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Securitization is a critical function of the modern financial system. Banks “package” individual loans, say a mortgage or an auto loan, into a group with similar characteristics and sell them to other investors. That gets the debt off the originator’s balance sheet so that they can offer more loans, while also offering private investors alternative investment opportunities to buy up.
Despite the scale of the market — the trade association SIFMA’s research shows that the volume for asset-backed securities reached more than $300 billion in 2019 (excluding mortgages) — much of that structuring remains relatively ad hoc, with structuring agents and buyers constantly seeking each other out.
Much in the way that real estate and startup crowdsourcing platforms democratized access to those alternative investments, Cadence wants to expand access to securitized products while increasing the velocity of transactions for originators and lowering prices. Founder and CEO Nelson Chu said that “our job is to bring transparency and efficiency to this market and through all the various things that we do.” The company operates on top of the Ethereum blockchain network.
Founded in 2018 and launched publicly in 2019, the New York City-based capital markets startup has now structured $88 million in notes across 76 offerings and 12 originators according to the company. The firm’s public leaderboard shows that the largest originators were Sellers Funding with more than $23 million and Wall Street Funding with almost $26 million in transaction volume. Chu said that “I think we are the 21st largest structuring agent the United States in 2020 so far,” which is not a bad place to be for a young startup in a massive multi-trillion dollar market.
In addition to that $88 million volume processed on the company’s retail platform, Cadence also structured a $40 million whole business securitization with FAT Brands, the owner of restaurant chains like Fatburger and Yalla Mediterranean. The company notes that the structuring reduced the company’s interest costs by $2 million.
The company has hit a number of milestones over the past two years. It closed a seed round of $4 million in December led by Revel VC, with Revel’s Thomas Falk, Navtej S. Nandra, former President of E*Trade, and portfolio manager Oliver Wriedt joining the company’s board.
In addition, back in 2019, the company said that it also became the first digital asset company to launch a digital asset ticker on Bloomberg Terminal and also the first to join the Bloomberg App Portal. It also secured the first financial debt rating for a digital asset.
The company has a variety of revenue streams from different areas of its platform. It takes transaction fees on each deal, but also derives revenues from hosting data related to the performance of the underlying loans. Given the company’s technology stack, it has better and more verified data about how the underlying assets that back each security are performing, giving all investment holders a much more robust look at the health of their portfolio.
Longer term, Cadence’s goal is to move to a mostly SaaS model for originators and buyers. “We can be very, very beneficial to every single counterparty involved when we become that,” Chu said, adding “we essentially are Switzerland … because our incentives are all aligned.”
I asked about how the company is responding to the COVID-19 situation, and Chu said that as the world saw in the 2008 global financial crisis, “there are pockets of opportunity here that we continue to find, and we allow retail, accredited investors to get access to that.” Chu gave the example of game developers waiting on payments from Apple and Google who need short-term loans to cover costs.
In addition to Revel, other investors in the seed round included Morgan Creek Digital, Nimble Ventures, Argo, Tuesday Capital, Manatt, and Recharge Capital. R&R Venture Partners, a joint VC firm of former Citi chairman Richard D. Parsons and Clinique chairman Ronald S. Lauder, also participated.