Would/Do Private Credit Hedge Funds Pay Advisory/Origination Fees?
Do Private Credit Providers Pay Advisory/Origination Fees
Have read a lot about Private credit being in a "golden age" of sorts.
Was curious about building an intelligence platform that could match middle market firms looking for funding, including debt investment with the proper capital providers. It's an idea I have been putting some thought into and got a friend who has about 3 years of commercial banking interested in partnering/co-founding.
Was curious, would hedge funds be open to paying small origination fees for companies they find & lend to through the platform? What would the correct pricing be? I know a few firms like this exist & they are young & venture backed.
Was thinking of if either charging 80 basis points upfront as the deal closes to the lender or 96 basis points paid monthly, 8 basis points at a time, over the next year assuming the borrower does not default.
Hope that is a good affordable price for them. Curious if family offices that claim on their sites to offer direct lending investments would be interested as well? Obviously private credit funds may be interested, perhaps venture debt funds may also be interested. Hoping I can find some boutique funds interested after building an MVP by mid-late summer.
Hoping the platform could also expand into majority or minority equity investments and be an origination/sourcing resource there as well. Thinking we could pay out a portion of our fee to people that refer good targets onto the platform that get funding, the target's lawyers, consultants, accountants ect.
Open to all thoughts, insights, advise ect.
Based on the WSO threads and discussions, private credit funds and hedge funds involved in direct lending often do pay origination or advisory fees, especially when dealing with platforms or intermediaries that facilitate the sourcing of investment opportunities. Here are some insights and considerations based on the context provided:
Origination Fees: It's common for private credit providers to pay origination fees as part of the cost of acquiring a new loan or investment opportunity. These fees typically compensate the intermediary or platform for the service of connecting lenders with potential borrowers and for the initial due diligence performed.
Fee Structure: The fee structure you mentioned, such as charging 80 basis points upfront or 96 basis points paid monthly, seems aligned with industry practices, though the exact rate can vary based on the deal size, risk, and specific market conditions. It's crucial to ensure that the fee structure is competitive yet also reflects the value provided by your platform.
Interest from Hedge Funds and Family Offices: Hedge funds and family offices that focus on direct lending might be interested in paying for such services, especially if your platform can demonstrate a strong ability to source quality deals and manage risk effectively. These institutions often look for efficient ways to deploy capital and might find value in a platform that streamlines the origination process.
Expansion to Equity Investments: Expanding the platform to include equity investments could attract a broader range of investors, including venture debt funds and private equity firms. This diversification might also appeal to investors interested in both debt and equity opportunities, providing a more comprehensive service.
Referral Incentives: Offering a portion of your fee as a referral incentive to those who bring viable deals to the platform could be a strategic move to encourage networking and increase deal flow. This approach can help build a community around your platform, leveraging the networks of professionals like lawyers, consultants, and accountants.
Building an MVP: Focus on creating a Minimum Viable Product (MVP) that addresses the core needs of your target users. It's important to gather feedback early and iterate quickly to ensure that the platform meets the expectations of both capital providers and seekers.
Regulatory Considerations: Be mindful of the regulatory environment, especially concerning financial services and intermediary platforms. Compliance with financial regulations is crucial to operate legally and maintain trust with your users.
In summary, your idea of building a platform to match middle market firms with capital providers aligns well with current trends in private credit and direct lending. Ensuring competitive and transparent fee structures, along with a strong value proposition, will be key to attracting hedge funds, family offices, and other private credit investors.
Sources: Credit Hedge Fund opportunities, Credit Hedge Fund opportunities, Undergraduate Opportunities - Credit Funds, Starting a Private Equity Fund/Firm, Good credit funds?
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