Full Transcript

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Welcome again to building Passive Income Streams. We're gonna be discussing ⁓ cash flowing assets and private markets. Everything starts with you, the investors who are here to listen and to participate and ask hard questions. So let's figure out who is actually here. Looks like our audience today is mostly investors with substantial experience, they moderate to advanced. ⁓ The majority of you are accredited investors.

And many of you have some exposure to cash flowing assets though, would note that that's a sort of a smaller piece of everyone's portfolio here, not the majority. Probably normal, they're talking about a 60-40, I think we're definitely under 40 for most. So with that in mind, let's jump into our panel. We've got an amazing panel here. have three innovators, each of whom have developed.

really novel cash flowing products for investors of our type, everyday investors. ⁓ And everybody here has got years of industry experience and knowledge to share insights with you. So let's do a quick round of intros of who we do have. Why don't we start with Travis from Hey everybody, Travis Jamison, a bit of a serial entrepreneur over the years who kind of fell in love with the small business space. I thought the small business assets were kind of the best around. So I ended up

building a platform called CapitalPad, which is a way to become a minority shareholders in those, essentially to build a portfolio of small businesses without having to run them. That's the gist of it.

Sounds good. Get some leverage. Kenny, you want to go next? Tell us a little bit about your background, your product sense. Sure. Thanks. So my name is Kenny Rose. I'm the founder and CEO at Franshares. And I spent a decade in the franchise brokerage space, helping people understand franchise ownership and recommend brands based on their budget, their skill set and goals, and coach them through that whole research and purchase process.

And over time, I realized that people who have capital typically don't want to go run a franchise. And a lot of operators are looking to raise capital. So Franshares connects investors into franchise opportunities as a whole new asset class.

Awesome. And Nelson. Thanks so much, everyone. Good to be here today. My name is Nelson Chu, founder and CEO of Percent. So we specialize in private credit, basically. So private credit, for those who don't know, is basically non-bank lending. And so we're offering exposure to things like small business loans, consumer loans, factoring in invoices, litigation finance, things like that. And it's

been all the rage right now at the very least, I private credit is one of the hottest asset classes. So we give consistent cash pay exposure on a monthly basis to these types of opportunities. I'm to share more.

Great. So you see, we've got three people who really brought what were formerly institutional or private office type assets to be more available to individual investors like us. So let's learn from them. Let's push them with the real questions and let's dig on in. Before we start, just a note that as usual, the information and insights you're about to hear is not financial advice. You've got your own situation, your own advisor, your own decision-making. None of this should be regarded as advice.

Great. So our agenda here is to spend about the next 30 minutes answering a series of questions that we got from yourselves, from our teams about the private market cashflow and alternatives for investors. And then we're going to open it up to our investor audience to drop questions in the Q &A. You should see a Q &A on your Zoom screen, so feel free to start dropping those now or wait until that section. Let's start with a little bit of data on

Why are we talking about cashflow and passive income? Well, two main factors and a lot of side factors you can truly touch on. Number one, yield is back, right? It's been a while, it's been a couple of decades, but you can make money off T-bills and in your savings account. And so the pressure to generate higher returns from risky assets is stronger than ever. That said, private markets have been a bit stalled, right? We've seen the IPO window has not opened. We've seen a limited set of &A.

in a lot of the venture investments, private equity, and a lot of people are allocated to. So all of this pressure is creating this massive demand for cash. At the same time, due to inflation, The value of that cash continues to drop. ⁓ And so everything's getting more expensive and everybody's needing more cash. And so it's creating this perfect storm and entering into that void.

is what we call the rise of alternative cash flowing assets. So just as one example, know, private credit is an asset class we're to talk about today. Nelson has a lot of expertise there. I'm sure you all have opinions. This asset class has grown leaps and bounds over the last couple decades, really in the last few years. And it looks like it's going to keep going. And so that shows you how much demand there really is for assets that have some cash flow attached to them rather than just appreciating assets.

we all have to realize that there are challenges as well. ⁓ There's always those trade-offs. And so when you're dealing with assets that are gonna be returning higher than the risk-free rate, like private credit, like franchises, you're gonna have some risks. you can be locked up for long periods of time, not only because of the timeframe of the different investments that are underlying, but also...

each fund, since these are smaller funds, not publicly traded, is going to have its own limitations on when investors can redeem as well as limited secondary market options. So we're going to talk a lot about this today, which risks and concerns to keep in mind. So let's just take a quick look at what is available to investors right now. The types of products, obviously there's thousands of products out there that I can use to generate cash flow, but just to give you a sense of the landscape, we've got private credit alternatives. Percent will be representing that.

you've got shorter time horizons there. We have SMB investing, invest in actual businesses serving actual people in leveraged ways. We've got franchises, everybody knows Dunkin and Wingstop and a hundred other companies. So that's an interesting opportunity to get into names that are more known. And of course there are risks to that as well. And then, you know, the list goes on. There's private REITs, there's infrastructure funds, all of these products are being increasingly

made available to us as everyday investors moving away from the institutional base. So let's jump into this conversation and think about what we need to keep in mind as we navigate this increasingly interesting kind of product ecosystem. So let's start with ⁓ a simple question here. And we'll start with Travis. How do you define a cash flowing portfolio in terms of the way the market is looking today? There is sort of a

very traditional, you should have 60 % in public stocks, 40 % bonds. What does it look like today to actually have an allocation to cash flowing assets? think there's a lot more places to get that cash flow before. Bonds, part of the perks is the cash flow, but also part of it is historically, it's been a hedge. When market zig, bond zag, that's not necessarily been the case the last few years after.

a few decades of declining interest rates and ZERPs. So everything kind of got slushied up. ⁓ So I would say like cashflow and assets, there's so many different places to get it now. Like again, we have the private credit is a great example, like the Franshares the CapitalPad, all these different places. It's kind of just like building into your portfolio a chunk of your assets that will produce some sort of yield. ⁓ I think people could argue that that is possibly irrational, that you should just go for.

Absolute yield at any time like the absolute highest returns that you can get and that focusing on cash flow is irrational But I think if you take what's more reasonable for people I think people sleep a lot better at night having some sort of somewhat dependable cash flow coming in on a regular basis I'm deep rambling you won't Nelson. Well, we got plenty of rambling to come Nelson, what's your view on what does it mean mean in today's?

situation of a cash flowing portfolio? Yeah, I think it's really heavily dependent on the investor themselves and so what they need. I think at every stage of life, you need cash flow for different purposes. I would say for our user base, we do have a heavily like retired user base. That's what we skew for sure. And given that's the case, then there's a lot of people who are looking for heavy on the cash flow side and less so on the illiquids and less so on, you know, even like public markets, right, which they kind of want to keep there. So we're seeing a higher concentration of that.

But it's very, very investor dependent. It depends on how much risk you want to take along the way as well. I know you were saying, you looked at where you showed private credit 10 to 12 % as considered high risk and we're tracking a 15. So yes, our stuff is definitely considered could be higher risk for sure. But at the same time, what we found and historically based on the data is that in general, it's not about the yield that's of cause for concern. It's not about the size of the deal that's cause for concern.

It's really about leverage. So using leverage to invest in these things, then that's dangerous. But if it's not unlevered, if it's unlevered and there's a lot of diversification across these cash flows, then you're in a good spot. So we're in a pretty good position to help investors in all walks of life. ⁓ I would say skewing less towards cash flow when they're younger, more towards cash flow when they're older, to be able to provide them with monthly pay, which is a big important part of what makes cash flowing assets much more interesting. If it's quarterly or unpredictable, that becomes a lot more problematic.

I have to agree with Nelson 100 % that it depends on the person's individual situation. You know, it depends on your portfolio, on your income or lack thereof, that type of thing. There's not a cookie cutter solution. Like people should have this much cash flow. It really just depends on the situation. If you try to cookie cutter it, you end up in a bad spot. Makes sense. Kenny, any last thoughts on this one before we move on? Yeah, you know, I call it the defensibility of the dollar.

You just showed a great graph that shows that the dollar's not going as far as it once was. And whether that's because of inflation or the markets, you wanna make sure that your portfolio is gonna be adjusted for that. Now, obviously you don't wanna have your entire portfolio adjusted for it, so you don't want your entire portfolio in anything. ⁓ But to echo Nelson and Travis, it's really about the individual investor's perspective and goals.

So for some that might be retirement because social security doesn't pay the same way to maintain your lifestyle as you were when you were earning income. But also for some people, they're looking at inflation and seeing that their dollars won't go as far. Others seeing that the job markets aren't increasing their salaries the way that they should. And so they're looking to stack additional income streams that are diversified to help protect their income and be able to maintain that lifestyle or saving for their future goals or whatever that may be.

Got it. So let's just double click on that and dig into like, let's call it a typical investor. We recognize that there's no typical investor when the situation is different. But the average investor on our call who I think said they were a credit investor with about 20 % allocated cash flowing versus appreciating. So you can feel free to talk to me like as that investor. So how do I think about what percent of my portfolio should be?

cash flowing versus appreciation. mean, I guess the new 60-40, how do I figure out where I should fall on that spectrum? then within that, so let's just say the answer is, yeah, you're 20%, you should get to 30%. In that 10 % that I'm adding, mean, how do I think about diversifying across these different opportunities and asset classes, or is it fewer is better? How do I think about building my actual passive income exposure?

Why don't we start with Kenny since you finished the lab. Yeah. So there's no one size fits all answer here, but a good rule of thumb for most everyday investors, in my opinion, is aiming for about 60 to 70 % appreciation focused and 30 to 40 % cash flowing. Reason being ⁓ appreciating assets like stocks, startups, or growth real estate tend to outperform over the long term but come with volatility and no immediate income.

And then cash flowing assets like dividends, rental income, franchises, or other alternative assets provide stability. They reduce reliance on selling those assets and hedge against market downturn or job loss. ⁓ As you get closer to financial independence or retirement, that ratio should start shifting towards more towards cashflow because appreciation isn't gonna pay your bills, but cashflow does.

Travis.

I honestly have no idea how to recommend for like a general audience. I, I know how to recommend for myself and people like me, which are somewhat wealthy people that stack some assets. They've got a lot of things going on and then you look at it from there. And so it's almost like cashflow won't be the first thing. Like liquidity will be the first thing. Do you have access to enough liquidity to get you through, you know, maybe a couple of years if need be.

or to survive market panics to make you not sell at the worst time to be able to sit through and hold. like liquidity is very much the first spot. Then you look at your lifestyle expenses from there. Do you have really high lifestyle expenses versus your total assets? Well, then you got to kind of look at it a little bit differently from there. Is it much lower? There's just not one way to do it. And I hate trying to fit it in there because I want to feel like a charlatan if I do.

⁓ I like to think I want to have enough. This is for me personally. I want to have enough cash flowing assets that allow me to maximize like my good sleep at night. And so for me, that would be if everything went away, if markets frickin closed, all this crazy stuff happened for a bit. Can I live on that cash flow ⁓ for an indefinite amount of time? And I don't mean thrive. I mean like survive on that.

Even if that is somewhat irrational, I think it would help me sleep better at night. And so maybe it helps me make better decisions for the long term. Because overall, just focusing on absolute returns is the key. It changes again as I get closer to retirement or you're more dependent on that. Illiquidity can really mess things up. But for people anywhere from your 20s to your low 50s, if you got a lot of assets, I think that's the way that I like to look at it.

And definitely feel free to, as we go through these questions and get investor questions to focus on a set, know, if you look like that, if you're about to retire, maybe think about this. If you're young and in your prime earning years, think about this. So feel free to segment since one size does not fit all, but just double clicking what you shared. Can you just differentiate for the audience between what do you mean by cash flowing versus liquidity? Just so we have our definition straight. Yeah, that's a very important definition. ⁓

Liquidity means you can access it immediately. So technically stocks are liquid, right? But I don't like to put that in that same bucket because I don't want to have to sell those. So for me, it would be like, I keep a lot of treasury bills. I am in some like private credit funds and stuff like that. Ones with almost weekly access, that type of thing. So can I get cold hard cash as needed and immediately? Now for cash flowing assets, these are ones that

pay out part of their earnings in cash, whether that could be like percent where they pay out literally all of their earnings as yield, ⁓ or maybe like you think a dividend stock, right? So the average Coca-Cola and whatnot, they take part of their earnings and they pay it out in dividends. They take part of their earnings and they reinvest or buy back stock or something like that. So that cashflow component is the yield that you're getting from generally a company.

Gotcha. Nelson, third chance on this one. Yeah. How should I be thinking about building this portfolio and diversifying it as an investor? And again, feel free to talk about segments if you don't want to just say. Yeah, I think we're not here to make recommendation for everybody, but I will make a recommendation for everybody, which is please don't do 60 40. Like that is so, so bad these days with all the alternatives and options that are out there. I actually don't really recommend bonds in general. I think you can get better.

yielding stuff and more of occurring yielding stuff that has way lower fees and all those things than a bond fund. Right. So lots of ways to do it these days. ⁓ I think in the way that I think about it, at least a little bit is about actually how much work do you want to put into it? everything that's cash flowing requires some sort of effort. There's one end of the spectrum, which is our side on percent private credit, all of that, which is actually a bit of a set it and forget it. No work, but you also have no control, right? You're kind of just like investing in

banking on the fact that it's gonna work out. If you invest in a small business or you buy a small business, if you buy a franchise, a lot of times that has a little bit more work involved. If you buy a property and you wanna rent it out, that has a lot of work involved. If you're property managing, you're paying that as well. So a lot of people enjoy the work. A lot of people enjoy getting involved. A lot of people would like the control versus it takes a different type of person to give it all away and just hope that it works out, right? And they do their diligence upfront and that's it. So it's a different approach. Cashflow comes in a lot of different forms.

And it just comes down to some of it's how much work you want to put into it how much control you want to have in the outcome.

Got it. So let's risk gears a little bit, up the energy here and then put you guys on the spot for 60 seconds. We're going to ask you, know, why is your product the best? So we're going ask you to do a quick sell. So I'm in an elevator with you. We're going up to the 10th floor. You got 60 seconds. Tell me why I should invest in your product. As we do that, I'd ask all the investors listening in to just note their own Q and A's, you know, things that pop up for them in the chat so we can get to them or in the Q and A rather so we can get to them later. So.

Why is your platform product the best? Travis?

I think I want to tell you how I personally invest. I have a big liquidity bucket, right, with T-bills and some private credit. I obviously have a lot going into public equities and whatnot. ⁓ But over the years of playing in just about every asset class that exists, I kind of found that the returns from small businesses are the best that exist, ⁓ even on a risk-adjusted basis. But the problem was, you know, these small businesses will trade at like,

three X earnings, right? Imagine buying like a public company at like three PE, you know, it doesn't really exist. But the problem is how do you do that passively, right? And how do you diversify? You can't. And so what we actually found, or what I found digging into the space was you can, if you are providing funding to help people acquire these like legacy, boring, small businesses. I didn't want to be investing in like the venture space where it's like all speculative, like no profits, no anything just based on future growth.

I want to invest in boring companies that have been around for decades that reliably produce great earnings, and I want to become a passive shareholder in that. Capital pad is probably one of the only ways for accredited investors to access that space if they're not deeply entrenched in the space already. Essentially, you just provide capital when someone's acquiring a business, so maybe an HVAC company, a plumbing company, something like that.

You provide the capital, you become a password shareholder, someone runs it after they acquire it. And we just participate in the earnings upside, whether that's reselling it years later, paying down debt or whether that's cashflow distributions along the way. It's the A20. Awesome. Kenny, give us the hard sell. Well, I'm going to do the soft sell first and say that there isn't a best product or platform. ⁓ Just like stocks, there's no one greatest stock. You don't go all in. So I'd say

If you said, holy crap, I love franchises, I love that franchise idea, cut that allocation by a third and check out capital, patent percent, because you want to spread it across different asset classes within that bucket. With the benefits when it comes to franchising and franchisees, honestly, predictability. I think that's what people really want to know what's in their investments. That's kind of what has been good about T-bills and bonds in the past. And great thing about franchising is it's actually regulated by the Federal Trade Commission.

And so as part of that, franchises have to publicly disclose everything from the leadership behind the parent company, ⁓ financials, startup costs broken down by line item, and even how much franchise locations make. And so you really have a good understanding of how that business is going to produce and scale. ⁓ Also, when it comes to the exit from it, ⁓ franchises come with that.

either household name or at least the systems in place. And so people can get a higher multiple because they're able to plug and play into that system. I think investors are looking for a combination of income as well as equity growth with franchises get to offer and ⁓ also ability to get into these different types of industries. People view think of franchising is just fast food, but that is one of hundreds of different industries that franchises cover. And so...

You know, even within the franchise bucket, I recommend people allocate towards food, towards hotels, towards haircare, towards automotive. And so you're able to have these systems in place to protect your investment, the scalability to grow it. And also just that, again, predictability of knowing what you're going to get with it and being able to sleep at night.

Awesome. Last but not least, Nelson, tell us why your product is the best. Yeah. I mean, think if we're to go with the Kubeya approach, then yes, everyone here is actually quite good, but it is actually true. think I've been in the space for seven plus years now, seen a lot of fair share of alternative investment platforms and franchise platforms and SMB platforms. And like, to be honest, this crew is, one of the best. So, ⁓ really, really good options here specifically for Percent. I think we're pretty unique in the sense that.

Yes, private credit, the one that's getting all the attention is Apollo, Blackstone. If you want to put in a couple of tens of thousands of dollars into their funds, you absolutely can. And actually, those are pretty good investments. They are going to return in that 9.5%, 10 % range. You'll get that consistently. But that's also barely above what you can get in a high-yield account these days. Is that worth the extra risk and the lack of liquidity? And I think some people would say no. I think for us, we're offering something pretty unique. And I think you had a

listed on that graph earlier, private credit being a 1.8 plus trillion asset class, that is just kind of what those guys do, right? That's called direct lending. We focused on a different segment of the market called asset-based or asset-backed. And that means that there's an entire portfolio of assets underpinning your one investment. And so you could have tens of thousands of loans within there to basically de-risk it substantially, right? And so even in that call at 14, 15 % yield,

there's 10,000 plus loans driving that, which gives you a bit more safety on that front. We also have monthly pay, which I think is really helpful for private credit. Our durations are a lot shorter. So we're calling like a lot of them sub nine months with the ability to refinance out within that timeframe. So all of the pitfalls of traditional private credit, which is long lockups, ⁓ somewhat yieldy, ⁓ and then very little liquidity options kind of goes out the window with the investments that we have.

And we have an entire tech platform that's there to support that, right? So it's a different approach to private credit. You can't really get anywhere else. It is really hard to do what we do, unfortunately. So that has allowed us to create something pretty unique for the market. But yeah, I think to everyone's point here, don't make your entire portfolio. Would not recommend that. It comes with risks. 15 % is never free when it comes to risk, but it is and can be a really good supplement even to if you invest in Apollo's private credit fund to get a little more alpha on top of it. Awesome.

We're really getting going here. We've got a full room, so let's keep the momentum. Let's just double click. let's say believe everything you just said, you know, in each of your cases. Your product sounds amazing. So now I just want to know what underwriting processes are you using to bring these deals in, right? You're finding me pizza. You're finding me small businesses in Phoenix. You're finding me these pools of assets to underwrite in a portfolio. What are you doing to make sure those are good deals? And then

What's my responsibility beyond that? Can I just trust you once I've gotten on the platform or do I have some similar responsibility to create an additional filter for each opportunity? Why don't we start with Kenny on this one? Yeah, so I'd say franchising is both a very attractive one and a scary one because people don't know all that much about it. So kind of lean into it. We call it the boo approach.

we look at the brand, the operator and the opportunity. It's the Holy Trinity to make sure you have a good investment. ⁓ From a brand standpoint, you're looking at what's publicly disclosed about it and understanding how locations are growing, what the strength of the franchisor is, ⁓ how income has grown for those locations over the years. And so you wanna make sure that at a very top level that that brand is strong and sustainable and growing.

Then you're looking at the operator because you could have the golden arches out front. But if you have someone that's coming from IT to go run the location, they have no idea what they're doing. They've never worked with those type of people. So you want operators that have the experience, have the drive and have the plan to go forward and really execute on scaling your investment. And then finally the opportunity, because you could have a great brand and a great operator, but if they don't want to pay very much, that's not a very good investment.

And so we're making sure that they are rewarding investors upfront for the financial risk that you're taking by being an investor, but then also maximizing that long-term upside of being an investor in their business. ⁓ We've had probably a thousand different opportunities that came in the last year and listed four five of them. And so, we like to be very, very stringent on who we're letting onto the platform. And then when it comes to like an investors looking at these different opportunities,

everyone's got different mindsets, different preferences that they're looking at. You some people say, hey, I love the idea of franchising, but I'm staying away from food. Other ones that say, hey, you know what? I know those are old, reliable brands and that they're gonna be successful for the longterm. So we encourage everyone, we provide offering pages that dive into the brand operator and opportunity. So everyone should do their own due diligence, build their own portfolio themselves, but we make sure that it's a very high bar before they're ever able to

get listed because we're able to select very carefully from the large volume of deals that come in for us and want to make sure that people are getting into the best deals of that asset class. Great. Nelson, how are you diligent seeing and how do I, what do I have to do beyond that, if anything? Yeah, I think we've improved our underwriting standards over the years. It's been seven years now. So I think we're probably as good as we ever been before.

We've definitely learned our lessons along the way in terms of how to better protect investors and we've gotten smarter at that, right? So we don't shy away from how many defaults we've had, how many workouts we've had, but also even how many recoveries we've had along the way as well. And I think in terms of what investors should be looking for, we've done a lot of work to standardize every transaction. So literally every single deal looks and feels exactly the same. You can see how much is the advanced rate. You can see how much is over collateralized. You can see how much...

lost coverage there is you can see how much historical default rate has been on that portfolio. Compare them side by side, right? So we kind of give investors as much tools as possible on that front. But there's a lot of this is actually also what an investor is interested in themselves as well, right? So during COVID, for example, there was a, we had a lot of SMB loans. I think people did not really want to invest in SMB loans during COVID, which is, you know, good reason why there's no cash was coming out of these businesses. They were all shut down. But then there was a lot of interest in mobile app invoice factoring from Apple and Google.

There was a lot of interest in e-commerce financing. And so we basically took the effort to get more of those deals into market because investors were looking for it as well. Now we're seeing a slight shift. Sentiment and consumer is a little bit weaker than strength of the small business. We have good two small business and franchise companies here. And so that's been, we've been moving more towards small business side because we have our own sector thesis, macro thesis, and also what investors are looking for.

And on top of that, we are international, so there is some Latin American exposure as well. And we have plenty of investors that say, you know what, I like Latin America more because I think the risk premium is better, right? It's worth it for me. So our job is to standardize everything. Our job is to let on board what we think is the best deal onto the platform at that point in time in the market, given the general macro economy. And then investors can do the work with all the tech that we've had to be able to make the best choices, whether that's the right fit for them or not. But we've definitely, again,

to be fully transparent, learn our lessons over the year, but we still have maintained a pretty good default rate in general across at least the asset-based portfolio specifically, which is where we started and where we're now focusing more of our efforts on as well. So again, it's all publicly transparent and made available for anyone to see, and they can see if they believe us, they trust us, and if they're interested in what we offer.

Right, Travis? So we had a question in the Q &A, so I typed in, like, what are the returns for these types of deals? And I think we're really lucky because Stanford actually does an annual search fund study and McGuire Woods does one for independent sponsors. Both of those check, you should check them out if you're interested in the space. And it comes down to, they go into the math of what it looks like. It's kind of like venture. You don't want to invest in just one venture company. Like that's a really bad idea.

With these search funds and stuff, you also don't want to invest in one, even though the default rate is infinitely lower. But in aggregate, the returns are over 30 % IRR. And how is that happening? It's picking the right deals. And so what we're doing at CapitalPad is we're not focusing on growth from companies. They all are penciling in growth and saying like, we're going to

Double and whatnot in five years, but we discount all of that We want to find the companies that are hard to kill that have been around for decades. And so that's the first thing we're looking for those literally those companies that are hard to kill and then we start going through and It's more like it's less about finding the ones that are a great fit and more about finding the ones that aren't a good fit, right Via negativa. So we're looking for watching out for companies that have like high cyclicality like a lack of developed infrastructure You know, is it just?

couple of dudes in a website or is it something real? Is it a company with management layers? How sophisticated is the sponsor? Do they understand cash flow forecasts and whatnot? ⁓ Is there a concentration risk? Is the valuation good? Are the economic standard, is there too much leverage or is just the company too challenging of an industry to understand? And so we're going through all of those things and ⁓ very much like Franshares, we're looking through dozens and dozens of pitches for everyone that we see like, this is actually a good company, we want it back.

and then we present it to our investors. So I think our main value add to investors is curation. Like we're just going and doing the hard work and curating it to only bring the deals that we're putting on there that we think are worthy. And to be fair, like I put my own money in every single deal that we've put on the platform thus far and plan to continue doing that. Skin of the game, that's key. ⁓ Let's just give the other two guys a chance to answer that question on performance that was dropped in the chat. We had a few questions tied to that.

What would you like to say, and Nelson, about historical performance, your asset classes performance, default rates, all the questions we saw about all these issues, we're just going to roll them into one answer. Kenny, you want to go first? Yeah, sure thing. So the great thing about franchising is that there is historical performance on how locations perform as a whole. So you do have that to get a very solid baseline of what you're looking at.

But then also you're looking at the operator's performance ⁓ as a franchise owner or operator and understanding what they've done in the past. And so you get a lot of indicators that show what performance will be like. However, not all of them will have direct, here's what they've done with this brand because some of them are doing new locations. And so that wouldn't be an apples to apples comparison. That being said franchises. ⁓

You're depending on the study you look at, but the main one from the International Franchise Association is that 92 % of franchises are still in business after five years, and it's about the inverse for small business startups. So, you know, it's something where, again, predictability tends to be the main thing that people are interested in, because you've seen what they've done, you know how they got there, and it's a rinse and repeat situation.

Got it. is, how much of that's on me? Or actually, I guess I'd say, what do I see in terms of performance reporting when I'm on your platform? Like how often are you getting updates? there any buttons I can push for, is it more like spectating? Yeah, so I like to say it's like you're in the spectator's view of being a friends and family owner of a franchise. So you get at least quarterly financial updates.

And then you also get monthly qualitative updates. So you get to hear about things that are not in the P &L, like, hey, we're opening a new location. We're looking in these different neighborhoods. Hey, we made some great hires with the team and we're really excited because of their experience. Or, hey, we did catering for this large business in the community and we're excited that it's going to start getting other businesses to cater from us. So we definitely want you to understand what's going on in the business. Because honestly, we have a lot of people who

are investors that are already franchise owners because they especially understand the asset class. But then also people that are thinking about owning franchises in the future and really want to understand what it's like under the hood. But then also others that have no interest in either and they just are looking for understanding where their investments at.

Great, Nelson, ⁓ performance and also as an investor, how I get to see that, get updated on that, et cetera. Yeah, like I said, we're trying to make it as transparent as possible. So if you go onto our website, present.com, go to the investors tab on the top left and just go to our performance, you'll see everything there. But in high level summary, we've done close to $1.5 billion worth of amount funded. The average

return is about 16.47 % if you were to invest in everything we've ever done. The default rate is about 2.58 % off of that. And the loss rate is 2.15%. So we have had recovery on that. So that's overall. Our asset-based portfolio does better than our corporate portfolio. And that's going to continue to be case going forward, given our focus on asset-based. But I think for us, and I think Travis touched on it earlier, we really tried to ⁓ also meet investors where they are.

There's no shortage of investment opportunities that are 500 bucks that you can cut as a minimum. You can just put your money in, try it out, get the whole ⁓ feeling of the platform and how it works from start to finish, which is great. But we've seen the average usual trajectory for investors is they'll invest in a handful of deals, maybe like 500 bucks, a thousand bucks each, see how it goes. And then realize that, you know what, I wish I had more of like a blended product or a managed product where I don't need to kind of keep thinking about, this deal is coming back into market. Let me make sure I my money back in.

So we have blended products that come out every single month that is almost like an index, almost like an ETF for this space, which you can't actually call it that because the regulators would be very mad. But either way, it is a managed product that you can then invest into that gets you diversified exposure across 10, 15, 20 different opportunities based on thesis and mandate, right? So that's great. We have family offices that have put money to work that said, you know what, your managed products are great, but I want you to make one for me. So we can do a customized managed product based on their specific criteria because all of our deals are standardized as well.

And then we also have a fund vehicle because some people have expressed interest in investing in a proper fund. So basically all these things are designed to meet investors where they are. Depending on what they're looking for, we have a product for them at the end of day based on risk tolerance, based on management style, based on anything. So we try and make that as easy as possible and accessible as possible.

you've given us a really good sense of where things are at now, what the asset classes look like. Let's look ahead a bit to finish this off. So a year ago, we had this conversation, maybe a year and a half, we were talking about, what happens when interest rates go up? think now we're looking at waiting for the time when interest rates are going to start to go down. So what if rates come down? Do these assets lose their appeal? Do they become more appealing?

Are there various other strategies that would outperform in a falling rate environment? Anything you want to say about what could be coming on the pike and feel free to include trends beyond interest rate, but that's kind of the starting point. ⁓ Why don't we start with Travis on this one?

I don't think it matters too much to the small business space. ⁓ You could make the claim that if interest rates go down, then the current companies that we've invested in would be more valuable. You could make that claim. ⁓ I don't know if that's the case necessarily. I mean, what happens is the people who are trading these companies, they can then essentially leverage themselves up and pay more because the interest rate is lower. That's what it comes down to. ⁓

I don't think that really works as much in these cases. The returns and the yields on these companies are quite high. There's a cap to how high they trade. ⁓ Thankfully, some of this is artificially set by the SBA and some of the lenders. They're not going to overextend loans ⁓ on these types of assets. It's not going to make a big difference either way for the most part.

Gotcha. Nelson? Directly tied to interest rates, actually. So, ⁓ yeah, it's literally one for one. Basically, think being around for as long as we have, we've seen lots of different interest rate environments, right? We had a zero interest rate environment. We had a Fed rate hike environment. We had a taper and then a risky environment. And then now we're, I think, maybe tapering again. So we'll see how it goes. But in that instance, private credit generally trades at a premium to the risk free rate, essentially. And so for the segment that we play in,

It's usually about 10%. So when we were in a zero interest rate environment, our products were yielding roughly 10%, give or take. When it was a high rate environment, and even now we're still relatively high compared to where we used to be, we're trading like 14, 15%. So this is normal given where we're at. In general, I would say a lower interest rate environment gives a lot of relief to borrowers. They obviously want to pay less. It allows them to service the debt a little bit easier. So in that instance then, a case can be made that borrowers

make it inherently safer as a result of a lower rate environment. And it's also harder for investors to find yield given where the risk rate is going to be. So I think private credit is attractive in a zero interest rate environment. I think it becomes still attractive, but slightly riskier in a higher interest rate environment just based on the debt coverage that these borrowers have to support. ⁓ But again, with diversification, I think you can mitigate a lot of that. And I think with structure in the way that we've done it, you can mitigate a lot of that.

And I think there's a shift these days now, even in the market towards asset base, which what we've been doing for a long time versus that direct lending model. think asset base is the news articles are all coming out. Like this is where everyone's headed next. And it's like, okay, good. We have some experience in that. we like that. And we like how we're positioned in that instance.

Kenny, interest rates.

Yeah, when it comes to interest rates, we typically don't have leverage involved in our deals. ⁓ Most of the franchisees are looking to raise majority of the equity as well as bring their own equity so that they can cashflow quicker and not have to service the debt. And so we see that they're performing typically about the same and people are continuing to want to get access to them because they're looking for that cashflow side of things. ⁓ fortunately, it's a very well insulated ⁓ part of the market from interest rates.

I mean, the area of franchising that does get impacted by it is like those who are looking to get SBA loans, like Travis was mentioning. And ⁓ the people that we are working with, they are raising equity. They're not looking at debt. They're trying to scale their businesses bigger and faster. And so it's not something that we're typically competing with for it. So ⁓ yeah, we're pretty well insulated from it and really looking just for the income side of things to maximize that as much as possible.

Just sticking with our forward looking, mean, what are some other trends and nobody's mentioned anything about our AI is impacting this or all the new crypto actor we're seeing in the markets, the IPO window potentially opening up. What are you seeing right now in terms of shifts and where are you allocating new capital to it? And you can feel free to answer either personally or institutionally or sub asset classes within your kind of field of vision.

What's happening right now in the market that's exciting and opening up opportunities for you? Let's start with Nelson on this one. Yeah, so a couple of things. I was mentioning that obviously the asset-based side is becoming more interesting for everybody. I think people are shifting that direction just because the diversification inherently makes it a little bit more safe compared to direct lending. One borrower is entirely responsible for them paying back and them performing. So that's working out in everybody's favor, especially investors.

When it comes to AI, I think there is a very large graveyard of companies who have touted a new type of underwriting model using technology that is going to change the game and then they usually die, right? So there is a long way to go at the very least from what we've seen and we've tested out every single tool out there at this point around AI underwriting to get us to feel comfortable about it. Because a lot of times this is actually almost a qualitative question, not a quantitative question.

It is a conversation with these borrowers, the management team of these borrowers saying, do I actually trust you? Are you a good steward of capital? And that's a vibe check. not a, know, the numbers may tell a very different story than that. so AI right now is not there to give vibe checks on these companies for sure. And I think we're going to stick with our guns in terms of our ability to actually understand how these borrowers are doing underlying all of that beyond just the numbers, beyond just the portfolio.

But we're using AI for a lot of things that make our lives easier, at the very least, just around ingesting a lot of information and making sense of it and all that. ⁓ But that's not going to be part of our underwriting model, at the very least, not for the foreseeable future. Is there something new emerging, just sub-asset classes of asset-based or other forms of private credit or even other asset classes that you're thinking are well positioned now? Not necessarily, I would say. Private credit, for better or worse, is probably a

one of the slowest asset classes to innovate and evolve. I think a lot of the stuff is still done via Excel phone calls and emails today. So, you know, I think the bar is pretty low for at least us as a tech company to make things better and make it more efficient. I think we are doing a lot of things to push the industry forward. We believe that secondary trading and liquidity is going to be a very important part of private credit. I think it unlocks a lot of different opportunities and different perspectives on how these assets should work going forward.

make it more efficient, make it more liquid, all those things that you'd want in an established market. So we're pushing that direction for sure. Hopefully investors that are listening and investors that we have on the platform are excited by that prospect. But that's something that I think the industry does need and it's been talked about a lot, but no one's really done it in a material capacity using tech. And so we're hoping to be the first on that side. So you heard here, we're gonna break that news here on this webinar, but I think keep an eye out for that in the next couple of months. Awesome. Kenny, what's your...

What's your gut feeling here? Well, I would say AI is changing everything in every environment. And in franchising, it's really exciting because they, especially the larger brands, they have central offices that have the capital to experiment, innovate, and implement. And so you see this in a lot of different areas from things like the fast food places that are using it for how we take orders and get ⁓ those orders ready.

things from scheduling, marketing, like every aspect that you see AI being implemented, the franchisors are working to implement these things that they can then ⁓ get out there for their franchisees and impact the bottom line. So it's a really exciting time for us. And as far as like other things in the market that are exciting, know, private equity tends to be the largest holders of franchises. And so they are constantly acquiring other locations that are out there.

And so there's always a buyer for a good profitable franchise location. And especially as there's competition between those private equity groups to roll up more and more locations, you can see a bit of a premium for it. So, you know, not a ton on the underwriting side of things for us, but we do look at it from a brand perspective, as well as an operator and how they're implementing those new tools that come from the corporate side of the franchisor.

So is this, I mean, maybe I asked two questions in one, but are there products or sub areas of franchising that you see have greater opportunity sets or maybe that you have a lot of deal flow coming that you're excited about? products you're excited about today? ⁓ products excited. Yeah, well, we actually just launched with one of the 10 largest franchise brands out there in Pizza Hut. And also with ⁓ not only one of their largest franchisees, but they're the one.

of largest franchisees of anything out there with over 400 locations. And so we're about launching more and more with these like household name brands that ⁓ people are really excited about because they understand the safety and security in it. That being said, I always say like, it's good to look at different ends of the spectrum, like get in with a newer brand because then you get more of the upside there as well as the better territory selection. ⁓

Yeah, so it's just really exciting that we're launching with all these different brands in different industries. So there's a lot of product launches out there coming.

Great, and you have Chick-fil-A? Somebody asked that. I was in the middle of typing that question or the answer, but ⁓ we don't have Chick-fil-A, but they're also different than most franchises where the owners actually don't have equity in that brand. And we want to invest in operators that have equity and that they are incentivized to grow it in the long-term. The Chick-fil-A operator, they pay 10K instead of the full 2 million, but

you know, then they don't have the equity in the business. So you want to be invested in an operator that is also equally invested in its success and not that can be switched out.

Got it. And just while we're on little clarifications for Nelson and Travis, do you allow international investors? For CapitalPad, half of our deals allows international. So any deal that uses an SBA loan is disallowed by the government. But for about half of the deals, including the one we're closing right now, yeah, international investors are welcome to it. Per Percent. It's yeah, it's on the it's called reg s versus reg D.

So we actually have every deal can become a reg s deal if they so choose. But usually if that's the case, we do actually ensure that the investors are investing in a certain size because there's more additional paperwork like it's regulatory things that we have to file for to make that possible. Happy to chat about sort of what that dollar value looks like. But in general too, because of the complexities that most of our international investors invest in that bespoke managed product, which is customized to their liking.

Got it. right, so I've learned a lot here and I want to close with a really exciting opportunity to just share the knowledge and insights from this crew. So let's take out our crystal balls. ⁓ These last few years, we've had a lot of macro dislocation, a lot of volatility, lot of unexpected developments to say the least, including the last month or two. What's on the horizon? Where is this heading? I I'd love to get one prediction, not about a product performance per se, but just

what you see developing or happening in some of these markets we're talking about, ⁓ or with the regulatory environment or the macro. ⁓ Let's benchmark 18 to 36 months. We get back together for three years. What are we going to be talking about then? ⁓ And this is really aimed at, as an investor, what are the things I want to keep in mind? ⁓ Why don't we start on this one with Kenny?

I gotta say it's everyone's thinking about it. I mean, we've been fearing recessions for since COVID. And so, you I think it's not, it's not unwise to still think that that's a real possibility in the next 18 to 36 months. And so it's really important to be prepared for that and think for your portfolio, how you're defended with it, both like impact of the dollar as well as market sentiment, you know, think about how crazy the market's been the last.

like you said, month or two with fears of war, fears of everything. And, you know, I hate seeing that like your net worth is impacted by the news cycle. And so, you know, I think it's important to look back, be able to look back on it and say that like you allocated into different asset classes to be insulated from market sentiment or from recessions and like what these asset classes are that tend to still perform or outperform during those times.

Great. Nelson, what's your prediction for us here? You've been very prescient on these since we've gone back a few years on this. What do you see on the road? Still like my gold bet. But no, think the only thing predictable in the future at this point is going be that it's going to be unpredictable. And that's for sure going to be the case going forward for the next three years. And what that means is as an investor, this is going to be going off script and not in favor of any of the platforms on here.

have some protection on the downside and expect that you're get like whiplashy type reactions as we saw a few months ago, right? So if I were positioning it and this is not a recommendation, ⁓ have like either a long call on the VIX that it's gonna rise, like have a downside short protection that you have on there just to offset the loss that you're get from on the liquid portfolio, any like changes that happen and make sure you can get out of those positions quickly, because as fast as they rise, as fast as they fall as well.

but just be able to have a hedge that's in place, right? And go after uncorrelated assets. And that's where I think a lot of our three platforms do come in. They're largely uncorrelated. ⁓ But again, I think there's on the liquid portfolio have a little bit of a downside ⁓ blocker there to basically offset any losses because they can be very massive, but you can hedge against it.

Great. Last word on this one, Travis. So I actually looked this up when you asked the AI question, and I think it's just as applicable here. It's actually a quote from Jeff Bezos. It's like, very frequently get the question, what's going to change in the next 10 years? And that's a very interesting question. It's very common one, but I almost never get the question, what's not going to change in the next 10 years? And I submit to you that that second question is actually the more important of the two. And that's how I personally like to approach.

these things. And like that's the idea of even like CapitalPad, and I'm not trying to pitch myself again, but I am. You know, we're missing things that the AI doesn't really matter to these boring businesses. And that's how I invest in my own portfolio as well. The stuff that 10 years from now, what's not going to change, like that's where I feel more comfortable. And then I expand from there of a lot like Nelson touched on, like some hedges in place, just things to help you sleep better.

I invest a lot in international companies through like public equities and stuff like that and public ETFs. There's no rational reason for that. A lot of times the US S &P has plenty of international exposure, but it helps me sleep well, right? I have a fairly hefty gold exposure that helps me sleep well. so just building in these like more uncorrelated assets so that you can like sleep better at night. I think that's the move.

I have no idea what's going to happen elsewhere, although markets tend to get crazier quicker now, but also recover quicker now. So I don't know what's going to happen in the future, but I just want to invest in the things that don't change and sleep well at night. So what's not going to change? Just give us one example.

You're really setting me up to pitch CapitalPad more. I mean, so like the last few deals we've done CapitalPad, it's like the one we're closing this week. It's a luxury rehab center. People are still gonna need that probably more than ever actually. The HVAC, the plumbing, these like home improvement companies, like AI is not gonna matter to these things. Even if the economy's in the shitter, if you're in Texas and it's a million degrees, you're gonna find money to pay that HVAC company to fix your.

Like stuff like that's not going to change. AI is not going to impact it as much. Global economic changes aren't going to impact it as much. Some, yes, but those things not as much. Gold will continue to be used as some sort of currency by sovereign nations, that type of thing. Those are things I feel pretty comfortable sitting behind.

Awesome. Great last word. HVAC is king and probably will be for three years and a long time thereafter. So thanks to each of our panels. It's been great to hear all your insights and all the innovation you've built and continue to build. Thanks for the investors who tuned in and we kept a nice sizable group of investors entertained for 50 minutes, So thanks to everyone and we'll see you next time. Take care.

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