CoVenture Credit - Esoteric Credit with Ail Hamed, Brian Harwitt, and Marc Porzecanski

**Patrick O'Shaughnessy** (0:04)
Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

**SPEAKER_3** (0:24)
Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.
Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

**Patrick O'Shaughnessy** (0:49)
My guests this week are Ali Hamed, Brian Harwitt, and Mark Porzecanski who worked together at CoVenture Credit. When I first had Ali on as a podcast guest, we discussed the many aspects of what his firm does ranging from venture to crypto to credit. We glossed over the lending side of the business, but having since learned a lot from them on the topic, I was excited to get a chance to talk with members of their credit team for today's longer exploration of esoteric high yield lending.
I'm always proselytizing the value of investor education, so this week we have a podcast first. The CoVenture team has prepared a long series of posts that correspond to our conversation and go even deeper into the topic of credit investing. You can find them in the show notes at investorfieldguide.com forward slash credit. This is entirely different from any conversation I've shared before, so I hope you learn as much as I did. Please enjoy my discussion with team CoVenture Credit.
Well, thanks guys for doing this with me today. It's going to be a much deeper conversation maybe than Ali and I had the first time he was on the podcast about a very specific part of CoVenture and that's unique or esoteric credit. This is almost the exact inverse of venture in many interesting ways, but is enhanced by the fact that you guys also play in the venture world. Maybe Ali, you could just begin by framing this whole, we'll call it like a sub-asset class, why it's so interesting and why the sort of intersection of early stage or venture and lending might represent an opportunity that most people aren't even aware of.

**Ali Hamed** (2:16)
Sure, and so thank you so much for having us back on the podcast and one of the things that we have been talking about before this is it's really easy to breeze over a certain type of investment thesis, but it's a lot more fun to like really dig in deep and so hopefully that's what we're able to do today. As a reminder, the way we ended up setting up our business and built CoVenture in the beginning was we thought we were going to be a venture capital firm and we were making equity investments in early stage startups, but some of the startups that we were most interested in were in the alternative lending space. And the reason we were interested in that space is because we sort of saw this wave of Lending 1.0, which was Lending Club, OnDeck, Prosper, SoFi, businesses that became really large but primarily were taking loans that banks used to make offline and putting them online. And there was this huge promise of these Lending 1 companies. They were going to lower the cost of origination so that they could decrease the loan size, lend where banks no longer could, and they were going to use data that other people weren't using to decrease default rates and price loans better.
Not only that, they were then going to sell those loans to retail investors who for the first time were going to have access to yield that they never had access to before. The problem is almost none of that actually happened. The cost of origination didn't go down because as soon as everyone else realized it was a good idea, it became a flooded market and there was so much competition that the cost of acquiring a borrower went up. The second thing is people would come to us and say, hey, I gathered 150 data points about our borrowers and we're using these 150 data points to price our loans and lower default rates. We'd say, wow, that's really exciting. Of the 150 data points, how many of them provide signal and they were like, three.
One of them was FICO. The last part is the lenders on the platforms were mostly not individuals. You ended up just going right back to institutions all over again and this whole idea of democratizing yield just didn't exist in the way that everyone thought it would. So look, I would have loved to been an angel investor or seed investor in some of these companies. Some of our partners actually personally have been because they're worth hundreds of millions of dollars to a couple of billion dollars now. But we thought the bigger opportunity and the longer lasting opportunity was going to be new lending companies that were creating new credit products. These are credit products that had never existed before and the way they were being invented was because you were finding technology companies that were one, using their technology to observe a data point no one had ever observed before that could meaningfully drop the default rate by an order of magnitude, not just 100 basis points, and two, they would have a barrier to entry. The thing that gets us most excited in the world is when we find a technology company that's using its tech to invent a new type of credit and where if everyone else in the world realized that that lender was doing what they were doing, they wouldn't be able to compete.