A case study from bond investment group Income Asset Management highlights the importance of debt financing.
Over the past 5-10 years, a number of high profile fintech success stories have emerged from the Australian market.
But while companies like Afterpay and Atlassian are now known, they needed early funding to meet their growth aspirations; and in this context, not all investors may be familiar with the key role debt financing plays in the initial growth of fintech disruptors.
For a case study on the idea, Storer recently met Kyle Lambert of listed investment firm Income Asset Management (ASX: INY).
As Executive Director – Fixed Income, Lambert is heavily involved in activity in the Australian debt capital markets. He said a good illustration of debt financing as value can be seen through IAM’s work with successful ASX financial lender MoneyMe (ASX: MME).
Today, MME is a $ 340 million market-capitalization consumer finance platform issuing approximately $ 50 million in new loans per month.
But in 2016, the company worked directly with Lambert and the IAM team to address its early financing needs.
“We have supported MoneyMe for almost five years, from when they were a private company,” Lambert said.
For a quick timeline, the first MME debt financing notes issued in 2016 offered investors a return of over 10%.
He then deployed that capital to finance growth and then refinanced the debt in 2020, as part of a larger funding deal that included backing from a major bank.
“So the clients who participated in the initial warehouse tickets got their principal back and got a return north of 10% for their holding period,” Lambert said.
Fast forward to 2021, and MME is expanding its loan portfolio with a warehouse financing facility of nearly $ 350 million.
Late last month, he also added a $ 50 million hybrid financing deal with leading private equity firm Pacific Equity Partners.
“The evolution of this funding program is pretty common now in Australia,” Lambert said.
“We’ve seen this before with groups like NextDC – when they were smaller they funded growth through higher yield notes. Then, as they mature, they enter larger debt markets at lower capital costs ”
Lambert also cited Afterpay as another good example.
“If you go back to 2018, they issued a high yield note that paid investors 7.25%. They then refinanced that early and now access most of their debt financing in the US markets at a rate more attractive to the company, ”he said.
“So there are a lot of examples, but I think MME really illustrates the key role debt financing plays.
“Since the first facility they set up in 2016 with higher rates, they can now access a warehouse with big banks and mezzanine financiers with enough cash flow to be able to finance their rapid growth in loans.” .
While citing IAM’s work with MoneyMe, Lambert also highlighted the importance the company places on balanced portfolio weights to facilitate fixed income exposure for clients.
Early stage debt financing that earns more than 10% is part of the equation, but not all.
“We are very aware that clients can end up with portfolios that are heavily focused on high yield debt,” Lambert said.
“A healthy portfolio must also be balanced. High-yield investments can play an important role for investors looking for higher returns than investment grade, but with increased return comes increased risk, it is therefore a matter of allocating capital to the high-end segment. yield appropriately.
In this context, “diversification is always the key,” Lambert said.
“And it’s diversification not only across the broader fixed income asset class, but we also help clients diversify that specific high yield component with a mix of different credit exposures. “
Ultimately, IAM occupies a significant niche in the Australian market, combining funding for high growth companies with providing tailor-made fixed income exposure to clients.
As part of its services, IAM also partners with Bond Advisor, Australia’s only independent research firm for the corporate bond market.
“They are completely separate from our business. So for all high yield transactions and many AUD denominated corporate bond transactions, they provide independent research from us and we make these reports available to our investors, ”Lambert said.
In addition to this, IAM also has its own in-house credit strategy team that develops a credit opinion and breaks down the transaction structure for clients.
“We like to show clients what a healthy portfolio looks like and then supplement it with enough information to allow them to make informed decisions about their portfolio mix and what credits they will add to their portfolio over time. “Lambert said.
Income Asset Management (ASX: INY) offers unparalleled access to full service income investing. We aim to provide investors and portfolio managers with the most reliable and competent platform to research, execute and manage their income investments. Our deposit, bond, treasury and asset management businesses are all here to enable investors to compare, choose and execute, in the most efficient, transparent and cost-effective manner.
This article was developed in collaboration with Income Asset Management, an advertiser for Stockhead at the time of publication.
This article is not advice on financial products. You should consider getting independent advice before making any financial decisions.