Equity and bond prices turned lower in Q3 2022 against a backdrop of rising inflation and interest rates in the U.S., U.K., and EU. Amidst this volatility, global venture funding hit a nine-quarter low in Q3, down 34% since Q2 2022 and a 58% decline from the investment highs reached at year-end 2021.1
What does this mean for companies seeking to fund growth or access capital between fundraising rounds?
By analyzing our Q3 2022 data, Percent identified three key trends showing there’s still room for optimism in the private credit markets:
1. In a volatile market, demand for private credit remains strong.
Companies (known as Borrowers on the Percent platform) are increasingly tapping into private credit as an alternative source of capital while more traditional equity venture capital ebbs. The Percent platform continues to show a strong mix of growth with existing borrowers refinancing and/or launching new deals and new borrowers joining the platform, resulting in the highest volumes outstanding on Percent across the largest number of borrowers since our first deal launch in 2019.
Additionally, we witnessed cash inflows outpace outflows during most of the last 18 months. Despite the challenging market backdrop we saw over the summer, overall demand for Percent’s short-term high yield credit has grown. Percent’s market continues to offer cost-effective capital solutions to borrowers with limited access to funding, while also providing investors with attractive returns.
With this additional demand on the Platform from our accredited investors, and borrowers’ financing needs on the rise, our quarterly new issuance hit $74 million in Q3 2022 — 123% higher than the issuance volumes we had in Q2 2022 and 114% over those of Q3 2021.
The data reinforces investor comfort and interest in private credit:
- Spreads in our Consumer Loan and Business Loan indices have narrowed, becoming more aligned to other benchmark indices (such as the ICE Data Indices).2
- Platform transactions in August and September were oversubscribed.
These are positive indicators of investor appetite for future issuances on the Percent platform, relevant for both new and existing borrowers.
2. Rising yields are not entirely due to rising rates.
The average yield on Percent new issuances in Q3 2022 was 13.2%, up from 11.9% a year ago. Market clearing rates on the platform increased during this period, with investors seeking higher yields as base interest rates also rise, but that’s not the full story. Parallel to this search for yield, we are also seeing increased demand for longer-term paper. Currently, 30% of all notes outstanding on Percent platform have a term longer than 12 months — 16% at 13-24 months and 14% at 25+ months. Investors are willing to go farther out the risk/tenor curve when compensated with additional yield. This is particularly true for programs associated with borrowers who have a demonstrated track record of performance.
3. Dynamic markets require flexibility in setting terms.
New issuance premiums stabilized in September after market-driven volatility earlier in the quarter. Our data and analysis helps borrowers on Percent quantify how much more they could expect to pay for a new deal versus their last deal done on the platform (adjusted for any curve extension if they are refinancing one note with a longer term one). Adding this market color to our new syndication process helps borrowers execute transactions at market clearing rates in dynamic market conditions.
By assessing investor appetite before locking in deal terms, borrowers can pinpoint the sweet spot for their next transaction. Using Percent’s historical and real-time market data, borrowers can set a range of APYs for each deal and watch the book build in real time. Sophisticated syndication tools allow investors to indicate minimum rates and investment amounts, enabling borrowers to see the order book for each combination of size, rate, and term before choosing the transaction to complete.
Our Q3 market analysis demonstrates that investor interest in private credit at Percent is strong and growing. This is good news for savvy borrowers seeking capital to reach the next stage of growth.
Contact us for more market analytics or to learn how Percent can help you access flexible and low cost capital.
1CB Insights, State of Venture Q3’22 Report, October 11 2022
2ICE Data Indices, LLC, ICE BofA CCC & Lower US High Yield Index Effective Yield