Viola Credit specializes in providing asset-based lending to fintech companies and the innovation economy. The firm has approximately $3 billion (£2.29 billion) in assets under management, with offices in New York, London, Tel Aviv and Sydney.
Alex Ginzburg (pictured), partner and head of risk at the global asset manager, explains how the firm is helping to close the fintech funding gap.
Alternative credit investor (ACI): Who are the investors in Viola Credit?
Alex Ginzburg (AG): We operate through our mixed funds, which we collect from institutional investors. We have a fairly large institutional investor base and we manage funds on their behalf in our commingled fund, but also through separate managed accounts that we manage primarily for insurance companies in the United States and Israel. We also have quite a large number of high net worth investors and family offices, but in terms of volume the majority of our capital comes from asset managers, pension funds, insurance companies and banks.
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Our positioning in this market is essentially a combination of expert in structured finance and expert in lending to technology companies. This is a combination that we think is quite unique in this market.
ACI: And who are your borrowers?
AG: Approximately 50 to 60 percent of our business is in the United States and approximately 30 percent is in Western Europe, primarily in the United Kingdom, France and Germany. The remaining 10 percent of our business is in Australia.
In terms of our focus, we seek to enter into transactions with disruptive originators who leverage technology for better underwriting or distribution of their credit products, with better efficiencies, better operations and better cost structures.
ACI: Are you already working with the peer-to-peer lending market?
AG: This is something we have avoided, for two reasons. The first is that long-term unsecured consumer credit is something that we have not identified as a differentiated, value-added asset. Second, we focus primarily on balance sheet lenders.
For us, it is important to create an alignment of interests with the originator so that the originator itself is the first to bear the risk of the asset. This creates a very healthy alignment of interests between the two parties.
ACI: What is it about fintech that particularly attracts your investors?
AG: Traditional banks and lenders have pulled out of many sectors, particularly small business or more complex credit solutions, as well as integrated solutions that they simply don’t have the technology to support. On the other hand, much of the economy is in transition. We’ve seen this in consumer e-commerce, where much of the commerce has taken place online.
Traditional credit providers did not have the capacity or infrastructure to support this business transition with adequate financial solutions. So what happened was the technology creators just came in and solved some of these big problems. One of the clearest examples is the buy now, pay later solution, which developed after this shift to e-commerce, where it provided the consumer solution for point-of-sale financing. We are seeing the same transition in business-to-business commerce today, where much of that commerce is also happening online.
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There is a new wave of solutions that fintechs are offering to these platforms. They create a lot of value, both for shareholders and for us, the lenders, where we can earn excess return through innovative distribution channels.
ACI: Is there currently a funding gap in the fintech space?
AG: Fintechs are filling financial gaps in their respective markets, whether it’s a consumer or business point of sale, business credit cards, bill financing or auto loans. Wherever they identify a gap, they fill it with technology. The same thing happens between fintechs and capital providers.
Credit funds and banks do not have the capacity to deal with these early-stage originators for two reasons: first, lack of sufficient track record; and second, it is simply too small and too operationally intensive. Since these transactions are very active, you must continue to provide capital on the assets on a daily basis. Many funders do not know how to address these challenges on a small scale.
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This is where we identified the gap in this market. We decided to try to bridge this gap by using technology on our side. We have created an internal R&D department. We have a CTO and four full stack developers. We just built our operational system for this business to allow us to do these transactions earlier and on a smaller scale. And we use technology not only to overcome operational challenges, but also to bridge the information gap. We therefore use technology to collect extensive data on the performance of multiple asset classes across multiple credit risks and across multiple geographies to build our proprietary performance benchmarks that allow us to underwrite these transactions, even with a track record limited to earlier stages.
ACI: So you had to create your own technology system to complete these transactions? This must give you the advantage of being a first mover?
AG: We are generally the first institutional lender to these originators. In many cases, they seek our advice on how to institutionalize their infrastructure. Because of our need for real-time data, we are incentivizing them to step up their game to start being able to work with lenders like us and later with banks and then even move into the securitization market and be able to securitize their assets. By working with us, it pushes them to build this institutional financing infrastructure that allows them to later attract additional lenders and more banks.
ACI: How many companies do you currently work with?
AG: This is an extremely selective process. We started this strategy in 2017 and we are now on our third fund. Over the years, we have reviewed over 700 originators and transacted with 26. And we have a very broad perspective. We are asset agnostic, so we have commercial credit, consumer credit, secured, short term and long term. We have many types of assets and we have a broad enough perspective on the market to know which products and production practices are best and which are the most advantageous offers. Based on this, we develop our thesis on the type of assets we want to finance that we believe create the most value and can also have the greatest growth potential.
ACI: Are you considering opening other offices?
AG: We are currently expanding our offices in New York. We are also expanding our London office. We are hiring more people, but at this time we have no plans to open more offices.