Friday,30 September 2022

Kilde’s Radek Jezbera: “BNPLs are misunderstood, the unit economics works”

5 min read

Interviewed By Foo Boon Ping

Radek Jezbera, co-CEO of alternative investment platform Kilde discussed the performance of private debt instruments against publicly traded assets and in times of stress, the prospects for non-bank consumer and SME lending in Asia and how it can be made more sustainable.

Kilde is a Singapore-based alternative investment platform licensed by the Monetary Authority of Singapore (MAS) in November 2020, with an initial equity funding of just over $800,000.

The two-year old investment company offers privately placed securities with returns of between seven and 11% per year that it puts together from non-bank consumer and SME lenders which it calls deal providers. These lenders serve mainly the South, Southeast and Central Asia regions and include Home Credit, part of a leading global consumer finance provider that is a top three consumer lender in Indonesia with about $600 million of outstanding consumer loans.

The Robocash Group that specialises in short-term, salary, instalment loans and buy now pay later (BNPL), and operates in Russia, Kazakhstan, Spain, Indonesia, Vietnam, India, and the Philippines, with about $1.6 billion of outstanding consumer lending. And Atome which has a leading BNPL product in Singapore and Indonesia. It also operates in Hong Kong and Malaysia and has about $1.6 billion of outstanding consumer lending.

Kilde has so far deployed about $25 million of private asset investments for wealth managers, funds, family offices as well as corporate treasuries and accredited investors. It is targeting a seed funding round of $3.5 million to enable it to tap about $1 billion of the estimated $343 billion non-bank consumer and SME credit market in South and Southeast Asia.

Radek Jezbera, co-CEO, is a credit and risk management expert with more than 17 years of experience in consumer lending and banking and was previously project office director at Home Credit.

The following key points were discussed:

The following is the edited transcript of the interview:

Foo Boon Ping (FBP): We are very happy today to be speaking with Radek Jezbera, co-CEOand co-founder of an alternative investment platform called Kilde, headquartered in Singapore. It's licensed by the Monetary Authority of Singapore (MAS), with a capital market services licence and is licensed to issue securities. 

And it is a marketplace platform that marries investors with deals. And some of the deal providers are fintechs that specialise in consumer lending, buy now pay later (BNPL) and financing to the SME sector in Asia and the rest of the world. One of its platforms (Robocash Group) actually serves the markets in Europe, Russia, Kazakhstan for example. Good morning. 

Radek Jezbera (RJ): Good morning. Thanks for having me.

FBP: It's good to have you. A few things I want to discuss with you, your business model, your clients and also the investment deals that you put together for the fintechs, for some of these tech companies that support inclusive finance.

I want to know more about Kilde. Your business model. And who are your investors? Who are your deal providers? Could you give us a brief overview?

Banks have abandoned the consumer and SME financing market

RJ: Sure. Thanks for having me again. Kilde, is an income investment platform, I will frame it in this way, providing investors regular income on USD investments, most investments are in USD.

And we placed those money which the investors invest with us into the deals with the consumer and SME lending companies. Our geographical focus is Southeast Asia and Central Asia mostly. Exceptionally, we might have some European deals. 

And we picked consumer and SME finance companies, because banks have abandoned that segment of the underserved customers. After the 2008 crisis, it doesn't look like they are coming back anytime soon.

Hence, the non-banking consumer lenders, non-banking SME lending companies took their place. And over the course of past 12, 15 years, their place crystallised, they are very clear players, their innovative business models are being crafted. Buy now pay later being one. New trade financing solutions being another. A lot of new technologies, new business models are being tried.

And we associate ourselves with the larger and more successful companies in this space. And we provide them with the funding. And in exchange, we can pass this yield to our investors. That's the reason for the existence of Kilde.

FBP: Now, to the investors, these deals come in the form of securities. And the deals are securitised as what is described as private securities.

RJ: Yes, you can think about it as a privately placed bond. It is a bond, typically would have a three-year maturity. It will be possible to redeem your investment sooner if you need it. And it pays monthly or quarterly coupon and this coupon ranges from seven up to 11% per annum. Again, the coupon is quite attractive in comparison with the public bond market, especially nowadays. And it is because there are still good margins to be made by the consumer and SME lending companies, especially in the emerging markets like in Southeast Asia.

I don't think it's going to last in the long term, but now there's such an opportunity and we would like to seize this opportunity because consumer and SME (lending companies), they need the funding.

There's a certain premium they pay, but I think with the increasing competition in the market, this premium will over time diminish. But then again, as a scout, we will over time also introduce more assets into our platform. So, the investors have something to choose from.

Investment thesis based on analysis of accumulated data and individual loan performance

FBP: Tell us in terms of the investment, how big is the portfolio currently? You have a number of deal providers. On the website, you mentioned a few. For example, the Robocash Group. Atome as well. Those you cited, have around $2.6 billion (in outstanding loans).

RJ: We will be by the end of the year about $25 million (in) outstanding investment, coming from the high net-worth investors, family offices and mid-sized private credit funds. Nowadays, we are at around $5 million, last time I checked, yesterday, outstanding investment on the platform. 

The platform has been operating since February 2021. So we have achieved this in one year and four months. We started from zero. The whole company is two years old.

We got our licence from MAS in November 2020. We launched in February 2021. And the first commercial transaction in the summer of 2021. So we are fresh in the game.

The whole investment thesis is built on many years of accumulated data on the performance of the consumer and SME assets. And that's the big differentiator between us and the investor who is looking for, says, "I don't want to deal". And just put the money there. What we do is we have a software which we developed in-house, which is stemming from my credit risk experience in the past, and my colleagues and their data science background.

So we are able to analyse every single loan those lending companies have issued in the last three years. Usually, we look at three years in the past. And we look at the performance of these loans.

And we are able to say very precisely how much money those loans or loan books are losing on a month-to-month basis. And we look for stability, we look for growing portfolios. And this gives us a lot of confidence about the asset class. This gives a lot of confidence to our investors as well.

This is a very well, safe and secure investment. It also allows us to look at the past, at the shock scenarios. COVID was one for instance, and how all these assets performed. That's why we feel very confident about these assets.

During the current cycle of the financial markets, we see that it's impacting less, so far, the end consumers and SMEs our customers are financing.And it provides a safe haven, which is very hard to find nowadays.

FBP: The yields on those investments are high, seven to 11%. Your investment size to date, you mentioned $25 million, and the current outstanding is about $5 million. Some of them have already matured, about $20 million of them. And they have realised returns of between seven and 11%.

RJ: So to be very precise last year, we need to publish them to MAS, I can say in 2021, the average yield from an investment standpoint is 10.48%.

Illiquidity of private debt assets protects against volatility 

FBP: And in the current environment, that's very good. So the pressure will be on to sustain those returns. As we head into higher interest rates. Yesterday, the Fed raised interest rates. But the market in fact rallied despite the increase of 75 basis points.

Tell us, your thesis is also that alternative investment will perform better on a Sharpe ratio basis in times of volatility. Can you tell us more.

The question is, aren't all these investments, the underlying assets, aren't they subject to the same financial, economic conditions and the prospect of inflation, or stagflation?

What's the risk of the global economy impacting some of your underlying deal providers and their business models and ability to maintain and sustain margins?

RJ: That's a very good question. The economic and financial markets are full of paradoxes. And there're many layers to unpack. And all these things. Where to start?

Let's start with the private assets versus public assets. Equities and publicly traded bonds, they have one large advantage. There's usually enough liquidity if you buy the major bonds and major equities. You can sell them anytime. You can buy them anytime. But because this buying and selling, every minute every hour, every day, the price is influenced by the supply and demand. And they are very much subject to these cycles.

We see the bond markets now that Fed is raising interest rates, the biggest raise since 1994, 75 basis points. Suddenly, all the bonds look expensive. And the price of the bond goes down. It means that the yield goes up. And we see high yield, low price bonds. And we see the net asset value of the funds hold equities and bonds are going down suddenly.

So, that's the dynamics. Why is the private asset different? Because of the seeming disadvantage of private assets. As they are private, you cannot go to a marketplace to sell or buy them. This illiquidity shields them from this daily price changes basically. It shields you from the volatility.

You can argue that certain public assets, which are less liquid also are a bit shielded in a way. But the private assets definitely. They are meant to be held until maturity. So, in cases of the privately placed bond, you are meant to hold it until maturity, or when you want to redeem it. 

Like in our case, you really are expected to redeem it at the par value. We have an arrangement with the issuers that they will redeem it on the par value. So, you are shielded from whatever is happening. The bond has still the same price, technically, and you hold it. 

Going back to the yields, why they are higher than in the public markets? This is partially the premium for liquidity. And that is a paradox. Financial markets are full of paradoxes. This premium for liquidity.

Nowadays, it's one of the few income assets which protects you against inflation. Inflation is approaching high single digit now. You need to have an investment instrument with the corresponding yield which protects you against this. And it protects you also against the volatility. And that's why the Sharpe ratio, technically, on the private market instrument is high. 

The second part of the question about inflation is the most important element in this. Yes, inflation is currently, practically one of the biggest worries, specifically in the bond markets. 

What I'm hearing both in the public and the private markets, less in private market is that investors are sitting on their hands, waiting for inflation at least to stabilise at a certain level. We understand where it is before we can make deals.

In public markets nowadays, you don't hear about IPOs. You don't hear about public issuances. Because there's such uncertainty that people don't know how to price. Basically, those issuances, they cannot estimate what the demand would be. So, there's not much happening in this space. 

In my own experience, the private deals are still going on. Specifically, like those which have these yield parameters, which in today's environment, protects you, protects your investment and growth in real terms. But inflation, as you rightfully pointed out, it could affect consumers in the end. 

FBP: Yes, ability to pay, and asset quality. 

RJ: The ability to pay, people’s salary. It still remains to be seen. So, the inflation nowadays is a supply driven inflation. It's a supply shock. The oil price going up, supply chain disruption, and so on. That's why the prices are going up. 

Consumer lending companies withstood the impact of COVID

The question is, is it a temporary thing? Will it clear out? By the end the year? It's not a demand induced inflation. That's correct. Everybody's asking, is it a temporary thing? Which will level off? And subdue eventually. Or is it the new normal? Or it will continue? I don't know. There were some early indications that I read last week, that prices in India are starting to be levelling off, I think around 7% if I remember correctly, will remain to be seen.  

But about a consumer asset. Coming back to this data set and COVID. COVID was the biggest stress. Suddenly, a lot of people taking these loans, they didn't have any income because they worked in hospitality, in restaurants, F&B sector and these kinds of places, those are typically the underbanked people in the service places, service economy mostly. And they've been hit.

And we see the lending companies were able to withstand the challenges. On average, they had three months of losses. And then they recalibrated the lending strategy. And they partner resources with the other customers. So again, that's another paradox. So yes, there might be a hit. Probably, companies with good risk management, they will adjust to it. 

Non-banking credit increases in times of stress

But there's another paradox. Whenever we see that the economic conditions are worsening, there are more people turning to non-banking credit. Banks nowadays, they serve the middle class customers in the emerging markets. They don't want to go below. It's too expensive to underwrite those loans. So we see a paradox that it's a bit counter cyclical in the sense that more people from the middle class are slipping into the mass segment. 

And suddenly, they are coming to these lenders and take eventually a more expensive loan than the bank would give them. So we make sure that we work only with the lenders which work on the ethical basis. And they are regulated in that market. That's the overall dynamics of what is happening.

So, I expect that the buy now pay later will become more popular. Consumer loans will be more popular. More SMEs will be asking for working capital finance.

FBP: That's an interesting point because there's been quite a bit of analysis of buy now pay later providers. And a lot of them are supposed to be making losses on very thin margins. Pricing is impossible for them to make a profit. And yet that forms the core part of the underlying assets for your private debt. So I also want to understand a bit about the economics and dynamics of the pricing. 

So, you're offering seven to 11% returns. Those are already part of the agreement, those are coupon payments, in a way are guaranteed.

RJ: They're guaranteed. 

FBP: And how do you get those pricing from the deal maker? Isn't for them a costly way of raising funds? And from a demand perspective, $25 million, so far. How are you able to command that kind of yield given the size of the deal? They are not huge. All these combined. Some of these deal makers, their combined total portfolios are over $1 billion. A few hundred million. And the funding that you provide them is a mere percentage, very small percentage. Could you comment.

A $343 billion consumer and SME credit market in South and Southeast Asia

RJ: There were a lot of important points. And maybe I start from the last one. What is the value of the market? We did a measurement in 2020 when we look at the central banks of Southeast Asia, including India. And how much are the non-bank financial lenders? What were their portfolios?

We have calculated, it was $343 billion at that time, and it was growing on average per year, less than 9%. 

The market is quite large, not a few hundred million, it's hundreds of billions. And probably we didn't encompass a lot of micro lenders which didn't report or go under the radar, as well. So, the asset class is large. We are, with $25 million, a small ant eating a huge sugar cone. 

We would in five years like to have more than $1 billion deployed, provided the business will go well and again this will be only a small fraction of the whole market.

BNPLs are misunderstood, the unit economics works, Apple’s entry is validation 

FBP: We are in this situation where there is this financial tightening. We're no longer quantitative easing, we are quantitative tightening. Investors have high expectation on tangible returns.

RJ: I think because of this tightening that's the reason why the stock markets crash. To the investors now, itseems that the cheap and easy growth is over.  Now, we need to look for value stocks.

The buy now pay later companies are generating every month a lot of cash. They are also criticised for their unit economics. I guess it's missing the point a bit. Unit economics are okay in buy now pay later, margins are okay. They are not so great two years ago. Now, the competition is heating up, at the same time the market is consolidating.

And I think they will command again, a higher pricing power once the consolidation is over. But generally, the unit economics always worked. It's just that it is a bit misunderstood by the investors for two reasons. For one reason, buy now pay later companies are not regulated as a financial institution yet. They might be later. They are reporting as any other company. 

And it's not apparent from the financial statement, in the P (profit) and L (loss), how actually their unit economics work. In order to understand unit economics, you need to analyse them as if they were a bank. 

We are at the stage of the market, where the buy now pay later are working towards actively substituting credit cards and other point of sale financing methods. And we are at a stage of the market where we know that these buy now pay later are a network product by definition. You could compare them to Uber or to Grab. The more riders, the more drivers. So here buy now pay later, the more merchants you have, the more customers. Any network product, they tend towards a situation where you have a few major players. I don't think it's going to be one player, is not the situation. It is going to be a few major players. 

They understand very well. The negative profit mostly is because of the marketing expenses. Investors should ask them a question. Would this level of marketing expense be sustained in the future or would we come into some market equilibrium? 

When is going to normalise and then they can start turning the profits. I think the story is more about that. The industry is a bit misunderstood because it's actually quite complicated the way they operate and how they make money.

FBP: And you have big players coming in, big tech players. Apple is coming in. It's got a huge merchant platform.  

RJ: Huge with all the merchants of MasterCard. Apple coming into the segment is a huge validation. Apple wouldn't come to anything which doesn't work. Apple always focuses its strategy. I see that on a limited amount of customers somewhere, something is working very well. There's a product which is very useful. What if I offer it to all my customer base? I can make it a big business. And that's exactly what they are doing with buy now pay later. 

It's great additional pressure for a monopolistic company. But here in Southeast Asia, we have a bit of time because they started in the US. Again, the main operator Apple is doing a bit different.

FBP: The next question is, as we look towards or we are facing assumably harsher economic, financial conditions. Although higher interest rates would suggest better margins. But the higher interest rate might cause economic slowdown and may thwart or reduce demand, affect asset quality as we discussed. In the midst of all this, part of your business model, you have your investors and your deal provider. How would it impact the deal providers? The fintech themselves and techfins that are supporting this consumer lending. And the yield, seven to 11%, how sustainable is it in the longer term?

RJ: So, there are two forces which are working against each other. I mentioned that overall interest rates are rising. So, it means that the cost of funding, and cost of funding is eventually my yield, for these consumer lending companies will be rising as well by definition or at least like by the standard pricing formula, right? It will go up. 

However, there's another force which is working against this. The larger those companies are getting the higher scale they have. They generate a lot of cash every month every day, it's a very cash driven business. Eventually they can go for larger financing volumes with a lower unit price.

So, these two things will be working against each other. It's not that simple. The large companies already have financing agreements with the regional banks, like Stanchart being one and Citibank being another. In Indonesia, almost all the notable non-banking lenders have large credit lines from the local banks. And banks have very cheap financing despite the interest rates because they have deposits.

I didn't notice the deposits in my bank would be growing recently, despite the Fed rising. So you see, there are a lot of delayed effects which play into all these things. So, the question, how are we going to sustain these yields? 

You don't want to be dependent on one institution. There's like a lot of technical situation why it's beneficial for them.

Mitigate risk through mixture of deals and processing large amount of data on many small transactions 

FBP: Does this also mean that you are taking on higher risks, you are picking the riskier portion of their portfolios?

RJ: No, I'm pari passu. We make sure that we don't take a riskier portfolio.

FBP: Risk-based returns. Higher returns at higher risk?

RJ: It is about the mixture of the deals. Currently, it is about the mixture of deals. The large very well household brand names. Yes. They will not have a double-digit yield. They don't need to. More like emerging but already cash flow generating and profit-making companies, they will offer a higher yield. We actually let investors choose. Do they want to go with the household brands? Do they want to go with the small companies? We usually recommend to diversify across all this and you will get a certain average return.

In the long-term perspective, like 10 years from now, maybe this opportunity will not be there anymore in this attractive form. But as an investment platform, we need to adjust as well, bring other opportunities in, there are adjacent opportunities which require the same kind of skill set which we have, which is mostly the ability to process a large amount of data on many small transactions to generate investment assets.

And there are other areas. I just can mention, without going into details, for instance, merchant financing on a major retail platform like Amazon or Lazada. This is a very popular, emerging topic in finance that requires the same capabilities, the data crunching of the revenue, of the cash and then eventually against that you can lend.

FBP: How much data do you process? Do you look at the individual transactions? 

RJ: So, we look every month, we look at every underlying loan which has been issued. We are talking about millions of rows of data processing. And it took us a while actually to make the software.

FBP: And how do you make your revenue and profit? Is it fees? 

RJ: Great question. So, unlike a fund, we are a broker dealer in insecurities. We take the fee from the borrower or the issuer. And it makes a lot of sense because we make all the work. Structuring, analysing, making the investment, creating the investment structure. And doing the placement with the investors. Whereas funds they on the other side, they take a fee from the investors and then they make the investments. No fee from the investor, fee from the deal provider for putting the structure together, there is a small admin fee, which is charged to an individual investors, but nowhere near what the private debt funds are charging.  

FBP: Tell us a bit about your own funding and who are your key investors and so on so forth?

Not the investors who buy into (the assets), but invest in the company? 

RJ: So, we've been quite cautious with the funding, because we always understood that this is a regulated business, we need to clear certain milestones in order to take somebody’s money. For instance, the first milestone was getting a licence to do this. Once we got the licence, we took the first investor money, European Fintech Fund ventures, the seed investment into us and it was followed by the several angels in Singapore, which are basically finance professionals who understand the model and see the potential in this. 

FBP: Angels who are really into impact investing?

Target seed funding of $3.5 million to deploy $1 billion in private consumer and SME assets

RJ: So mostly, we have nine. I think we mentioned we are still very early on in the stage. We did two stages in equity funding we have raised so far $832,000. Not so much in two years, so nowhere near what the usual fintech startups are raising. We're actually going to be raising now proper, around $3.5 million. We started working last week. It's actually going to be seed, we don't rush. We think we have a long way ahead of us to get into this $1 billion outstanding investment. There's no need to rush to the series A, B, C. It will all come. 

FBP: So, it's still very early days for you.

RJ: It is early days. Interesting from the equity investor side. We have a very nice and helpful community of angel investors, friends and advisers around this. And they hold high position in their investment banks, and they understand what we're doing is very unique and very valuable. They are helping with the contacts, helping with putting their money in, introductions and these things  And we've been very blessed by this. Also, when I look at our investor base who are investing into our financial products. Also, we see a lot of people who are investment banking VPs, SVPs. So, it's full price validation, it's a product which is well understood and which is ready for a wider investment.

FBP: So, your current investors are mainly accredited investors, not so much institutions?

RJ: Most of the money invested through us is from institutions, but we have a growing base of accredited investors. Since the beginning of the year, we focus more on growing the base of accredited investors.

We may consider in the future also, whether this asset is suitable for the retail investors. I personally think yes. But we will see and we will have a discussion with all the concerned parties. Regulators, in terms of the risk exposure as well, but at the same time, I think there are already retail assets with similar characteristics which I see as riskier actually than ours. We'll see, up for discussion.

FBP:  The other question is, a lot of this funding goes into companies that are lending to the underserved. Our belief is that this whole idea of financial inclusion, enabling financial inclusion,

in the end, the costs of doing so to the end borrower, they have access, but there's a high price to pay, because investors are extracting certain margins or returns which are quite high. In the end, if we go back to social cause and social impact, does it come at a high price to the end users?

Sustainable inclusive finance starts with creating rails for the underserved into the credit system and lowering the cost of credit

RJ: That's a very valid and a good point. And we are very cautious about this. We have seen a lot of, I would say unsustainable lending. Which was in the past five years, these online lending apps offering 30-day loans with a 700% (interest rate), payday lending and all these things, which is very expensive.

On the second point, they were actually calling people in the cycle of the credit. Not very ethical practices. Fortunately, the regulator's started cleaning the space out.

For instance, in Indonesia where this practice is prevalent, OJK (the Financial Services Authority) has stepped in, started issuing licences. And they say we only want a certain number of these lending companies. And there's going to be certain rules. That's a good thing. This is clearing out the space. 

To your point, yes, the APRs (annual percentage rates) are higher than I wish them to be, for instance, sometimes they are 20, 24% APR on those loans, to their end customers. Although,it's still better to have these options.

Get the people, their records in the credit bureau that they are credit worthy. And eventually, the cost of the financing for them will go down and it's definitely much better than the other part, which is unregulated shark lending, predominantly in the rural areas. At one point, we provide consumer loan, somebody can finance a new mobile phone or something in the city, in Jakarta. But I think what is really important is to get these loans in the remote regions, get access into these remote regions. 

And for someone who buys a washing machine, or fridge, or something which is more productive. We have one more initiative, which is adjacent to our main business. So, it's women impact lending.

The idea there is that we set a certain criterion for funding, which helps the underserved, productive loans.

And in this case, it's women entrepreneurs, small entrepreneurs who have a small kitchen, a small service business like a cleaning business. And we then go to the lending companies we have. If you will originate loans to the customers according to these criteria we're are going to fund them with a lower yield, not the seven to 11%. But we will under the impact financing framework, and “please make these loans cheaper for them as well”, pass the savings to them. 

So, this is the way we like to give back to the economy and to the society.  

And you're creating that kind of product or that kind of opportunities for investors who are more concerned about impact than financial returns, and a lot of them are willing to invest not necessarily for the returns, but on the positive impact that it has on the lives of these people, as well. And you will be surprised how easily the classical consumer lending can be turned around to be impact lending.  

One of my customers in Indonesia, they have the largest point of sale network for consumer loans. They decided they're going to dedicate one third of their portfolio for working capital finance for the sole entrepreneurs, who want to buy supplies for their business, and is exactly this kind of small kitchen, cleaning business. They want to buy supplies at that shop, and because the lender has a point of sale lending arrangement with the shop, they can do a loan, which they call working capital finance loan.

And it's amazing. They already are on the one third of portfolio but they already issued about $20 million, quite a large number. And 51% of the borrowers are women. Exactly where it needs to go.

FBP: There are a number of this kind of marketplace lenders in Indonesia, Amartha, Koinworks are also looking at creating positive impact, lending with a mission, not just for financial returns.

RJ: I think it's possible. When these rails are put in place, in a sense, maybe for-profit consumer lending or corporate lending. When these rails are in place, then it's relatively easy to put through these rails a train for impact lending as well.

FBP: We see a lot of the formal institutions, the commercial banks right now, increasingly, they have got ESG, sustainable banking or responsible banking. And more and more, will for compliance reasons, have more sustainable lending practices. 

Thank you so much. I see this as the start of a conversation, and as you develop as you grow, that we will continue this conversation. 

RJ: Excellent, Boon Ping. Thank you for having me.


Keywords: Investors, Investment, Lending, Assets, Loan, People, Companies, Financing, Deals, Market, Pay, Price, Inflation, Funding, Yields, Question, Fintech, Bonds, Platforms, Terms
Institutions: Kilde, Home Credit, Robocash Group, Atome, Apple, Amartha, Koinworks, BNPL, Indonesia, OJK, MAS,
Guest: Radek Jezbera
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