Is a origination platform feasible given all the dry powder?
Have read a lot about Private credit being in a "golden age" of sorts. Also have read about a high amount of dry powder in private equity.
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 lenders 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.
How much would a fee for originating a target/platform/tuck-in be? Would 1% 100 basis points be good? To my understanding, since there is no financial advising it would be out of the realm of regulators (given certain conditions are met, not giving financial advise ect.) as a fintech.
Open to all thoughts, insights, advise ect.
Based on the WSO threads discussing origination fees and the dynamics of private credit and equity markets, here are some insights that might help you evaluate the feasibility and pricing strategy for your origination platform idea:
Market Demand and Dry Powder: There is indeed a significant amount of dry powder in private equity and private credit, suggesting that capital providers are actively looking for viable investment opportunities. This environment could make a platform that efficiently matches middle-market firms with capital providers quite valuable.
Origination Fees Acceptability: In the context of large transactions (over $100MM), origination fees typically range from 50 to 150 basis points, with the most common being around 75-100 basis points. For your platform, proposing an 80 basis point fee upfront or 96 basis points paid monthly could be competitive, especially if your platform can demonstrate a strong value proposition by effectively matching lenders with high-quality borrowers.
Interest from Family Offices and Private Credit Funds: Family offices and private credit funds are continuously seeking new opportunities for direct lending. Your platform could attract interest from these entities, especially if it can offer unique insights or access to deals that are not widely available on the market.
Expansion into Equity Investments: Expanding the platform to include equity investments could increase its appeal. Charging a fee for originating equity investment opportunities, such as 100 basis points, seems reasonable and aligns with typical market practices for similar services.
Regulatory Considerations: While your platform might not be offering financial advice, ensuring compliance with relevant financial regulations is crucial. It's advisable to consult with legal experts to navigate the regulatory landscape effectively, particularly as you plan to operate in the fintech space.
Referral Incentives: Implementing a referral program where a portion of your fee is shared with those who refer successful deals (lawyers, consultants, accountants, etc.) could foster a network of professionals who have an incentive to direct quality deals to your platform.
In summary, your idea of creating an origination platform for middle-market firms seems timely given the current market conditions. The proposed fee structure appears to be in line with market rates, and there is potential interest from various capital providers. Legal and regulatory compliance will be key, as will be the ability to demonstrate clear value to both capital seekers and providers.
Sources: Origination Fees on +$100MM Loans
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