Commercial Debt Market Goes Live With Backing From Coinbase Ventures

Cadence, an ethereum-powered marketplace for commercial debt, is out of its test phase.

The startup, which recently secured a place on the Bloomberg terminal for its pools of commercial loans, is now open to all institutional and accredited investors. Such users can now contribute funds to packages of short-term loans that help businesses cover payroll, inventory and other unexpected costs.

"Cadence is doing its part to help power the growth of small to medium-sized enterprises by providing them market-driven cost efficiencies,” Cadence founder and CEO Nelson Chu said in a statement. The loan packages are made transparent by the ethereum blockchain.

In private beta with select investors, Cadence saw $5.67 million pass through its offerings since January.

With the news, Cadence is also announcing the closure of a pre-seed round of venture funding. Led by Recharge Capital, a fintech-focused family office, the $2 million round also included Argo Ventures, the venture arm of Argo Group, a New York Stock Exchange-listed specialty insurance company; Coinbase Ventures, the investment arm of the unicorn cryptocurrency exchange; and InBlockchain, a leading crypto investor based in Asia.

The round also included individual investors, many of whom serve as executives at banks that might buy debt on Cadence. With more investors than he had room for on his cap table, Chu explained how he picked partners:

"The value is really in how much they can help us drive institutional adoption."

The market for private credit is growing rapidly. According to a report by BNY Mellon, it first hit $1 billionhttps://www.bnymellon.com/_global-assets/pdf/our-thinking/private-debt-the-rise-of-an-asset-class.pdf in 2017, and it has since grown to a market in the hundreds of billions of dollars. In a widely cited forecast, the Alternative Credit Council estimates it should reach $1 trillion by 2020.

How it works

Cadence offers short-term loans paid to businesses to cover operational needs, targeting a 10 percent annual return. So a three-month loan term could return over 2 percent at maturity.

For a hedge fund, this can be a nice, reliable place to stick some excess capital without holding it up for too long, in case something really amazing pops up.

"We are by far the best 'try before you buy' model," Chu said. "We've had hedge fund managers put in $500 to see if it works, and then it comes back with interest and they put in $25,000."

Once an investor has their identity checks run and is granted access to the system, they'll see an array of loans on offer and how much space is left in each round. All these offerings are also viewable inside the Bloomberg Terminal as well, for traders who live inside that system.

All the attributes of each pool – such as sector, risk profile, the originator and other details – are viewable on each loan. All the loans include multiple borrowers, to help spread out risk.

One advantage of getting into a pool is that previous investors get first dibs if it rolls over. If an instrument cycles over again, existing investors get a few days to renew their allocation before it opens up to new investors.

"If you go on any other private crowdfunding platform, the biggest complaint is you get locked out," Chu said. "That first look, investors really appreciate."

Cadence CEO Nelson Chu speaks at World Blockchain Forum New York 2018. Photo via Twitter/Cadence