The Life of a Deal: A Deep Dive into Percent’s Vetting Process

By
Prath Reddy, CFA

September 27, 2024

Beyond Tradition: The Rise and Reach of Modern Private Credit Investments

Historically, the realm of private credit investments was an exclusive domain, limited to very wealthy individuals and institutions. This opacity stemmed from a lack of standardization and reliance on outdated methods like email chains and spreadsheets. However, the landscape has dramatically shifted in recent years. Private credit has witnessed an explosive growth of over 1,000% since 2006, propelled by a confluence of factors. Post-crisis regulations tightened the grip on traditional banks, leaving a gap for alternative lending. Investors, searching for yield in a low-interest-rate environment, found opportunity in the high returns offered by private credit. Simultaneously, the tech boom democratized access to information and investment opportunities, driving demand for innovative solutions.

As the market evolved, deals that were once too small, unconventional, or fast-moving for traditional banks suddenly found a receptive audience willing to prioritize speed and flexibility. The COVID-19 pandemic and subsequent monetary policy response only accelerated this trend. The surge of new market participants during the pandemic, some lacking experience and driven solely by yield-chasing, highlighted the urgent need for rigorous due diligence in private credit.

Percent: Democratizing Private Credit with Transparency and Efficiency

Our platform serves both accredited and institutional investors, providing new access to this once-elusive market. Our innovative suite of software tools serves as a bridge, connecting investors, underwriters, and borrowers with public market-like standardization and efficiency, allowing for greater velocity and frequency of transactions, at a fraction of the cost.

With over $1 billion in private credit deals syndicated since 2018, we stand as the premier investment platform exclusively dedicated to private credit, having facilitated more than 600 deals and partnered with over 100 diverse borrowers across various sectors and geographies.

Trust and Due Diligence: Cornerstones of Percent’s Approach

As an SEC-regulated broker-dealer, our interests are closely aligned with those of our investors, ensuring a higher level of transparency, oversight, and accountability throughout every transaction. This sets us apart from platforms without broker-dealer status, where investor protections and obligations may not be as clearly defined or rigorously enforced.

But how exactly does a deal make its way onto the Percent platform? Let’s pull back the curtain and explore the life cycle of a deal, from initial sourcing to ongoing management, showcasing the rigorous vetting process that sets Percent apart in the world of private credit.

Sourcing Excellence: A Diverse and Robust Pipeline

Our journey begins with sourcing borrowers and underwriters. We engage directly with potential borrowers, participate in co-investments, and facilitate agent placements. Our broker-dealer status enables us to access a higher-quality deal flow from other regulated entities, ensuring a diverse and robust pipeline, including:

• Direct Borrower Engagements: We connect with borrowers seeking flexible capital solutions tailored to their needs. These can be by inbound applications through our website or our network of connections in the asset-based lending and lender finance space.
• Credit Fund Co-Investments: We partner with experienced private credit managers to leverage their underwriting expertise by syndicating portions of their deals on our marketplace, providing them with additional liquidity. Given these underwriters maintain significant exposure to the underlying deal in their portfolios, interests are highly aligned with those of our investors.
• Placement Agents: We source high-potential deals from leading underwriters across a range of sectors. These placement agents are generally very well-connected boutique investment banks, other registered broker-dealers, or investment advisors that have geographical or sector-specific expertise. Our broker-dealer status and license allow for a more sophisticated deal flow from these players.

Percent’s pipeline spans a wide range of deal sizes, deal types, geographies, and sectors, reflecting the depth and breadth of the private credit market. We collaborate with existing private credit managers and agents (underwriters), leveraging their expertise to curate a comprehensive selection of investment opportunities.

The Initial Filter: Selectivity at Every Stage

From the initial contact to the final deposit, Percent maintains a rigorous screening process. We carefully evaluate each potential borrower and underwriter, applying strict criteria to ensure only the most promising opportunities progress. Our selectivity guarantees that investors gain access to high-quality deals with strong potential for returns.

Less than 10% of all borrowers introduced to Percent make it to the deposit stage.

Our vetting process begins long before a deal reaches our investors. For both asset-based securities (ABS) and corporate loans, we conduct a thorough pre-deposit market fit assessment. This process requires potential borrowers or underwriters to showcase key deal parameters and supply crucial documentation.

For ABS deals, we look at factors such as:

• Target size, term, and interest rate range
• Collateral and advance rate
• Use of proceeds and source of repayment
• Historical asset performance
• Preliminary legal structure analysis

We also require detailed financial information, business documentation, and comprehensive data on underwriting and servicing policies and procedures.

For corporate deals, similar information is required, with additional emphasis on the company’s financial projections, capitalization table, and any existing debt obligations.

Key criteria for progressing to the deposit stage include:

• Appropriate jurisdictions (United States, Canada, Latin America, Europe)
• Acceptable asset types (excluding those linked to cannabis, crypto, and weapons)
• Note program terms of less than 36 months
• Monthly or quarterly paying coupons with flexible principal repayment structures
• Rates that align with investor market appetite
• Strong security packages
• Consistently strong historical performance metrics and experienced management teams

Every deal must pass our stringent two-step pre-deposit fit assessment, and only a small percentage of deals make it through.

The Power of the Deposit

For deals that pass our initial screening, we require a deposit. This step is crucial in creating initial alignment and commitment. Requiring a deposit not only signals commitment from borrowers and underwriters but also aligns interests from the outset, deterring bad actors and ensuring accountability at every step. While we prioritize efficiency, we never compromise on proper due diligence.

Rigorous Vetting

Once a deal progresses to the deposit stage, our in-depth vetting process kicks into high gear. Our underwriting team, with decades of combined experience from rating agencies, banks, and funds, leads this critical phase.

The vetting process includes:

1. A comprehensive review of initial onboarding materials
2. A Due Diligence questionnaire and multiple rounds of targeted follow-up questions
3. Operational review calls
4. Extensive background checks on all key individuals and entities
5. Reference calls
6. Data and performance reviews for asset-based deals

All findings are meticulously summarized in a formal memo, which is then presented to our internal credit committee for review and approval. This entire process typically takes between 3 to 6 weeks, ensuring all aspects are carefully considered.

Our commitment to thorough vetting has uncovered critical risk factors that other lenders might have overlooked. For instance, we’ve had cases where well-known and established real estate lenders were unable to provide the necessary data to evidence their claimed performance. Our insistence on analyzing comprehensive data tapes of loans or advances and associated payments has saved our investors from potential pitfalls.

The Lifecycle of a Deal

Once a deal passes our initial filter, we start the formal due diligence process:

• Pre-Screening/Vetting: We analyze the borrower’s industry, history, financials, business model, management team, and growth potential, among other factors. At this stage, we also assess the preferred deal structure, and terms, and conduct an in-depth analysis of collateral quality and performance (if applicable). During this phase, the underwriting team generally interacts frequently with the underlying borrower or underwriter (if applicable) to review the due diligence materials and answer questions that arise from our analysis. At this phase, we also run background checks on relevant shareholders, managers, and entities involved in the transaction.
• Committee Approval: On the back of the due diligence process, a formal credit memorandum is prepared and presented to the Credit Committee. This memorandum covers many aspects of the transaction, and the information that needs to be presented is fairly standardized by deal type. The Percent team has dismissed multiple deals from reputable borrowers who have been unable to provide all the necessary information for our review.
• Launching the Deal: If the transaction is approved by the Credit Committee, all investor disclosures and marketing materials are subsequently produced (this includes the deal page, offering documentation, any investor presentation, deal comparables, risk factors, and data room – if available). Once the deal is launched, interested investors can place bids through a transparent auction system, and the transaction prices at the clearing rate for which sufficient demand was received.
• Post-Launch Surveillance: We provide regular performance reports on the borrower or collateral performance, partner with third-party collateral verification businesses to reduce the risk of fraud, perform ongoing due diligence (quarterly and on a per-deal basis), and maintain frequent communications with all underwriters and borrowers in our marketplace.

Vigilance Beyond Launch

Our commitment to investor protection doesn’t end at launch. We maintain continuous due diligence and portfolio management practices to monitor the performance of each investment and proactively address any potential risks.

Regular surveillance reports, collateral verification on asset-based deals, and ongoing dialogue with underwriters and borrowers provide valuable insights into the health of each investment fostering strong relationships that enable us to address any issues early on.

Transparency extends beyond the deal launch. Investors have access to every piece of ongoing surveillance through our investor portal. We issue regular surveillance reports (typically weekly for ABS deals and monthly for corporate loans), and investors receive real-time critical updates as soon as we are informed or identify a key finding. This level of transparency is unprecedented in the private credit market and allows our investors to stay informed about their investments throughout the lifecycle of a deal.

Our Partnership Philosophy

At Percent, we view our investors as partners. Their success is our success. We are committed to empowering investors with the knowledge and tools they need to make informed decisions. Through educational initiatives like webinars and transparent communication, we foster a community of informed and engaged investors.

We extend this partnership philosophy to our underwriters as well. Our ongoing dialogue and collaborative approach build mutual trust and foster long-term relationships. They act as an extension to our team throughout the deal onboarding process, ensuring proper diligence, transparency, and investor protection.

Borrowers, the third vital component of our marketplace, are also valued partners. Percent connects them with flexible capital solutions to support their growth. By providing efficient access to capital and ongoing support, we help borrowers scale their operations and achieve their business objectives.

This three-way partnership between investors, underwriters, and borrowers creates a robust ecosystem that drives value for all parties involved.

Shaping the Future of Private Credit

Percent’s unwavering commitment to transparency, selectivity, and partnership is shaping the future of private credit. We are dedicated to democratizing access to this market, empowering investors with opportunities for high yields and portfolio diversification.

Percent’s President, Prath Reddy, CFA, emphasizes the importance of diligence in an evolving market:

“ With the potential for increased economic volatility in 2024 and 2025, a focus on risk management and transparency in private credit has never been more important. Percent is committed to providing investors with the tools and insights they need to make confident decisions. Our rigorous process, combined with innovations like our transparent order book, helps ensure alignment of interests and the long-term health of the market.”

We invite you to explore the opportunities that Percent offers in the evolving private credit landscape. Our platform combines rigorous due diligence, cutting-edge technology, and a commitment to transparency to provide accredited investors access to a diverse range of private credit investments. Join us in shaping the future of finance, where informed decision-making and high-yield potential go hand in hand.