Andrew Curtis is the CEO of Clearco, a working capital solution for e-commerce brands to fund invoices and receipts.
In the past few months, rumored and announced acquisitions of private credit managers swept through my emails, texts and newsfeeds (see Victory Park, HPS and Atalaya), a first in my 25-year career in corporate finance. If the dozen years following the Great Financial Crisis were private equity’s golden age, it’s clear the current decade belongs to private credit.
As an asset class, private credit has grown 50% since 2021 and is expected to grow another 87% in the next five years. With a newly reelected president with a bold economic agenda and near-record levels of dry powder, it’s easy to argue we are in the early innings of a private credit supercycle.
Private Credit Expands
So, what comprises private credit, and how has that definition expanded over time? Ten or 20 years ago, people thought of the category narrowly—nonbank middle market direct lending and not much more.
Today, the asset class is sprawling. Direct lending in all its forms—unitranche, senior, subordinated, special situations, distressed—still occupies the core of the market. But private credit today has expanded to countless other assets: non-qualifying residential mortgages, aviation finance, consumer lending, middle market collateralized loan obligations and music royalties.
Many of these new private credit assets fall under an asset category called asset-based finance, or ABF. Like direct lending, ABF involves the extension of credit by nonbank lenders. But instead of making direct loans to a corporation and relying on that business’s operating cash flows for repayment, ABF typically relies on pools of cash-flow-producing assets with underlying contracts (think of a non-qualified mortgage residential loan or a consumer loan).
The ABF market includes investors that provide capital to small-to-medium-business (or SMB) financing providers, such as our firm. Fintechs that provide SMBs capital leverage AI and other technology and data tools to deliver financing solutions that traditional financial institutions, such as banks, often cannot. While regulated banks are reluctant to directly fund such SMBs, they can fund capital into ABF structures backed by diversified pools of SMB loans or similar assets originated by fintechs.
Regulated financial institutions get better balance sheet treatment from regulators for financing these diversified pools rather than providing the SMB loans directly themselves. They also don’t need to invest in the fixed cost overhead to originate and service these loan assets in-house.
The Guiding Principles Of SMB Financing Platforms
With the support of strong ABF markets, fintechs that provide such funding solutions can focus on what they do best—underwriting, originating and servicing the capital advances they make to customers. Success in doing so depends on a few guiding principles that I believe any successful SMB financing platform should follow:
• Scale your SMB portfolios without overleveraging borrowers. At Clearco, we understand that overleveraging can turn the best borrowers and customers into bad ones. Again and again, we have seen peers find and fund strong, healthy merchants only to later ply them with too much capital as they grew.
The short-term satisfaction of hitting originations targets and growing assets or loan books by further leveraging existing borrowers is never worth the long-term risk of those borrowers’ financial stress. It’s bad for funding partners, and it’s terrible for the customer. Successful originators win by mastering the art of origination sizing, increasing exposures intelligently as customers grow, and portfolio composition.
• Leverage artificial intelligence to drive efficiency in underwriting. Artificial intelligence is transforming the underwriting landscape by dramatically increasing speed, accuracy and efficiency. By leveraging AI-driven models, capital originators can aggregate vast amounts of data in real time, eliminating bottlenecks associated with manual processing.
Machine learning algorithms continuously refine underwriting models by identifying patterns, assessing risk factors and adapting to new market trends, ensuring faster and more precise decision making. This iterative approach allows for more intelligent, adaptive underwriting strategies that optimize approval rates while minimizing delinquencies and credit losses. The automation accelerates the underwriting process and enhances productivity, allowing businesses to scale without increasing operational overhead.
• View every relationship through a multiyear lens, with careful consideration of cyclical volatility. The past five years have seen dramatic volatility in rates and credit spreads, which has impacted lenders and borrowers alike. Successful originators will balance the short- and long-term range of potential outcomes in underwriting to carefully manage the risks of macroeconomic volatility and ensure they can be a reliable capital provider through cycles.
Private Credit Fuels SMB Market Growth
Private credit’s golden age is good news for countless financing markets, and directly supports our firm’s mission to fuel the growth of one rapidly growing SMB market segment—direct-to-consumer e-commerce merchants that would otherwise struggle to finance their businesses. The current opportunity in SMB credit is generational, and I look forward to working with my team and other ecosystem partners to advance capital to this critical segment of our economy in the coming decade.
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