Podcast Summary: How I Invest with David Weisburd – Episode E151: The Rise of Asset-Backed Credit w/Billy Libby

Podcast Information:

• Title: How I Invest with David Weisburd
• Host: David Weisburd
• Episode: E151 – The Rise of Asset-Backed Credit
• Guest: Billy Libby
• Release Date: April 1, 2025

Introduction to Asset-Backed Credit

In this episode, host David Weisburd interviews Billy Libby, a seasoned investor specializing in asset-backed credit. The discussion delves into the innovative approaches Upper 90 employs to finance equipment-oriented businesses, the strategic use of credit versus equity, and the evolving landscape of institutional investment in niche asset classes.

Financing Emerging Assets: The Nvidia GPU Case Study

Billy Libby begins by sharing a pivotal moment when Crusoe Energy approached Upper 90 to finance Nvidia GPUs, which were anticipated to be central to AI cloud computing. At the time, traditional banks did not fully comprehend the asset class.

“A few years ago, Crusoe Energy approached us with a new asset, the Nvidia GPU. We think it’s going to change the world. We think it’s going to be core to all AI cloud computing. Will you help us figure out how to finance this equipment? At the time it wasn’t really well understood by banks.”
(00:00)

Upper 90 recognized the potential and specialized in financing such equipment before it became mainstream. This foresight allowed institutions like Blackstone to later finance Nvidia chips, a testament to Upper 90’s pioneering role.

Strategic Equity Ownership: Seamless vs. Grubhub

The conversation shifts to the 2013 merger of Grubhub and Seamless, highlighting the differing equity structures resulting from distinct financing strategies.

“The vast majority of Seamless was owned by the management team. The Grubhub team, which was Chicago-based, ended up raising more of the traditional seed, A, B rounds.”
(01:45)

Billy explains that Seamless’s lean equity approach, bolstered by effective use of credit, enabled the management team to retain substantial ownership. In contrast, Grubhub’s traditional equity-heavy fundraising led to a diluted ownership structure. This divergence underscores the impact of financing choices on company ownership.

Beyond Fintech: Diverse Applications of Credit in Startups

Jason raises a pertinent question about the perception that credit is exclusive to fintech startups. Billy counters by illustrating that various sectors, particularly those involving equipment, can effectively utilize credit.

“Fintech is very easy to understand because you kind of have some payment in the future and you’re factoring it or collecting it today. But there’s a lot of new forms of collateral or new businesses where equipment’s not yet well understood.”
(02:50)

Upper 90 targets equipment-oriented businesses, helping them leverage credit to fuel growth without excessive equity dilution. This strategy is applicable across diverse industries, expanding the scope beyond fintech.

Structuring Attractive Asset-Backed Credit Deals

Jason probes into how Upper 90 structures investments in nascent asset classes like Nvidia GPUs to appeal to both counterparties and investors. Billy emphasizes the importance of fast payback periods and tailored financing solutions.

“The most important thing is having a fast payback period. So having a shorter duration facility and having faster amortization and getting paid down along the way. So your break even is under two years.”
(04:16)

By customizing facilities to ensure quick returns, Upper 90 enhances the attractiveness of these investments, balancing risk and reward effectively.

Aligning Incentives Between Upper 90 and Credit Partners

Billy discusses Upper 90’s approach to maintaining alignment with larger credit partners, focusing on fund size flexibility and equity participation.

“We’ve kept our fund size small in the world of private credit so our last funds around $400 million. We can do 10 or $20 million facilities. Most people don’t want to be bothered with that size, but that’s often what the company needs when they’re getting started.”
(05:08)

Additionally, Upper 90’s practice of investing a portion in equity ensures they are genuinely invested in the success of the businesses they finance, fostering stronger partnerships.

Credit vs. Equity: Strategic Decisions for Startups

Jason explores the circumstances under which startups should opt for credit financing over traditional equity raising. Billy advises that startups with capital-intensive needs should integrate credit early into their financial strategy.

“Raise equity and then you think about debt. And I would really encourage firms where capital is kind of a critical part of their business strategy. It should be part of that round as one versus two step double click.”
(06:28)

By doing so, startups can maintain greater ownership and financial flexibility, mitigating the need for excessive equity fundraising.

Seasonal Financing Instruments for Institutional Investors

Billy elaborates on the concept of "seasoning" financial instruments to make them attractive for larger institutional financing partners like Blackstone.

“We didn’t start there. Crusoe started capturing natural gas... We said, we’ll finance your generator. We gave him an $8 million facility... as he started showing good performance, we grew that to $40 million over time.”
(09:34)

This phased approach allows businesses to demonstrate viability and financial stability, making them more appealing for substantial institutional investments later on.

Expected Returns and Investment Philosophy

When discussing returns, Billy distinguishes Upper 90’s asset-backed credit from venture debt, emphasizing sustainable, low to mid-teens returns based on the company’s profitability.

“Low to mid teens from the credit. And we want to make sure the company we’re investing in is earning from the capital... That's an important metric for us.”
(12:48)

Upper 90 focuses on niche businesses where the excess spread— the difference between what the company earns and what it pays in financing costs — ensures robust returns.

Navigating Market Volatility and Capital Availability

Billy addresses the challenges posed by market volatility, noting that ample capital often searches for fewer quality deals, necessitating increased diligence and strategic sourcing.

“The amount of money that’s sitting on the sidelines is huge. I feel like you have to work twice as hard now to find reasonably priced deals.”
(11:29)

However, Upper 90 leverages its nimbleness and focused strategy to identify and secure attractive opportunities amidst the competitive landscape.

Managing a Diverse LP Base

With nearly 300 Limited Partners (LPs), primarily founders, Upper 90 benefits from a rich network facilitating unique deal sourcing and knowledge exchange across different industries.

“Pros are you’re just interacting with so many interesting people that are really in the middle of unique opportunities... The best ideas often occur when you bring together two different groups.”
(18:02)

This diverse LP base not only enhances deal flow but also fosters innovation through cross-industry collaborations.

Transitioning to Institutional Practices and Fund Growth

As Upper 90 advances to Fund 3, Billy highlights the necessity of institutional-grade operations, including robust reporting, compliance, and hiring top-tier talent to meet the expectations of larger investors.

“You need to really invest in operations and reporting and compliance... You have to have that minimal viable size to do all the things that institutions expect.”
(20:34)

This transition is critical for maintaining credibility and attracting substantial institutional capital.

Minimum Viable Fund Size for Institutional Quality

Billy and Jason discuss the evolving standards for fund sizes, suggesting that a minimum of $500 million is becoming essential for institutional-quality credit funds to effectively engage with large investors.

“I think that this number is going up. For the credit side, like 500 million... I see a lot of funds that are kind of creeping into this like 1 to 5 or 1 to $10 billion.”
(21:30)

This scaling ensures sufficient capacity to manage larger facilities and meet institutional investors’ concentration limits.

Talent Acquisition and Retention

Recognizing the competitive labor market, Billy emphasizes the importance of attracting and retaining top talent, particularly in investor relations and compliance roles, to uphold the fund’s operational excellence.

“We did an extensive search in IR for like a partner level hire and it’s like bank levels, you know, starting salaries and bonus guarantees.”
(23:27)

By offering competitive incentives and fostering a collaborative culture, Upper 90 maintains a high-performing team essential for institutional success.

Lessons Learned and Future Directions

Billy reflects on the importance of diversification and strategic capital deployment. He acknowledges initial fund limitations and underscores the value of a programmatic approach to equity liquidity and capital structuring.

“Diversification is your friend right now... Everyone just kind of viewed those as average returns.”
(28:33)

Looking forward, Upper 90 aims to continue partnering with founders, securing unique deals, and expanding its community of LPs to sustain growth and deliver consistent returns.

Final Thoughts and Closing Remarks

In closing, Billy encourages founders to consider credit as a strategic tool early in their business development, advocating for a balanced approach between equity and debt to optimize ownership and financial stability.

“If you were a founder, I would almost demand that my debt investor had a little bit of equity in the game. It just changes the whole relationship and how things transpire.”
(25:11)

David Weisburd wraps up the episode by thanking Billy for his insights, highlighting the critical role of asset-backed credit in modern investment strategies.

Key Takeaways:

• Asset-Backed Credit as a Strategic Tool: Leveraging credit can help startups retain more equity and provide financial flexibility, especially for capital-intensive businesses.
• Early Integration of Credit Strategies: Incorporating credit financing early in a company's lifecycle can facilitate growth without excessive equity dilution.
• Importance of Seasoning: Demonstrating financial stability and robust unit economics is crucial for attracting larger institutional investments.
• Diversified LP Base Enhances Deal Flow: A broad network of founders and industry experts fosters unique opportunities and cross-disciplinary innovations.
• Scaling and Institutional Practices: Transitioning to larger fund sizes and implementing institutional-grade operations are essential for sustained growth and credibility in the investment landscape.

This episode offers valuable insights into the nuances of asset-backed credit, strategic financing, and the evolving dynamics of institutional investments, making it essential listening for investors and founders alike.