The fintech funder: Interview with Viola Credit’s Alex Ginzburg

Viola Credit specialises in providing asset-based lending to fintech companies and the innovation economy. The firm manages approximately $3bn (£2.29bn) in assets under management, with offices in New York, London, Tel Aviv and Sydney.

Alex Ginzburg (pictured), partner and head of risk at the global asset manager, explains how the firm is helping to address the fintech funding gap.

Alternative Credit Investor (ACI): Who are Viola Credit’s investors?

Alex Ginzburg (AG): We operate through our commingled funds, which we raise from institutional investors. We have quite a wide institutional investor base, and we manage funds on their behalf in our commingled fund, but also through separate managed accounts that we manage mostly for insurance companies in the US and in Israel. We also have a quite significant number of high-net-worth investors and family offices but in terms of volume, most of our capital comes from asset managers, pension funds, insurance companies and banks.

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Our positioning in this market is basically a combination of being an expert in structured finance, together with being an expert credit provider to tech companies. This is a combination that we think is quite unique in this market.

ACI: And who are your borrowers?

AG: About 50 to 60 per cent of our business is in the US, and about 30 per cent is in Western Europe, mainly UK, France, and Germany. The remaining 10 per cent of our business is in Australia.

In terms of our focus, we are looking to transact with disruptive originators that leverage technology for better underwriting or better distribution of their credit products, with better efficiency, better operations, and better cost structures.

ACI: Do you ever work with the peer-to-peer lending market?

AG: This is something we have stayed away from, for two reasons. One is that plain vanilla consumer long-term unsecured credit is something that we have not identified as a differentiated asset that creates added value. Secondly, we are mostly focused on balance sheet lenders.

For us, it’s important to create an alignment of interest with the originator so that the originator itself will be the first to bear the risk of the asset. It creates a very healthy alignment of interest between the two parties.

ACI: What is it about the fintech space that is particularly appealing to your investors?

AG: The banks and traditional lenders have been pulling back from many sectors, specifically small businesses or more complicated credit solutions, and embedded solutions that they just don’t have the tech to support. On the other hand, a lot of the economy is transitioning. We saw this in consumer e-commerce, where a lot of the trade has moved online.

The traditional credit providers didn’t have the capacity and the infrastructure to support this transition in commerce with adequate financial solutions. So what happened was that tech originators just came in and solved some of these big problems. One of the most clear examples is the buy now, pay later solution that grew after this move to e-commerce, where they provided the solution to the consumer for point of sale finance. Now we see the same transition happening in the business-to-business trade, where a lot of that trade is also moving online.

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There is a new wave of solutions that we see fintechs provide to these platforms. They create a lot of value, both to the shareholders, but also to us, the lenders, where we can get an excess return through innovative distribution channels.

ACI: Is there a funding gap in the fintech space at the moment?

AG: Fintechs are closing finance gaps in their respective markets, whether it’s a point of sale for consumers or for businesses or corporate credit cards or invoice finance, or auto loans. Wherever they identify a gap, they close it with technology. The same thing happens between the fintechs and capital providers.

Credit funds and banks don’t have the capacity to deal with these early stage originators for two reasons – firstly, a lack of sufficient track record; and secondly, it’s just too small and too intensive operationally. Because these transactions are very active, you need to keep providing capital on a daily basis against the assets. Many funders don’t know how to handle these challenges at a small scale.

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This is where what we identified the gap in this market. We decided that we would try to close this gap by using technology on our end. We started an R&D department in-house. We have a CTO and four full stack developers. We just built our operational system for this business to allow us to do these transactions earlier and at a smaller scale. And we use technology not just to overcome the operational challenges, but also the informational gap. So we use technology to collect a lot of data on the performance of multiple asset classes in multiple credit risks and in multiple geographies to build our proprietary benchmarks for performance that allow us to underwrite these deals, even with limited track records at earlier stages.

ACI: So you actually had to create your own technological system in order to do these deals? That must give you a first mover advantage?

AG: We are typically the first institutional lender to these originators. In many cases, they are looking for our guidance on how to institutionalise their infrastructure. Because of our need for real-time data, we drive them to step up their game to start to be able to work with funders such as ourselves and later on with banks, and then even move to the securitisation market and be able to securitise their assets. By working with us, it drives them to build this institutional funding infrastructure that allows them to bring in additional funders and more banks later.

ACI: How many companies do you work with at the moment?

AG: It’s a highly, highly selective process. We started this strategy in 2017 and we are now in our third fund. Over the years, we have examined more than 700 originators, and we have transacted with 26. And we have a very wide perspective. We are asset agnostic, so we have commercial credit, consumer credit, secured, short-duration, long-duration. We have many types of assets, and we have quite a wide perspective on the market of what are the better production practices and products and what are the more favourable offerings. Based on that, we develop our thesis on what type of assets we want to fund that we think create the most value and also can have the most potential to scale up.

ACI: Do you have any plans to open any further offices?

AG: Right now, we are expanding our offices in New York. We’re also expanding our London office. We’re hiring more people, but right now we are not planning to open any more offices.