FULL TRANSCRIPT
Slava (00:00)
In this episode of Smart Humans, we talk with the CEO of percent, Prath Reddy. He talks to us about the world of private credit. We talk about public fixed income versus private credit. What's the difference and what should you get involved with? How can you get yield? He has some hot takes on the economy, and they're not all bullish. And he also has some picks for three years out.
Slava (00:48)
Hello and welcome to the latest episode of Smart Humans. I'm excited for today's guest. We're gonna be talking about another asset class in the world of alternatives. So today we have Prath Reddy, who's CEO of percent. Welcome, Prath.
Prath Reddy (01:02)
Thanks so much for having me. Great to be here.
Slava (01:05)
Absolutely. So I'm excited to dive in, but we always have to start with the beginning, which is how did you even get into this world? How did you get into your world role? You know, take me back as far as you'd like, whether it's where you were born, growing up, schooling, your previous jobs, how did you land in this seat?
Prath Reddy (01:23)
Yeah, yeah, absolutely. as as always, it's always a a very winding path. And so for me it's you know, very much that story. So you know, in in college I I went to Northeastern and so it was all about, you know, kind of having different types of career experiences, you know, the co-op program, that's the whole reason why I went there. And so you know, understanding finance from a couple of different lenses is what ultimately led me into being really interested in investment banking.
And so, you know, I started my career in basically the heat of the financial crisis. you know, joined Wall Street at that time and, you know, really dug my heels into the the fixed income side. that's just kind of where the opportunities were at that point and kind of where my interests were. And so spent a couple of years you know, working at a couple of different banks, most of that time at UBS. And so while I was at UBS, I I worked on the fixed income desk there, specifically the debt capital markets desk. So
originating investment grade and high-held bonds is what I was doing day in and day out for the better part of ten years. And, you know, understanding how large companies kind of raise capital vis-a-vis this machine that's been created, that's been around for for decades prior to my existence was always fascinating to me. And, you know, eventually I I I didn't know if I wanted to be a career bond banker for the rest of my life. And so, you know, I I I I saw a lot of what was going on in the private markets while I was there.
We saw a lot more of our clients accessing debt in non-traditional ways, in ways that, you know, were really unprecedented, especially back in like 2014, 2015, 2016. And this was really a result of, you know, everything that happened post-crisis. So I saw the writing on the wall around, hey, there's different ways to raise debt capital. How can we kind of leverage, you know, this trend and how can we, you know, uncover an opportunity specifically in an area of the fixed income market that no one was really looking at back then.
And so that's that's what kind of led me down this road with percent.
Slava (03:24)
Sorry, so you go from you're from UBS to percent?
Prath Reddy (03:28)
Yeah, yeah, exactly. So I
Slava (03:31)
is a very big company, well known. I've seen some advertisements from UBS and then percent smaller. So how many years ago is that? And how do you make that jump? How do you make that transition? I mean, I imagine that's like a a bit of a change.
Prath Reddy (03:35)
Yes.
Yeah, to say the least. so this was back in twenty eighteen. I was a director at UBS, you know, making good money, having a good career, and you know, for promotion probably a year or two later, and I had just gotten married. And what was funny is, you know, I you know, I just got married and I was just like, what is next for me? I do I really want to be again a career investment banker, or is there something else out there? And and and part of this is like this entrepreneurial itch that I'd be scratched for a long time. I saw my dad build a business from scratch when I was younger.
That was successful. So I was always like, hey, for the right idea at the right time, I'd want to do something myself. So I was actually trying to find what was next, leveraging my background. So I made a profile on Angel List of all places. And I found a posting from my co founder, now co founder. his name is Nelson Chu. And he had this idea for a private credit marketplace built on blockchain. And I was like, hmm.
That's interesting. You know, that's that's got a lot of buzzwords that, you know, I can certainly subscribe to. So after meeting him in his kind of small little office downtown, he had a startup incubator that he'd been running for the last couple of years, you know, helped other businesses get off the ground. So I was like, all right, this is someone that knows how to kind of build a startup from scratch, you know, has the right VC contacts and things like that. I was like, okay, we can complement each other. I can bring kind of the capital markets background, he can kind of bring the you know the venture equity, you know, startup background.
We can kind of build this together. So that's basically what happened. After I'm meeting him in May of 2018, I kind of took the the whole idea back to back to my wife and I was like, Hey, I'm gonna like quit my job and just like meet this guy I met online. And she's like, You're crazy. But but you know, after a a few months of convincing, she was like, There's there's you know, there's nothing she could do about this. This this train's already left the station, and so
you know, joined Nelson and kind of formally started with him back in September of twenty eighteen. So it's been eight years now.
Slava (05:42)
Amazing. Amazing. and you're more recent to becoming CEO, is that right?
Prath Reddy (05:47)
Yeah, that's right. So, you know, after eight years of building this with him, you know, he wanted to pursue other interests, which is totally fine. You know, he's bu always been this kind of seri serial entrepreneur of sorts, much more kind of on the tech side. that's really what the area of focus was his what w you know, in terms of what he was doing here at percent. So wanted to take that and kind of run down the AI direction, which is great. You know, I I wish him best of luck, but he's still involved as
you know, our chairman of the board and so he's still gonna be supporting in a variety of different ways for for at least the near term. but, you know, really taking the reins here recently, building this business for what's next and, you know, leveraging a lot of what we've done over the last seven or eight years.
Slava (06:30)
Amazing. So we'll we'll dive back into percent and you know what it does in just a second. Let's change chapters here, which is how do you having lots of experience with background in finance, working at UBS and seeing all these innovative products, how are you Prath investing your net worth? And more specifically, what I'm asking is the default historically is 60% equities, 40% bonds.
Zero percent alternatives. Obviously, our show is all about alternatives, so some of our guests don't follow that percentage. So let's just start with the simplest of questions, which is what do you think your hundred percent allocation of net worth across the three sections, which is public equities, bonds, and alternatives is just three numbers.
Prath Reddy (07:21)
Just three numbers. I would say it is probably about seventy percent and thirty percent. And I'll say controversially zero percent. And I and I'll kind of circle back as to why I say that.
Slava (07:38)
So 70% equities, 30% bonds, 0% alternatives. And that is controversial on this show. So double click on the zero percent alternative. So for us, we're including anything alternative, which is not the equities and not publicly traded bonds.
Prath Reddy (07:44)
You know?
Okay. So with that definition, then I would say it's 70%, zero, and thirty percent. Yeah. So I I view private credit as some type of hybrid between alternatives and fixed income, depending on, you know, where you play within that spectrum. you know, if it's just for the fact that it's private, but it's otherwise, you know, kind of investment grade or, you know, highly structured to, you know, withstand any type of downside, then
Slava (08:02)
Okay, because it's all private bonds.
Prath Reddy (08:25)
You know, I would categorize it as more of a fixed income instrument, especially if it's a current pay type of product. So for me, private credit is more fixed income. current pay. So it kind of has monthly, quarterly distributions, in terms of coupon payments. So, you know, if it fits that mold, I kind of view it more on the fixed
Slava (08:31)
Sorry, if it's what type of product?
So that's what current pay means
is the monthly d distribution mechanism? Okay, great.
Prath Reddy (08:46)
That's right. So if it's cash flowing and it's, you know, paying, you know, with frequency and you're expecting to get a hundred percent of your principal back, you know, barring any type of default or workout situation, then you know, I would categorize it as more of a fixed income instrument than an alternative asset. And I know that's a controversial statement.
Slava (09:06)
Yeah, no, that's why we have you on the show, which is what is the difference between the public bond, which you originally said you were seventy thirty zero, versus the private credit, which now you're seventy zero thirty. What would you consider like again, this is for the sake of our audience learning and potentially following? what is the difference between the two besides the fact that one is literally through the public markets and one is not through the public markets? Or is it just that simple?
Prath Reddy (09:25)
Yeah. Of course.
It's it's sort of that simple, but there's a lot of nuance. So I would say for public bonds, the reason why they're considered public is because they're SEC registered, or they're in a format that's really, you know, kind of more liquid than not between institutional investors. So that's the one forty four A regas market. and they're QCP'd, they have ISINs, and theoretically you could trade them on electronic exchanges that that exist. And so as a you know, kind of
retail or a credit investor or non-institutional investor, in theory you you could go and purchase those bonds depending on your ability to access them vis-a-vis you know different types of brokerage platforms. So the key difference here is that private credit is typically not CUSIP not ISIN, and not offered any type of electronic trading system, nor are they SEC registered and nor are they, you know, kind of in a one forty four ARI guess format. So in that f because of that, they're considered
highly illiquid. So there's not really any trading venue for it. It's a buy and hold instrument and you're not getting all the the visibility that you would otherwise get if it was an SEC registered instrument. So that is the difference between private and public. And I would argue that if you were buying the bonds on the basis that it was liquid in the public market, that doesn't mean the liquidity is there. That just means you could trade it if you want to.
And what we've seen in the last eight years is that there is, you know, more and more interest to trade private credit in some form or fashion where the liquidity profile of private credit is getting better by the day and perhaps we'll even compete with the level of liquidity in the public fixed income market soon enough. So that's why I throw the lines.
Slava (11:16)
So
if it's not regulated through the one hundred forty four and I see register and it doesn't have QCPs, should I feel less safe about my investment into private credit?
Prath Reddy (11:30)
You should feel like you need to do more diligence around who the counterparties are and how exactly you get paid. because in the public markets you have trustees, you have different counterparties that are well regarded, everyone knows who they are. There's investment banks involved that are facilitating those transactions between issuers and, you know, investors. And so, you know, there's a lot of mouths to feed as well, right? So there's a lot of fees and, you know, there's a lot of leakage in terms of the returns.
but in private markets, you have to do your diligence, you have to trust who the counterparties are. And, you know, you you need to have access to that information in a way that makes sense for you. So if it's an SEC registered bond, like there is publicly available information that for that. You can go to Edgar, you can see the latest filings. you know, these are not just private placement memorandums or offering memorandums, they're they're full blown prospectuses. So you get a lot more disclosure. And so in private, you just need to be
you know, in the know. And how you get in the know is whether you ask for it or you're dealing with a high quality counterparty that can deliver that information to you.
Slava (12:34)
Awesome. So you didn't in your thirty percent, it sounds like your thirty percent alternatives is all one asset, which is private credit. Is that right? And just and just double click on that for the sake of the audience. So beyond your primary home, you don't have any real estate investments?
Prath Reddy (12:44)
Yeah, that's right.
No, I don't.
Slava (12:54)
Okay. And then you're not into crypto?
Prath Reddy (12:58)
I have some crypto but not worth calling any part of my meaningful asset allocation.
Slava (13:03)
Got it. Got it. And then things like pre IPO, like holding private stock, like let's call it anthropic.
Prath Reddy (13:13)
No, none of that. I I've you know, I I'm a so maybe to back up one step, I I I have the CFA. I went through the whole kind of CFA program back when I was at UBS. And for me, I always thought about, you know, kind of risk and capital and allocation from the perspective of your investments as well as your time and you know, where you're naturally exposed to. And so for me, I'm building percent. I have been for the past seven or eight years. I have a lot of exposure to percent as an organization that's a private company.
Slava (13:40)
Right, of course.
Prath Reddy (13:42)
So for me to go out and buy pre IPO stock is not helping my case. I I'm all in on percent right now.
Slava (13:49)
So your thirty percent is that all in percent or is that a portion percent? and I don't mean your personal holdings of equity, but rather your private credit holdings. Is it a hundred percent percent or is it a certain portion percent and a certain portion other private credit opportunities?
Prath Reddy (14:11)
So it's primarily percent deals vis a vis you know different fund vehicles that we have formed or that we have partnered with makes up that thirty percent.
Slava (14:25)
Got it. And are you getting like a mix of like a specific type of yield per year that you're expecting from that thirty percent?
Prath Reddy (14:31)
Yeah, I'm trying to get a a percent a month. That's that's my goal. trying to have, you know, twelve percent per year and have a monthly income distribution of roughly a point.
Slava (14:41)
Got it. Super helpful. And that twelve percent is that pre or post fees, just so I know for yourself.
Prath Reddy (14:49)
Yeah, post fees. So everything is net.
Slava (14:52)
Got it. Super helpful. That's super interesting. And then your public equities portion, are you just like S and P really passive or are you stock picking?
Prath Reddy (15:04)
Super duper passive, as you might suspect. So it's all Vanguard mutual funds. I'm super boring on that end.
Slava (15:10)
I somehow did expect that. Yes. That is what I sounds great. So you have like an interesting background, lots of experience. What do you think? This is a very open ended question. Take it where you want. What do you think of the current economy and the current state of the stock market? Obviously, there's so many things you can cover and I purposely left it open ended. So just give us the Prath point of view.
Prath Reddy (15:12)
Yeah.
Yeah. My point of view is I think that we're overdue for some type of equity correction. I think the market is very hot right now as it relates to a lot of AI hype. Now I'm not saying that it's all hype. I think that there's a lot of value in what's being created out there in the AI space, but it's early days. And I think a lot of people are leaning in, trying to pick their their horses as to who's gonna win the infrastructure side versus the application side and you know
And I think it's you know, time will tell in terms of you know which companies kind of win the day on that end. But overall, I think that there is a lot of money flowing into the stock market. I think there's a lot of concerns around inflation, which is kind of where the dollar has been and where it's going. and all that, you know, kind of is intertwined in this overall narrative of income disparity in the United States as well as globally and
you know, this kind of E shaped economy, if you will. And I've you know, I I call it an E, some people call it a K. I feel like it's almost like a, you know, you y you have a disparity where it exists to the point where the have everything's are consuming more of the wealth in this country. You have a lot of the folks that can afford to live in this country living comfortably or some on some spectrum of, you know, being able to make it and living comfortably. Like I'll call it the middle class.
And then you have a growing population of folks that can't even afford, you know, basic necessities. and that concerns me. It concerns me a lot. And it makes me wonder, you know, how are all these people going to be able to, you know, make a livelihood for themselves and be able to live in, you know, this economy that hopefully if you could afford it is great. and and then it also takes me to a place of thinking about, you know, the digital economy. And there's kind of the the the the real world economy that we all, you know, live in virtu you know, from a physical standpoint.
And there's a lot more that you can do in the digital and virtual world today. And maybe that's where, you know, a lot of the folks that can't afford the the real world will live in a virtual world now going forward. I know that's getting a little bit, you know, too too obtuse, but I I I that's just where where my mind's at these days. I'm I'm trying to look at all the different levels.
Slava (17:46)
Right, give me give me some more there. So the ones who
can't afford to live in the real world and living in the virtual world, give me another couple of sentences there.
Prath Reddy (17:54)
Yeah. So have you seen the movie like Ready Player One by by any chance? Yeah. So thinking of a world where, you know, if you can't afford to, you know, have real experiences and enjoy, you know, the physical world for all the beauty that it has or, you know, the people that you can share it with. And, you know, it's cheaper to live in a virtual world and you can actually afford it and you can, you know, kind of get your basic necessities met physically, like, why wouldn't you just choose to live in the virtual world? And
Slava (17:59)
I have.
Prath Reddy (18:24)
I think that we're gonna see like a growing portion of the population choose that route unless something happens, unless there's a way for us to kind of pull that population back into the into the real world.
Slava (18:35)
You know, for a guy that has very passive investments in the S P or whatever, that's a pretty good hot take. I like that. All right. So I'm gonna put you on the spot here. I call this lightning round. So interest rates twelve months from now, up, down or flat?
Prath Reddy (18:41)
I thought you like that.
And then they go up.
Slava (18:55)
Give me some magnitude.
Prath Reddy (18:57)
I think they go up by two percent.
Slava (19:01)
Whoa.
Prath Reddy (19:03)
Ha ha ha.
Slava (19:04)
Two hundred basis points.
Prath Reddy (19:06)
Yeah. I'm I'm gonna I know that I don't think that they're gonna go f down. I don't think they're gonna stay flat. I think that that we have some real runaway. Mm-hmm.
Slava (19:17)
to lower the rates, but they're gonna go up by two percent. You heard it here first. So is that right?
Prath Reddy (19:23)
That's right. That's right. I think that he is in his chair and I think that he's going to you know, listen to the administration. but I don't think the economic signals are gonna warrant his ability nor the Fed's consensus to move in any other direction than flat to up in the next twelve to twenty four months.
Slava (19:46)
So segueing right off of that, inflation, up, down, or flat.
Prath Reddy (19:50)
Up. I think let's say a hundred basis points.
Slava (19:52)
Magnitude?
Wow, okay. So we're talking like high fours, five.
Prath Reddy (20:01)
Yeah. I think f I think five percent, close like encroaching five percent is where we're headed. just by the level of kind of heat this economy currently has.
Slava (20:12)
And is that the war and oil, et cetera, or it's other things as well?
Prath Reddy (20:19)
I think it's I think it's the war, it's energy prices, I think it's a inflated stock market, I think it's gonna be some type of pullback around that end as well. That's gonna trickle into the rest of the economy. I think it's the inability for the government to subsidize, you know, some basic necessities for the entire population and and I think that's gonna translate into some type of economic issue from an inflation standpoint. and and and also just the lack of demand for the US dollar internationally.
given all of those issues domestically.
Slava (20:51)
Unemployment, up, down, or flat.
Prath Reddy (20:55)
Up. Yeah, I think it'll be up. I don't think it'll be double, but I think we'll start seeing it stick upwards. I don't wanna make a call on exactly where it is, but I'd say
Slava (20:56)
Twelve months from now.
But that's what
we do. So what's it gonna be twelve months from now?
Prath Reddy (21:13)
Let's say up another hundred basis points. It'll it'll rise within with in lockstep with inflation.
Slava (21:19)
wow. Is that on purpose or is that an accident?
Prath Reddy (21:24)
I think it is could be considered coincidental, but I think that they're related.
Slava (21:32)
Okay, so twelve months from now, are we in recession?
Prath Reddy (21:38)
So that's the interesting piece. I don't know if we're actually being recession despite all of that. So I think that there is going to be enough spending and enough economic output from the wealthiest classes of the US to prevent some type of formal recession from happening. However, all of the metrics that I just mentioned are really driven by the inaffordability of, you know, the rest of the population here in the US.
driven by everything that we're seeing right now.
Slava (22:11)
So recession, yes, no?
Prath Reddy (22:13)
No, no recession.
Slava (22:15)
And the stock market, let's just call it the S P or Dow or Nasdaq or pick your whatever you want. what is it twelve months from now? Is it up, down, or flat?
Prath Reddy (22:30)
I think it's down twenty percent.
Slava (22:32)
Wow.
Another hot take. Sorry, and when you say it, what was it in this scenario?
Prath Reddy (22:36)
Well,
let's just say the S P five hundred.
Slava (22:43)
Okay, great.
Nice. I mean, I like that you're not I like that you're not pulling punches. yeah, I mean interest rates up two percent, that's gonna be pretty rough. Inflation up a whole nother percent, that's pretty rough. Unemployment up, that's pretty rough, but no recession and the stock market's down twenty percent. Okay, cool. Let's now talk about anything else you want to add about the economy. Lightning round was fun with you.
Prath Reddy (22:48)
Not nice, but I think we're overdue for something like this.
I I think it's, you know, the the numbers may not make sense on paper, based on kind of what we've seen before as to how like recessions come to be or how, you know, kind of stock market pullbacks happen. But I think the nature of what I was mentioning earlier in terms of the E shaped economy that we're in and the fatter bottom E and the thinner top E is what's gonna lead to all that.
Slava (23:27)
Yeah.
Yeah, I mean in your scenario, obviously the middle and bottom part of the E, it's pretty rough.
Yeah, okay. let's dive into percent. So you already explained a little bit about public versus private. You actually a lot in your own portfolio are trying to get one percent yield a month, which is really interesting. So probably others are like, how do I do that? so let's just start with what is percent?
Prath Reddy (23:59)
Yeah, so Percent is on a mission to unlock liquidity and private credit. That's been the basis for the company from the very beginning. What that translated to over the last couple of years is building a marketplace where lower middle market lenders and and companies can raise debt capital directly with high net worth investors as well as institutional investors. So all private credit, none of it is public.
And everything runs through the platform. So you have a full brokerage style digital experience coming to percent.com where you can open up an account, you can peruse all of the individual deals that are on offer. They're all syndicated on like a two-week basis, basically, and you can participate in an auction. And so each deal is auctioned for full price discovery for the borrowers, for the investors, and ultimately you can build a portfolio of short term, short duration, kind of.
double digit yielding private credit transactions.
Slava (24:59)
So what is lower and middle market?
Prath Reddy (25:02)
So if you think about, you know, the size of transactions taking place in private credit, which is a good barometer for this. If it's, you know, call it over $500 million per individual deal, that's formally upper middle market. That's basically, you know, quasi-investment grade territory. That's what the uphauls, KKRs, and you know, the name brand firms are doing, and largely taking market share away from the leverage loan market and even kind of the high yield market in many cases. then you have middle market, which is like everything between call it 50 to 500 million.
So there's our companies that you know are don't quite have access to the public debt markets that are smaller, but there's a whole swath of kind of deal flow and counterparties and funds that are active in that space. And then lower middle market, I would I would define as anything that's like sub $50 million in terms of transaction size. So that doesn't necessarily mean that the deals are riskier. It just means that they're smaller. And the key determinant for risk and credit is really leverage. So as long as the leverage multiple still makes sense.
It's really a question of, hey, can you find access to these types of deals because they're being done left, right, and center, not in any type of, you know, kind of central marketplace or platform until percent existed. And so you can get higher returns for the fact that these borrowers don't have access to capital in the form that, you know, larger borrowers do. And so you're getting that scarcity value in in the form of higher yields.
Slava (26:21)
And are all your deals in that sub fifty or are you partially in the fifty to fi five hundred as well?
Prath Reddy (26:25)
All all sub fifty. In fact, most of our deals are sub twenty five million. And I'd say on average we've been around like the five to ten million dollar range.
Slava (26:33)
Got it. And you use the word auction. What what does that mean auction?
Prath Reddy (26:36)
Mm-hmm.
Yeah. Yeah. So it's a it's a Dutch auction. so it means that every deal is marketed with a range of yields being offered by the borrower. So let's say it's 13 to 15% and with intervals of you know 50 basis points across that range. So as an investor, you can say, Hey, I'm interested in this deal. I looked at the data room, I you know, asked the right questions with the IR team. I I understand what's going on here. I'd like to put this in my portfolio, I'd like to put a bid in.
And so I'd like to bid, you know, $100,000 at, you know, 14% or higher. So I don't want this deal if it clears less than 14%, if it clears 14% or higher, count me in. And so we build like a live order book on the back end to track all of those individual kind of price sensitivities and then ultimately clear a trade at the same rate for everybody and deliver those proceeds to the borrower. And you know, in that process, investors may get cut back or if if it was oversubscribed.
So it's a full, you know, kind of public style auction process for these transactions.
Slava (27:37)
So even though I as the investor, all of us want the higher yield, we want the fifteen percent, you're saying some people, because they're so interested in the deal, are willing to take it for thirteen percent. So then there's some sort of like, let's call it average result. So everybody gets it for thirteen point seven, who said that they would take it for that price or above.
Prath Reddy (27:59)
So it's actually at the borrower's option, which means that the borrower should always try and get the lowest possible rate. And so if they have enough demand at 14 in my example, you know, they'll take it there. If they don't have enough demand at 14, they'll take a higher rate. So as an investor, if you don't select a rate that's at or higher than you know, where the borrower wants, then you may get cut out of the deal completely because they may take a lower rate. So it's actually not the average of what everyone puts in, it's whatever the borrower wants.
Slava (28:26)
I see.
I see. So it's just like filling as much at the lowest rate possible. So it's a little bit competitive between the investors to be like, Hey, I really want the fifteen, but if I don't put thirteen point five, I'm probably not going to get it.
Prath Reddy (28:39)
Exactly. That's right. That's right. And and if even if I put it at thirteen point five and the deal is still oversubscribed and they take it at thirteen point five, I might get a lower than desired allocation too. So it's a very consensus.
Slava (28:41)
Got it. Okay.
Because first all the thirteens
took it and I might not be able to get all my thirteen point five.
Prath Reddy (28:53)
Yep, that's right.
Slava (28:55)
Okay, great. So let's talk about me as the customer and you as the lead salesperson, since you are the CEO, probably know how to sell this. I have no percent yet. I have no private credit. So what what am I so do I have to be an accredited investor? Can I be retail? How does that work?
Prath Reddy (29:04)
Sure.
Yeah. So you have to be an accredited investor or hire. you go through the process of signing up for an account, onboarding, it's all digital. It'll take you five minutes to kind of get set up with the with a percent account. And, you know, once you're logged in, then you know, you can peruse individual deals. You can take a look at all of the research that we have in terms of you know, case studies and, you know, kind of just blog posts around different topics that we've covered over the years.
We also have like an onboarding webinar that we encourage all of our investors to attend, you know, within the first, you know, couple of weeks of joining that we hold, I believe at least twice a month. and then we have like a quarterly webinar where we would invite all of our existing investors to join to provide the latest and greatest. So we're always kind of educating our investors throughout the entire process as soon as they sign up. and then on a per deal basis, there's also a lot of information. There's data rooms, there's, you know, kind of documentation, there's a lot of
comparison tool so you can compare this deal versus another very easily side by side. So really bringing like a public markets style experience to the private debt markets was again our North Star from the very beginning. And that's how we viewed the best way to unlock liquidity in private credit, right? Between different counterparties. yeah.
Slava (30:31)
It interesting.
So what's my minimum investment that I can make?
Prath Reddy (30:38)
So minimum is on a deal-by-deal basis. So it could be as low as five hundred dollars for some transactions. but I'd say the average minimum is probably like five to ten thousand. And so that's at the deal level. Another way that you could also invest on percent is through our SMA products. So we manage you know, your portfolio on your behalf. We'll sit down with, you know, a separately managed account. So it's basically a managed portfolio. So you'll you'll let us know kind of what your preferences are in terms of
Slava (30:59)
Sorry, SMA stands for what?
Prath Reddy (31:08)
you know, term duration, or we'll kind of, you know, walk you through what's available in kind of a starter package and you can tweak it as you see fit. Like I don't want these asset classes. I don't I don't want any deals that are less than twelve percent in terms of coupon. So our team will sit down and kind of curate that and then manage that on your behalf so you don't have to worry about the auctions and you know when the deals come up and all
Slava (31:27)
What's that product called
where you do that for us?
Prath Reddy (31:30)
sure.
It's called a separately managed account.
Slava (31:33)
Got it. So I choose if I wanna kinda like pick my own or if I want the SMA.
Prath Reddy (31:41)
brokerage account or SMA. And then there's a third option around funds. And so, you know, there's a couple fun vehicles that we're either doing internally or we have, you know, joint ventures with externally. So those are other products that, you know, we point investors to to get similar percent exposure.
Slava (31:58)
What's the difference between like an SMA and a fund vehicle? I mean, I think I understand that one is your handpicking to create a customized basket for me and the other one is a predetermined fund, but is that really the like the only difference?
Prath Reddy (32:03)
Mm-hmm.
Yeah, that's the really other difference. Like for the fun vehicle, you're just commingled with a bunch of other investors. so you don't have to you know, you're not picking a curated portfolio type. We're managing all investors as one unit. And so that's that's the key difference.
Slava (32:25)
So are the fees or the expense structures the same or different across the three?
Prath Reddy (32:30)
They're a little bit different. So if you're going direct, the only kind of fee that investors pay is a servicing fee. So that's you know, 10% of the coupon that's on the platform that's advertised. If you Yeah, that's right. So 15% deal, you're getting 13.5% net, and you're getting those distributions as and when, you know, that deal pays. then for the SMAs, it's another one percent on top as a management fee, since we're managing and actively managing your portfolio.
Slava (32:41)
That's the self directed is ten percent of the coupon.
Okay.
So is that eleven percent of the coupon or one percent on top of everything?
Prath Reddy (33:00)
And then from
One percent on top of everything. So for the same example, if it was just one deal, fifteen down to thirteen and a half, now down to twelve and a half.
Slava (33:10)
Got it.
Prath Reddy (33:11)
Yep. And then for the fund, it's a traditional, like, you know, one and a quarter management fee, twelve and a half percent carry, with a six percent hurdle. So that's more built for, you know, kind of QPs, RAs, kind of larger investors that, you know, need more of a fun vehicle to actually invest into the types of deals that we originate vis-a-vis our investment team. So that's that's why that vehicle exists. It's it's mainly for the non DIY investors.
Slava (33:39)
So let's just walk through the same, for the sake of this example, let's call it the a hundred thousand dollar investment. As a matter of fact, what's your average portfolio size?
Prath Reddy (33:50)
So average portfolio size is roughly fifty thousand because we have a lot of individual investors that are on the platform.
Slava (33:56)
Yeah.
And I imagine it grows over time.
Prath Reddy (34:00)
It it does. It does. I'd say most people kind of start with, you know, one or two deals, they see how they perform after a few months, they see the, you know, kind of interest being generated and hitting their accounts. And so they're like, Okay, great, this is not a scam. Yeah. And then they invest more.
Slava (34:13)
Right, right. And how
many deals is that average portfolio?
Prath Reddy (34:19)
So I'd say most portfolios have roughly call it six, seven investments. and over time it can be like I mean, there's the I saw an account the other day where the this particular individual has been investing with us since twenty nineteen, and I think they had roughly three hundred investments.
Slava (34:35)
Right. So the average investment is again somewhere like seven to ten thousand dollars.
Prath Reddy (34:40)
Yeah, exactly. That's right.
Slava (34:42)
And before we go back to the examples, and at a macro level, how much have you transacted in terms of volume? Or can you give me like number of customers or dollars through the platform or whatever, you know, big numbers, interesting numbers you have?
Prath Reddy (34:56)
Yeah, yeah. So we've had sixty thousand investors sign up on percent dot com. I'd say about ten percent of those investors kind of went all the way through and, you know, started actively looking or investing in in deals on the platform. so currently we have about four thousand or so active clients. We've done close to two point two billion through the platform over the last eight years through eleven through eleven hundred individual transactions, individual securitizations effectively, which is what these are.
Slava (35:20)
Awesome.
Eleven hundred deals. And do you have a sense of how much like yield you've returned to date?
Prath Reddy (35:32)
Yeah, yeah. So so net returns, in terms of like our core product. Our core product is this, you know, senior lender finance structure. So it's lending to lenders. So we don't actually lend mostly to borrowers, like in terms of individual companies. We're lending to other non bank lenders because we think it's a better risk adjusted return for everybody when you're inherently diversified through like a credit facility type structure.
So for that product we've done, you know, almost one point five billion in in terms of, you know, overall. And so on that end we've delivered fourteen percent, a little north of fourteen percent net to investors since inception.
Slava (36:11)
Amazing. so that's like well over a hundred fifty million.
Prath Reddy (36:18)
Yeah. Yeah, we've we've done we I mean we we have about four hundred million outstanding at the moment, so there's still stuff that's outstanding. But yeah, absolutely. the the numbers are are adding up.
Slava (36:29)
go back to me as the customer. I want to put in a ten thousand dollar investment. if I do the self directed, once again, assuming a coupon of let's call it twelve percent, is that fair?
Prath Reddy (36:44)
Yeah, I think that's fair, kind of net. absolutely.
Slava (36:48)
Sorry, okay, so in that scenario you're taking ten percent of the twelve percent, so you take one point two. So
Prath Reddy (36:58)
would be on the lower end of the types of coupons that we offer on the platform. I'd say most deals are like in that fourteen to sixteen percent, roughly. Yeah.
Slava (37:07)
use your fifteen percent example for the simplicity of math. So if I do ten thousand dollars self directed and I'm getting fifteen percent, you take ten percent of the coupon, which is ten percent of the fifteen percent right? So I get fifteen minus one point five, which is thirteen point five, thirteen point five percent, and that's coming in monthly. so divide that by twelve, so a little bit more than one percent a month. and when does that start to pay? Is that in month one?
Prath Reddy (37:10)
Yeah. Mm. Mm.
That's right.
Yeah, after month one. So it's
Slava (37:37)
If I invest tomorrow
because I love this podcast mo so much, when's my first payment? Do you know?
Prath Reddy (37:43)
So it depends on the deal payment structure, but if you invest tomorrow, your first payment's gonna be in August. I mean it's it's always after thirty days of when the deal closes is roughly the first payment.
Slava (37:53)
Okay, perfect. And if I do one deal or five deals, it doesn't matter because I'm doing self directed, I'm doing it on my own. Each has his own schedule. Then the SMA
Prath Reddy (38:00)
Yeah. Yeah, that's right. And and most most deals
are monthly pay. I'd say some are quarterly pay. But yeah, they're all, you know, certainly cash flowing is is the idea.
Slava (38:10)
And the if I do the SMA and I did that same $10,000, you said it was the 10% plus 1%. So it's the 10% on the let's call it mixed again. I'm just averaging it out the 15% mixed return via my SMA. So again, I'm getting that 13.5 back if the SMA equals out to my self directed. And then you're taking one percent from the 10,000. Is that right?
Prath Reddy (38:36)
We're taking one percent off of that thirteen and a half. So now you're down to twelve and a half and you'd earn twelve and a half on ten percent over the course of the year.
Slava (38:44)
Right. And on the SMA, I just have to fill out some criteria one time and then you just do everything. And on the sub directed, I have to like pick the deals. Is that right?
Prath Reddy (38:48)
Mm-hmm. Yeah, we just do everything. Yeah.
Yeah, just up front we kind of aligned on what you want, what you don't want, and then we just manage your portfolio on your behalf. And it's typically like a two, three year type of structure. So but we had check in. We do check ins, you know, every couple of months. We have an annual, you know, kind of mandatory check in, just to make sure that everything's going according to plan. But the idea is more of a passive approach for sure.
Slava (39:12)
If the average investment is seven to ten thousand, in the SMA, are you doing smaller slices if I only want to do ten K? So are you doing like, you know, seven, fifteen hundred dollar slices? Or is an SMA not worth it if you don't want to go below a certain amount?
Prath Reddy (39:26)
So an SMA, you know, our starting kind of size for that is fifty thousand because otherwise your point, you know, we we need to be able to diversify and have it actually, you know, be meaningful. So fifty K, that way you're not kind of subject to only the deals that have the lowest minimums, then you're also getting a good cross section of the deals with higher minimums too.
Slava (39:30)
Okay, makes sense.
Awesome. cool. Anything else you want to mention about percent for the audience to know?
Prath Reddy (39:50)
No, I'd just say that, you know, we've we've been building this marketplace platform for the past eight years. you know, me taking over the reins recently as CEO, I've, you know, made it a commitment internally to make sure that we continue to do what we do best, which is, you know, senior lender finance, you know, putting all that into kind of more of an asset management side of our house so we can have the longevity that that requires and make sure that, you know, investors are protected, that we continue to do well by them. On the technology side, we're actually building out an entire electronic trading platform for private credit.
that, you know, will not only service the lower middle market, but we plan to go up market with that and really try to, you know, provide a solution that I think that the market is looking for right now in terms of unlocking liquidity at all rungs of private credit in in a true secondary market. So, you know, we have we have a lot of wood to chop going forward, but that's that's kind of what we're focused on here in the years ahead.
Slava (40:40)
Great. you're obviously a smart guy. We all want to be as smart as you. What is it that you're reading, watching, listening, that you know, keeps you, you know, on top of things?
Prath Reddy (40:52)
Yeah, I I listen to a lot of podcasts. You know, I I love listening to like the acquireds of the world, right? I think those are always good just to kind of hear other people's perspectives on their journeys and like get the long form version of it versus like the the shorter snippets. Like those are always nice. you know, books wise, given that I've just recently kind of entered into CO seed, I've been reading a lot more books around how to manage my my time better. As one might expect. So off the clock is a yeah, off off the clock.
Slava (41:18)
Can you give us a block?
Prath Reddy (41:21)
is a book that I've been reading for the past couple of weeks. you can get it on Amazon. Just all about, you know, how you can be a little bit more time hacky with your day and, you know, with your life in general. and then another book I read recently, called Pattern Breakers. really interesting book just around you know, how a company can, you know, have a non consensus view and really, you know, kind of leverage and capitalize on that. You know, follows like Lyft and other companies that, you know, really were doing something against the grain that didn't exist before. But
Just sticking to it and making sure you get the right support and co conspirators around the hoop to make sure that you can, you know, succeed in that vision. So all all those things have been you know, been front of mind for me more recently.
Slava (42:03)
Amazing. and finally our three years out picks, which is can you give us one pick in the public markets that you think will be a returner three years from now? And then one pick that is not available on the public markets and you can't say percent. so give us your public markets pick first.
Prath Reddy (42:25)
So public market pick is gonna be boring. I'm gonna say the Vanguard. I'm gonna say the the Vanguard technology index specifically. So not the index, not the ETF, but the mutual fund, because you just have lower kind of expense ratios with that. But it's done well. I think it'll continue. Vanguard.
Slava (42:44)
Do you know the ticker?
Prath Reddy (42:46)
So VGT is the ETF, but the V I T A X. Yeah, V I T A X. So that's the Vanguard Information Technology Index Fund. and so that that I think will end up doing better long term. It'll continue to gobble up all of the the mega cap companies that continue to come to market in in a more balanced way. And so, you know, me being the conservative.
Slava (42:54)
V I T A X.
Prath Reddy (43:13)
person I am on the equity side, that's that's where I gravitate towards.
Slava (43:17)
All right,
perfect. and then what's your non public pick?
Prath Reddy (43:23)
In terms of equity or anything?
Slava (43:25)
Anything that's not in the public markets.
Prath Reddy (43:26)
So on this side, I came across a company recently that you know we started kind of getting more friendly with. It's a company called Krexin and I'm just gonna give them a a shout out today. its CEO is a guy by the name of
Jateen. And Jateen has a great background in you know, kind of data science and and really you know being a quant at the insurance level. And so he spent a lot of time on that side, kind of managing asset liability management within insurance and pension fund portfolios. And so I think that there's going to be a lot of AI need for those types of environments.
And he's building a fantastic business, building it, you know, completely AI native and you know, introducing really interesting products for, you know, the largest insurance companies in the world to leverage it. to ultimately like reduce, you know, their their their their cost basis, right? And if he's able to do his job correctly, like every dollar of savings for those insurance companies leads to, you know, savings in premiums for customers. And so it's a very macro approach and I think he's gonna bring
Slava (44:32)
What's the exact product
that he's building?
Prath Reddy (44:34)
it's it's an ALM, like an asset liability management analytics solution for insurance companies. that's all AI native and AI driven.
Slava (44:39)
Got it.
Yeah.
Prath Reddy (44:45)
So Krexin, K R E X I N, check it out.
Slava (44:49)
K-R-E-X-I-N. All right. A lot of hot takes here from a guy that's supposedly boring with how he invests, but I like it. I like it. So we've been on a long, windy road here. Thank you, Prass, starting from Boston, with your education and then with UBS getting your fixed income chops, then obviously becoming CEO here at percent. Very cool. 70% equities, 30% bonds.
debate whether it's public or private, whether it deserves to be alternative, but it is private, so it really does deserve to be alternative. You gave us a good explainer as to what's the difference between public and private, which I think the audience and myself really appreciated. You do think there's a correction to be had in the economy and in the stock market. So that's a pretty hot take. And not only do you say that, you actually gave us all the numbers between interest rates, inflation and employment, and obviously you did say there's no recession, but the stock market will drop 20% in 12 months.
Prath Reddy (45:26)
Mm-hmm.
Slava (45:44)
We talked about e-economy versus K economy, which is really helpful. Then we got into percent.com, which has been around for many years, has done over $2 billion of transaction volume, has already dividended out, well over $150 million. We got to talk about that you should be accredited, but there's lots of options, whether it's SMA, self-directed via the funds, and there's a lot of opportunities to really get into the private markets. I think that you know the $50,000 average investment, six to seven investments, accounts are growing.
really interesting the fact that you've had so many returns already. So definitely want to check it out. you talked about some interesting content. I want to read off the clock because everybody needs to learn how to have life hacks. And you did give us a boring pick for public markets, but you know, it can't everything can't be a hot take. you gave us V-I-T-A-X, but then you did give us a little bit of a hot take on the private markets pick for three years out. Prath, thank you very much.
Prath Reddy (46:38)
No, absolutely. Slava, really really appreciate being here and really enjoy the conversation.
