Val Katayev

Val Katayev

04-08-2022

16:44

The 2008 crash gave me a golden insight that I kept to myself. I used this insight to turn a $9M fund and grew it to fund $1.7 BILLION. My insight was so compelling that investors were giving me 10s of millions in a single meeting Here's what the insight was and how it worked:

Part 1 - How I got my golden insight. In 2006 I was lending money to people through a new platform called Prosper. Say you want a loan. You could get a bunch of people to pool the capital and loan it directly to you through Prosper

It was a new concept at the time. The concept was called "Peer To Peer Lending" or "P2P Lending". In February 2006, Prosper was the first to launch such lending in the US.

When I first came across it, I thought it was an excellent idea. "I can be a bank!" was my thinking. So in March 2006, I started to lend money. I lent out $150,000 to a bunch of strangers with random needs. I was one of the first 1,000 P2P lenders in US history

I was making loans through Sept 2007. The loans had a 3-year duration. So they went right through the 2008 Great Recession.

This was the most horrible time in history to be giving out loans. Frankly, I was sure that these unsecured loans would get wiped out. I had several $100K invested. Mentally, I already wrote it off and forgot about my account

A few years later, I logged into my account assuming I have a huge loss. I intended to take out all the money left after the losses.

Miraculously, there was a 2% gain!! It was amazing that this portfolio withstood the worst lending crisis and came out with a gain.

I had a big "aha!" moment. Let me explain this billion-dollar insight. Prosper was in the business of giving unsecured loans to ordinary people. This lending business was very similar to the credit card debt business.

I did some research and found that credit card default rates have NEVER surpassed the actual interest rates they charge. Not even Financial Crisis. This chart tells the whole story perfectly. Peer-to-peer doesn't carry the risk profile that bank business loans do. Because...

- These are small loans spread across many different credit-worthy borrowers so the risk is diversified. - Borrowers don't want to ruin their credit score. - Default rates may increase, as they did in 2008, but still lower than the interest rates these loans charge.

Peer to Peer loans were extremely low-risk. I carried this insight with me for 7 years. Now, fast forward to 2013 of Part 2 of this story. I put this insight put into action.

I have just sold my 2nd & 4th companies. I was sitting on a bunch of cash from the sale. I went on a hunt to invest a chunk of the capital into something that will generate cash flow, without much risk.

And I remember how P2P loans performed for me. The first thing I do is call Prosper and tell them, "I need to put in $20M of my money". They tell me, "impossible". "That's institutional size money, we can't put that to work. It'll take forever. You might want a fund."

Ok, "fund", even better. I can give it to a fund and let them do all the work. Great! There were probably a total of 4 funds at the time focusing on this. I called several.

One firm was Prime Meridian Capital Management. It was small, maybe about 1 year old at the time. With only $9M under management. The founder was Don Davis. Based in San Francisco. I liked Don.

So instead of just becoming a LP investor in the fund, why not leverage this investment to become a GP owner of the management company as well. Plus I can help the company grow. I made him an offer...

I'll: โ€ข invest $20M as a Limited Partner into the Prime Meridian Income Fund โ€ข help you fundraise more In return, I want an option to buy a significant % of the management firm if I'm going to help it grow. I believed in this and wanted to be a GP.

We had a deal. I would soon own 30% of the firm. At this point, I was "retired" so I had spare time to go out and help raise.

Hereโ€™s the thing thoughโ€ฆ I never raised a dime to that day. Never had to. All 4 of the companies I founded by then were self-funded. So I had to learn how to raise money on the fly. And I learned fast.

The big selling points were: - The returns were consistent in the 7-12% range. That sounds boring, but that's a lot for a low-risk investment. And it's meant to be a "stay rich" fund. - I had significant "skin in the game" with my personal LP investment.

- There were monthly liquidity options. So that investors have means to exit the investment. This was due to the fact that the funds have incoming loan payments at all times. So we can predict the amount of cash that comes in. That cash is available for investor redemptions.

- Minimal Cash Drag. There are many investments doing great returns for small $$s. But take forever to absorb big amounts. That's called "cash drag". Big investors need a way to put BIG $ to work fast. So when $10M comes into our fund, we are able to bid on 40 loans per second!

So my first strategy was to go after other high-net-worth individuals like me. People like me made big $$ in risky bets like tech. But many don't know where to park the cash safely with the possibility of a steady return.

I went out there and started to network. My rich friends jumped on first. Then the network effect started to kick in. You meet 1 person, and that person introduces you to 3 more. Those 3 introduce you to 9. It was so quick.

In one case I went into a meeting with a successful tech entrepreneur who just had an exit. He showed up with 2 other guys. It was a 30-minute meeting and I walked out with $18M from all 3.

As our AUM (assets under management) grew to over $100M, we started to see institutional and international interest. It was fascinating to see how the world of money operates. It is fascinatingly vast. People and institutions largely make decisions on whether they trust you.

Some institutions such as foreign banks, wealth managers, and even mutual funds would allocate big money. $50M, $100M at a time.

To attract international investors we hired a legal team to set up a special infrastructure. Investors outside the US do not want to invest in US funds due to a number of legal or tax reasons.

We created what is called a "feeder fund" in BVI (British Virgin Islands). A feeder is essentially a fund that collects the capital and invests it into the main fund (back in the US). This allows international investors to more easily invest in our funds.

Another important decision we made is to have "pure play funds". Many fund managers would have a single giant fund, and all investments are made out of this one giant mixed fund.

I told Don that there is something special about being able to choose your own flavor. So we had separate private credit funds for: Consumer Small Business Real Estate Specialty Finance

Each one had a different profile. Most investors would pick and choose where to allocate. This would reduce a systemic risk.

We now had $100s of millions under management. Funny enough I started to be recognized in the fintech world. It was now 2016 and I was the only person with 10 years of experience in P2P lending!

In 2017 Prime Meridian was given the award for the Top Fund Manager at Lendit Awards. Don and team were crushing it.

Since we started, Prime Meridian has evolved into a broader Private Credit world. Plus we launched a public fund ($PMIFX) to make it easier for everyone to invest from their own brokerage account such as TD Ameritrade (without being an accredited investor).

We started with $9M. But we have now funded $1.7 BILLION of private loans across our funds. With 300+ private investors around the globe. If you want me to share more of these stories -

Retweet the first tweet of this thread. Follow me @ValKatayev for lessons in business and life.

And since managing money is a serious business, our lawyers are making sure I tell you to read these disclosures:

Since some of you are asking, forgot to tag the company this whole thread us about! ๐Ÿ˜ƒ @PMIfunds



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