Happy Sunday, friends. I’m sure you have all seen varying takes on how the alternative capital space will fare through this cycle. (See below for a couple articles about just that.)  I had several conversations last week that got me thinking, so I wanted to share just a couple quick observations about what I’ve seen and heard recently that I thought might be helpful:
 

• I’ve heard investors say that they are wary of RBF and alternative capital platform viability, as they see significant risk in the underlying market. Mostly, this is coming as investors watch ClearCo and others pull back from the market, and it applies to fintech platforms as well as traditional fund platforms. It also spans target market and deal structures. My point of view on this is that the events causing this nervousness are a function of the underlying asset quality, which is a function of underwriting quality. I do not think this is a “market” challenge; I think the firms with sound underwriting and risk management practices will weather the storm, so long as they adapt their underwriting to the risk as market conditions unfold. 

• While some investors are wary of RBF and alternative capital provider viability, they certainly seem to be hungry for the capital! Companies of all stripes, including those with significant VC backing, are seeking alternative and nondilutive capital. For example, Capchase recently publicly reported a 50% uptick in applications for funding, and I imagine that many of you, like us, are seeing a similar phenomenon. So, notwithstanding the nervousness shared by VCs, they are directing/approving their portfolio companies toward nondilutive capital. 

• Interest rates are not expected to slow down their rise anytime soon. Most forecasts I’ve seen call for another 12+ months of incremental rate increases, which means you will have to adjust. If you are fundraising, be prepared for a slow process, as the folks who typically like alternative capital as an asset class are looking for substantially higher IRRs today than they were looking for a year ago. 

Now, I haven’t been in this space that long, but I have been here long enough now to remember when it was such a niche that no one understood it. And I haven’t been here long enough to know how it will respond to the macro environment (I don’t think anyone has). It is remarkable that this market has grown so quickly in only a couple years that we are now reading articles in mainstream investor and tech publications about how alternative capital will fare over time. Even more remarkable is the complexity of the market though. It’s tough to know what to expect. But I’ll hazard a high level guess. I think the next 12-24 months are going to be very interesting. I think we’re going to see continued pullbacks by alternative capital players and probably some failures. So button up your underwriting and batten down the hatches. We might be in for a long winter.