Fusion Foundation to bring YAD Capital’s Alternative Credit Investments onto Blockchain
YAD Capital is be bringing its alternative credit portfolio to Fusion Foundation’s cryptofinance ecosystem.
Fusion is a non-profit organisation building the next generation infrastructure for decentralised global finance.
The borderless efficiency and fractionalisation of assets enabled by blockchain will broaden YAD’s reach to both underserved merchants in need of funding and to more investors globally.
YAD Capital was co-founded in 2017 by former Goldman Sachs Managing Director David Perez, and former private equity investor and Lehman Brothers investment banker Daniel Rubin.
Following the 2008 market crash, credit options for small to medium-sized enterprises (SMEs) became severely restricted. The World Bank estimated in 2018 that 70 per cent of SMEs were unable to access credit yet accounted for half of GDP and only three out of four SMEs were able to get financing while 75 per cent were unable to secure small business loans.
YAD found its niche meeting this funding gap with merchant cash advance businesses, where carefully selected SMEs exchange a portion of their future receivables for cash up front. YAD offers a promising alternative source of funding too often withheld from SMEs that need it most, due to the inefficiencies of existing funding options and a lack of awareness of new alternatives like YAD.
To date, YAD has invested nearly USD50 million in cash advances, closing its most recent fund in April. YAD selects deals dynamically and invests in businesses that present the best risk-reward by taking a large number of underwriting criteria into account and looking at risks at the portfolio level, both from a micro and a macro angle. With several of its investments yielding 12 per cent or higher returns, YAD’s investment options are a boon in today’s low – even negative – interest rate environments.
As YAD gained expertise in this space, it observed various inefficiencies introduced by middlemen and lack of transparency. Third-party brokers often take exorbitant fees for connecting merchants to cash advance providers. In many cases, brokers are incentivised by the volume of business they transact, and thus encourage merchants to over-leverage themselves. To make matters worse for the industry, through the practice of “stacking”—the equivalent of taking multiple “liens” on receivables—investors often find themselves suddenly subordinated to other claims.
Partnering with Fusion, YAD will initially be digitising its portfolio to help SMEs more easily monitor cash advances and drawdown activity. The partners are planning to mirror the next USD10 to USD20 million of cash advance vehicles on Fusion’s blockchain by the end of 2019 and have already started integration using its recently closed USD5 million deal as a pilot.
“Bringing its portfolio onto the blockchain brings real-time transparency for investors and merchants, while giving some merchants a digital identity for the first time,” says Fusion Foundation founder and CEO, Dejun Qian. “It eliminates the need for costly and time-consuming fundraising roadshows while enabling YAD to deliver truly borderless investing in opportunities to which investors might not otherwise have access.”
In addition to providing real-time visibility into performance, YAD will use its detailed metadata on merchants (such as credit quality, sectors and cashflow profile) to create data-driven investment analytics and granular investment products that meet investor risk profiles not otherwise available today. Finally, through digital IDs and receivables being put on blockchain, investors and banks will benefit from transparency into merchants’ true credit state, creating a safe investment environment.
“As technology continues to redefine the financial markets, we look forward to helping digital asset issuers and investors build confidence in blockchain’s potential for streamlining information access and management,” said David Perez, Co-Founder of YAD Capital. “Longer term, our ability to also reach more investors globally with unique investment opportunities is very exciting.”
Beyond documenting YAD’s off-chain investment and cash advance activity, Fusion’s growing ecosystem of crypto-asset platforms such as Realio and Liquidity Digital are set to offer legally compliant Reg-D digital assets like YAD’s when they are available, subject to regulatory approval. Accredited investors will then be able to purchase and secondarily trade the securities on exchanges and trading venues.