t being efficiently serviced by the banks. As a result, many speciality lenders have appeared since the 2008 financial crisis to help support and finance their growth. These loans often times take the shape of cash advances, factored receivables, and other working capital finance products.
Through our innovative legal structure, we can take these short duration loans, some of which have life spans of just a few weeks or months, and pool them together to create short duration investment opportunities for our investors. This mitigates many investment risks in private credit such as providing diversification benefits, inherent liquidity since all of our offerings have durations of less than one year and structural enhancements for principal protection. All in all, this makes for some of the most attractive investment offerings on the market. We target an average return of 10% APY.
Why is the Cadence team best positioned to make the best out of these opportunities?
We have a management team with a collective 75+ years of financial services experience. Many of us, including myself, have fixed income backgrounds and we saw the opportunities that stemmed from inefficiencies in the market. We’re also at the point where the industry has caught up with the technology.
The rise of “underwriting 2.0” has fueled more transparency into the underwriting process than ever before at a time when demand for private credit has never been higher. This, coupled with our ability to leverage our experience and create some of the most innovative financial products on the market, has allowed us to push our advantage and capitalize on the opportunity in front of us.
What is the structure of investments offered to investors?
We offer a variety of different investments based on duration, sector, and asset type. All of our investment opportunities have durations of under one year. When an investor elects to make an investment into any one offer, for example, one of our one month opportunities, they will be notified 7 days prior to the maturity of the investment that they can either roll over their investment (less than, equal to, or more than their principal and projected interest) or cash out upon the date of maturity.
We believe this gives investors the most flexibility so that they can manage their liquidity needs on their terms. This also creates a very efficient market for originators seeking alternative sources of capital at competitive, market-driven rates.
What are the main risks for investors?
Investments of any kind carry many different risks. Our investment offerings are subject to the most prevalent types of risk, asset-level performance risk and counterparty risk are the primary considerations.
What steps is the team taking to minimize these risks?
Asset-Level Performance Risk
Investing in Cadence offerings exposes the investor to the performance of the underlying assets of that investment. This could be in the form of receivables, cash advances, and more. They all carry some sort of asset-level performance risk – when a retailer doesn’t pay an invoice on time or when a business doesn’t generate the revenues it expected, these will impact the expected cash flows funneling through to our investments. We employ various different internal and external credit enhancements to mitigate as much uncertainty as possible.
Overequatization, cross-collateralization, and credit insurance are often times embedded into every offering and are a key part of our risk management strategy. These act as built-in buffers on the off chance that an underlying asset doesn’t perform the way we expect it to, maximizing the chance that the portfolio of assets as a whole has a higher chance of delivering what investors expect from the investment
All online investment platforms have some degree of counterparty risk when you make an investment. When it comes to the originator, we stipulate in our Master Participation Agreements that all cash flows emanating from underlying assets are paid to our investors first until all obligations are met before paying down any other party. We also may obtain security interests, when applicable, through UCC filings to protect these assets against claims from other creditors if the originator ever goes bankrupt. This is final recourse and Cadence would even manage the recovery process on behalf of investors. When it comes to us as Cadence, we ensure every potential offering is structured, vetted and reviewed through a formal deal committee.
In the unlikely event that we cease operations, our investors are fully protected. Uninvested funds from our investors are deposited in segregated FDIC insured bank accounts and are never commingled with our own operational bank accounts. Our investors are legally entitled to their own money deposited on the platform and all funds would be automatically returned to the account of their choosing should Cadence cease to continue operations. All funds invested in active opportunities would also be protected as they reside in special purpose vehicles that have fund administrators and services that operate the entities independent of us.
What are the fund fees?
As mentioned prior, we are not a fund, we offer investment opportunities on an issuance by issuance basis. We charge a structuring fee to the originators we partner with on a per issuance basis depending upon the duration of the offering. We do not charge investors on the platform any fees.
How can investors participate in this project?
Retail accredited investors in the US can sign up for the platform directly from our website, withcadence.io. Institutions can find all of our current and historical issuances on the Bloomberg Terminal by searching for the ticker CDGRP.
Would you like to add any further information?
Our retail platform just went live, sign up today – we’d love to have you on board!
For more information please visit: Cadence
We thank Nelson Chu for the interview.
- This interview does not constitute an endorsement.
- The answers have been provided by the interviewee.
- This is not a buy, sell or hold recommendation of any assets mentioned in this interview.
- Do your own research before you invest in anything.
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