How debt financing plays a key role in the growth of successful Australian fintechs such as Afterpay and MoneyMe
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A case study from fixed income investment group Income Asset Management highlights how important debt financing is.
Over the past 5-10 years, a number of high-profile fintech success stories have emerged from the Australian market.
But while companies such as Afterpay and Atlassian are now household names, they needed early funding to match their growth aspirations; and in that context, not all investors may be familiar with the key role debt financing plays in the early growth of fintech disruptors.
For a case study on the idea, Stockhead caught up recently with Kyle Lambert from listed investment firm Income Asset Management (ASX:INY).
As the Executive Director – Fixed Income, Lambert has extensive involvement in activity across Australia’s debt capital markets. He said a good illustration of debt funding as value can be seen through IAM’s work with successful ASX fintech lender MoneyMe (ASX:MME).
These days, MME is a $340m market cap consumer finance platform issuing around $50m of new loan originations per month.
But back in 2016, the company worked directly with Lambert and the IAM team to meet its early funding needs.
“We’ve supported MoneyMe for the better part of five years beginning when they were a private company,” Lambert said.
For a quick timeline, the first debt financing notes MME issued in 2016 offered a return to investors of more than 10%.
It then deployed that capital to fund growth and subsequently refinanced the debt in 2020, in a larger financing deal that included backing from a major bank.
“So clients that participated in the initial warehouse notes received their capital back, and had north of a 10% return for their holding period,” Lambert said.
Fast forward to 2021, and MME is scaling its loan book with a warehouse funding facility of almost $350m.
Late last month, it also added a $50m hybrid funding arrangement with leading private equity firm Pacific Equity Partners.
“The evolution of that funding program is quite common now in Australia,” Lambert said.
“We’ve seen it before with groups like NextDC – when they were smaller they funded growth through higher yield notes. Then as they mature they access larger debt markets at cheaper costs of capital”
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 subsequently refinanced that early and now access most of their debt funding through US markets at a more attractive rate for the business,” he said.
“So there’s plenty of examples but I think MME really illustrates the key role debt funding plays.
“From the first facility they put in place at 2016 with higher rates – now they can access a warehouse facility with major banks and mezzanine financiers with enough funding headroom that they can finance their rapid lending growth”.
While citing IAM’s work with MoneyMe, Lambert also highlighted the importance the firm places on balanced portfolio weightings when facilitating fixed income exposure for clients.
Early-stage debt funding that returns more than 10% is part of the equation – but not all of it.
“We’re very cognisant of the fact clients can end up with portfolios that are heavily weighted towards high-yield debt,” Lambert says.
“A healthy portfolio should also be balanced. High-yield investments can play an important role for investors seeking returns above investment grade, but with increased return comes increased risk so it’s about allocating capital to the high yield segment appropriately.”
In that context, “diversification is always 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 fills an important niche in the Australian market, matching funding for high-growth companies with the provision of tailored fixed income exposure to clients.
As part of its service, IAM also partners with Bond Advisor, which is Australia’s only independent research house for the corporate bond market.
“They’re completely separate from our business. So for all high-yield deals and a lot of AUD-denominated corporate bond deals, they provide research independent of us and we make those reports available to our investors,” Lambert said.
Supplementing that, IAM also has its own in-house credit strategy team who put together a credit opinion and break down the structure of deals for clients.
“We like to show clients what a healthy portfolio looks like, then supplement that with enough information where they can make well-informed decisions about their portfolio mix and what credits they’re going to add to their portfolio over time,” Lambert said.
Income Asset Management (ASX:INY) delivers unparalleled access to a complete income investment service. We aim to provide investors and portfolio managers with the most trustworthy and capable platform to research, execute, and manage their income investments. Our businesses across deposits, bonds, treasury management and asset management are all there to enable investors to compare, choose, and execute, in the most efficient, transparent, and cost-effective way.
This article was developed in collaboration with Income Asset Management, a Stockhead advertiser at the time of publishing.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.