MakerDAO Community Real World Assets Onboarding, 17 Dec 2020

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From YouTube: RWA 2020 Wrap-up & RWA-2021

Description

Introduction: @juanjuan
RWA Comment (0:00:55): @sebventures
Update (0:03:56): Centrifuge
Presentation 1 (0:09:40): Harbor Trade Credit
Presentation 2 (0:32:57): Peoples Company
Presentation 3 (0:50:04): Fortunafi

Agenda and Discussion:
https://forum.makerdao.com/t/collateral-onboarding-call-21-rwa-2020-wrap-up-rwa-2021-3-asset-originators-wednesday-december-16-18-00-utc/5588

Governance Forum:
https://forum.makerdao.com/

Disclaimer: These calls and the summaries are produced and hosted by MakerDAO community members. Content produced by the community are not the statements or views of the Maker Foundation.

A

Hi, everyone welcome to another well actually to the last collateral boarding call of the year 2020., uh in this case real world assets.

A

um Yeah we're very, very excited about everything that happened in this last couple months and uh sev is going to be speaking a little bit more about that and then, after that, we're going to have um a quick uh presentation by I guess, introduction by leia from centrifuge, and then we're going to have three asset originators uh talking about the product, harper trade, credit, people's company and fortuna file, uh again a very, very informal conversation. So if anyone feels like like interrupting or asking a call, please go ahead and yeah step.

A

If you want to to take it away.

B

Yeah sure so I want to thank thanks everyone for joining this call as it's as you have said, it's the last one for the year, so we've made uh some good progress on wala set all the maker teams. So currently I was maybe I can just share it quickly.

B

So yeah this is just a quick status of every real-world assets. We currently, we are currently onboarding so for success. Matthieu is doing a lot of work on inside, registering a cayman island entity. Currently we are still we're working waiting on the smart contract and arc of the work, but that should be quick, just a smart contract at the end as much waves provided most of the smart contract code for new silver, almost everything is green.

B

We are still waiting for the oracle assessment, but there shouldn't be any issue and should be quick and same as the smart contract and oracle works, but it's just a formality, as saos refuge has done most of the contract work and consult right, it's just exactly the same story, waiting for the same oracle assessment and the smart contracts work.

B

So I think that we should have a launch date for all freeware assets in january. Let's say in january- and that's that's super super good news that everything is good moving forward and.

A

I think there's also sorry, so I wanted to ask you, I think, there's an implementation side that would have to, I guess, be added here right.

B

uh What kind of representations amplitude motivation style.

A

Yeah, so I.

B

Mean once that.

A

The ss once the assessments are are made. You still need to implement rights.

B

uh Yes, but for the smart contract teams, that should be quite easy because it's mip, 21 and mib 22 most of the code is done. They are testing in covan and they will put in production next year.

B

So I don't expect too much delay here and on the smart contract team. We are sorry and the risk team. We are working on the infrastructure to monitor all the loans that will be made by the special purpose vehicles, but we can start as soon as possible.

A

Are there any questions for seb regarding this.

A

All right yeah, if you want to.

C

Okay, cool um yeah- I guess this this caused a little bit of uh because it's the last collateral onboarding call of the year at least for real world assets. I think we wanted to use it as a little bit of recap what happened 2020, but then also give an outlook on what we've been working on um next year, and I think sebastian was a little bit shy in like talking about what um how much work. Actually his team has put into formalizing the process of real-world assets.

C

Maybe just like recap: on our side we have been working with maker.

C

um I see greg is on the call like we have been working with maker, for I think, almost two years now and but like really this year, robot assets has gotten a major push within the community and it has been yeah really great to be able to get to the point where we are right now. um I guess what I want to point out um is that we are at centrifugal, we've been working on or like where we see us.

C

We see us as the technology providers, so we have been building the tools that all the different asset originators that are here on the call, but that also have gone through the process already and can make use of to basically securitize pool of loans, so like take the different real-world assets, bring them on chain and then um create fundable errors. You funny tokens to then use those in in maker, and we have also come a long way. We've been working on our protocol.

C

Throughout the year we've launched our v3 we've launched and audited our version 3 end of october. As of today, we have six pools, live with the six different asset originators, and um here the um the assessments or like the process that seb showed is. We have been in particular working with two asset originators or with two our partners to basically guide them or support them through the governance process. That has been really new for everyone here.

C

um Risk risk evaluation is out, and um smart contracts is also in the works and oracle's coming soon, um and so these are the the two um that are on the almost at the finishing line um of this process, and I guess what we wanted to.

C

What we wanted to do today is give a little bit of an outlook um what we have in our pipeline.

C

We really we're really working towards having real-world assets play a big part of d5 21, and not I mean and having mega is one of the cornerstones of dbfi, of course, working towards um onboarding, more robot assets um onto the system, and we have asked three of our partners or asset originators that we're working with already to jump on a call today and um they are at they're very different in the collateral type that they finance, we'll get we'll get an overview of that in just a second and then also um the stage where they're in um with the governance process.

C

So we have, um we have on one and we have throttle and harvard trade credit that are working on a pool to finance trade finance transactions. They've launched the series two. They will launch the series two actually tomorrow. um They have already submitted them six um a couple of months ago.

C

They passed the green light stage, um and then we have people's company that just submitted their mipsix last week and as a company, that's working on tokenizing farmland and um yeah waiting for the community greenlight and then last we have nick from fortuna fi who's planning on entering the governance cycle in january and submitting his lipsticks then, and he will be introducing revenue-based finance so all like very different, diverse assets and each of them will so we're many on this call and it will more or less only be an introduction to these assets.

C

I think we won't have time to go into so much debt, so we thought 10 minutes each presenting and then five minutes q a and we can play it by ear so feel free to.

C

Ask questions in the chat or we'll pick it up later. um I think we'll we'll figure it out along the way and I don't even want to um spend so much time talking, maybe we'll just start with throttle and arbitrary credit, and I think you prepared a few slides. um Let me know if you can share your screen.

D

So I'll go ahead uh and share, it looks like I'm sharing my screen. Can everyone see it.

A

D

Right thanks again for having us, uh I am uh with the throttle capital side of the team here and uh as leah had mentioned, you know we were working on the initial transaction with harbor trade. Credit uh closed that and now uh literally this week, uh working on the second transaction, which will be a revolving pool. um You know what what we have uh done so far, uh just to kind of give you an update on on who we are and how we fold into it.

D

uh I'll start with our team at throttle capital, and we essentially have been uh in the industry for uh quite a bit, and so uh my partner rana, who on introduce in in a moment, uh is uh our structured finance. Guru, he's been at kind of all the the wall street shops that you see here on the page. You know jp morgan, credit, swiss, morgan, stanley and uh funding circle.

D

I was uh also kind of in the uh started in the credit world, uh both with mortgage uh banking investments a little bit of insurance and then in 2010 was in an early employee at lending club had a great run. There shortly thereafter uh worked at a hedge fund and then worked at a online venture capital firm. Where I got really excited uh about cryptocurrency.

D

uh The company I was at was called funder funders club. uh We were actually one of the first investors in coinbase uh chain analysis, uh shape shift and about a dozen um crypto platforms or exchanges. uh So since then, I've been a personal investor both on the equity side as well as individually pretty excited to see bitcoin go over 20 000 today, um so it's been an exciting year for for crypto.

D

I think just in general, for all of us and d5 for me has been kind of a passion and really enjoyed learning about it so far and getting a little bit deeper dive. We do.

E

Have technology.

D

Advisor and our data and analytics guys that are very well experienced both with wall street as well as uh internally as you'll, see here, rob craim over at facebook funding circle and so on. um I'm going to pass this over briefly to rana mukherjee my partner. He can kind of give you an overview of what we look at traditionally outside of the d5 community and how we're going to bring this to real world assets on the d5 chain.

D

F

Yeah, uh hello, everyone uh yeah, so what we focus on is really cash flow uh uh cash flowing assets. um We look at it's the private, uh structured finance market in the real world side, uh we're focused on shorter term assets uh and with higher yields and have kind of statistical cash flows. uh We like this asset because it it is uh at some level uh it can be structured to be very uh safe for lending against them.

F

We typically segregate assets in an spv and lend against those assets at some level and generate high higher yields uh than um other comparable uh assets and the what we like about this is it can be. There can be triggers uh on the underlying collateral uh to there could be reserve accounts there. It can be structured in numerous different ways to protect against different types of risk and it can scale with the underlying originators and well.

F

If you look at this list of the assets that we work with they're all data driven, they are they kind of take lending the new uh new vistas in how they look at risk. They're not just relying on fico scores and- and these are y combinator technology companies in silicon valley, with tremendous sponsorship from blue chip, real world vcs.

F

So we they don't, they understand scale, they understand technology.

F

Few of these founders understand debt and that's where blake and I kind of come in and we are kind of their capital markets arm to bring them to institutional capital and we're excited to bring them to the d5 community uh and that's uh kind of our focus uh on this channel.

F

I'll hand it over to blake or brian, I guess.

D

Actually uh yeah uh brian uh at harvard trade uh you're on mute now. But uh this is uh your part here, so we'll go ahead and pass it over to brian.

G

Thanks guys thanks everybody, I appreciate you being here thanks for the time um I guess I'll start with um a little intro on uh on what what trade credit is right and and what harbor's providing to clients. So you know in in in trade finance this this big realm and umbrella of trade, finance, there's a lot of avenues and I think we're sort of narrowly focused on supply chain finance, which is a buyer-led initiative to uh improve working capital and liquidity, uh with a with a focus upstream on procurement on on payables right.

G

So you know as an as an asset originator. We originate trade receivables which are you know, payment obligations, but they're, there's an anchor buyer right. So typically, you have uh like our client focus.

G

Is you know, u.s european middle market corporates that have some senior secured uh credit facilities that are taking care of the the current assets on the balance sheet right, so they're, accelerating receivables, uh they're pledging inventory to to borrow against, um but that's only sort of one one piece of the puzzle or one side of the equation when looking at a cash conversion cycle of a business right, so where we come in, is we really work to optimize the payables?

G

And so what we're doing here is we're playing a supplier, aggregation role where we're offering payments to suppliers upon shipment and delivery and then transforming tenors of those payables down to you know 60 days, 90 days, 120 days whatever it may be right um if you want, if you want to uh blink, if you want to jump to the other slide, there client focus yeah, so so this is kind of where we play right so proactively originating in in north america. um Really what comes with that along the way throughout our origination?

G

um Is we see a lot of opportunities in europe and now we're seeing a lot more in latin america? So the profile is really this: 10 to 200 million we've even got some larger mandates, looking at some larger but still mid-market corporates, as we would call it and aggregate credit limits of under a million 250 500 000. Up to you, know three million or four million dollars, um we're industry, agnostic, um we're working with commodities, traders we're working with manufacturers working with some retail outlets and distributors across all industry segments.

G

um So now, on the next slide, getting back to what I was saying about cash conversion cycle right like why, why do companies need supply chain finance right? So you see here this cash conversion cycle is a formula that consists of you, know, receivables, inventory and then and then payables right. So it really defines or calculates what the working capital need is for a business right.

G

How quickly are they collecting on receivables? How quickly is the inventory turning and can they turn the inventory and sell it before they have to pay for it right so, where we're really focused is on up again optimizing the payables. So this is a typical as-is scenario: where we'll have our a client they've got an asset-based facility covering inventory and receivables.

G

That's 60-day carrying costs on inventory, the 90-day collection, so accelerating receivable monetizing the inventory that's on the balance sheet right. So that's the as is so you you know. Basically, you have 150 days working capital need because there's a payment at site. There's no payables! Now.

A

This is an extreme example.

G

uh But if you go to the next slide, what what we're doing here is reducing that working capital need down to 30 days right, so you have inventory still sitting at 60 days, receivable still collecting in 90 days, but if you're optimizing, the payables basically selling it before you have to pay for it, you're, creating liquidity and working capital efficiency right. um So that's sort of the nuts and bolts of our structure.

G

Now now what we do is from an asset origination standpoint is, since we take the role of the supplier as a supplier aggregator right. We now have trade receivables and a payment obligation that we then assign into our vehicle into our fund right, and so those are the underlying assets sitting on the balance sheet of of the vehicle in which and investors like yourself and the d5 community uh can can uh lend against uh and have that collateral.

G

um So that's sort of the the nuts and bolts um there's a lot of detail that goes into this. A lot of information that that I'd be happy to share offline. uh But I thought that it'd be best to just give you sort of a high level of the asset class and the solution that we're providing.

C

Well, thanks: are there any.

C

A

Sorry, I was going to say it's a pretty straightforward solution in trade finance. So I guess that's why they're not a lot of questions.

C

Maybe you can just share a little bit on um maybe what um what pool size you're working on and um what you intend to um originate in the next six to twelve months or just like how what your plans are to grow. It.

G

Is that for me, yeah, okay, so this so the second pool we're bringing back in um an existing client snake bite, which is a consumer electronics. Business focused on um aftermarket video game accessories um and they've, also expanded into other segments like uh flight simulation yokes, um as well as uh tablets they're disney licensed. um They have a license from disney uh and they're making this proprietary tablet uh for for kids, which is like frozen and and toy story four and all of that stuff.

G

So it's like kind of cool products coming out, so we're certainly um excited to expand the program with with snake bite. The performance has been good. We see a growth trajectory there, so we're looking forward to expanding upon that. um We, uh like I said we are very industry agnostic, so we have.

G

We have deals in the pipeline that we'll be introducing to this vehicle um over the next um six to 12 months, um where we're focused now is given the current environment and considering covid um we're looking at very sort of neutral type segments of of the market, so introducing programs like uh home.

G

You know gaming as an example right or um or staples like some some food we're looking at some coffee opportunities um in europe and in the u.s, um so that's kind of it will be the client focus going forward over the next 12 months. um Considering you know some of the counterparty risks that may exist with consumer spending and.

G

Industries, I suppose that are uh a little bit exposed to cobit and a downturn. um Our expectation over the next 12 months, conservatively is about 25 million in origination, um of which I expect probably anywhere from five to seven, to be introduced uh through the ten like protocol.

C

Well, thanks, um I think, will wrote something here: um can you introduce a bit where they fit and how they interact with the actors of the value chain, freight carriers, customs.

C

C

You can also see the question here in the chat, um yeah yeah. Sorry, it's probably also a question for.

C

G

Yeah, so um as a as a trade finance company, um we're certainly reliant on the the carriers, um specifically as it relates to verification of the underlying trading activity right. um So when we're funding transactions, we we use uh bills of lading for verification.

G

um We are not integrated, nor involved with the movement of goods or integrated with the service providers, logistics providers that are actually moving goods like freight forwarders. um As of today, of course, we have different ideas on on the horizon, um but but we're not integrated.

G

Currently, I hope that answers the question or maybe there's a different direction. There.

C

Yeah or maybe we can also then um continue that conversation a later point and maybe move on like or I will just let us know and then maybe, let's move on to the next one um to people's company in case there are no more questions.

A

I actually have a quick question. uh I I'm just curious, um and maybe this is more of a tin like question, but where do you demonstrate your underwriting standards and how can the maker holders keep track of that.

G

Is that a 10 like question, I don't know.

C

Maybe that's a question for blake and ronna and or maybe jason. You can also determine.

F

Yeah, the the focus here is to really look at the underlying counterparty risk uh on these transactions and diversified counterparties and receivables on the other end and um and that diversification uh creates um the the the uh the safety if you will in in the deal. So in the case of snake bite, we looked at the underlying financials.

F

We looked at uh the the trajectory of the sales going forward on the underlying products and the demand uh for that product and that we- and we thought it was a good test pilot solution for for this channel.

F

um On the throttle side, uh our uh we plan to introduce uh traditional structured finance transactions that have one thousand dollar loans, adding up to several million dollars and then have uh an a and a b piece um and in the drop in tin structure that that's contemplated here and those are uh we underwrite those levels uh based on uh the underlying cash flows and.

G

I think that I think the difference here what rona's pointing out is, depending on the asset class right, so so we're we're we're underwriting credit risk. um As you know, some of the some of the other activity that throttle's involved. That's a portfolio businesses right, that's that's! The difference. um We're buyer led supply chain finance. The obligor is is corporate right, um so it's about credit risk and debt service of the individual obligor.

G

And, of course, you know as it scales um there's a pool performance that that'll be looked at, but on a individual basis, we're set assessing credit and and debt service.

A

Yeah, so I guess my question is: what level of visibility will the maker holders have into that through tin lake? So can we click on an individual loan and see all the details that you just described to me.

G

As far as financials on the on the individual obligors, no.

A

But that you know kind of a check box that you did, that for that borrower and what you're out with the outcome was.

G

So you're, but are you talking about like an explicit scoring model that that we would that we would use on a particular client.

A

Yeah, I'm really asking broadly like as a maker holder. What do I see when I click into your loan portfolio? Is it a black box? Do I just see that I'm lending you money or do I see details of each line.

G

It's the pool performance as of today.

B

Yeah, maybe I can.

A

On the risk side, yes.

B

So on the team, like page, you can see the every loan that were made, but you don't have access to the credit score of the company or stuff like that.

B

But on the risk side we can have access to those informations and we maintain another spreadsheet to follow the criticality of the portfolio and we can do some due diligence we'll make a due diligence on the due diligence of the acetogenator and then we can using sampling techniques, see if everything is okay, with, uh with the credit limit at least.

A

Got it and do we have like an approval mechanism for new loans entering the pool like how do we know that a you know, horribly rated company is not going to be pushed into the pool like what's the the blocker mechanism, there.

B

uh There is no blocking mechanism, is it's after the fact, mainly because from most assets on centrifuge up to to now, the loans are quite small, and you don't want to to take time is every time to review the loan. You do that every month or every quarter, depending on the type of uh of asset for, for instance, for new silver. It will be a quarterly and for some concept right, it will be monthly, because the loans are short maturity and.

G

B

Get access to data.

G

I would also mention that, as an asset originator, um we have taken a junior position in the vehicle.

A

Oh yeah, I know I'm not doubting that you guys are very incentivized not to do that. I I'm trying to understand mechanically, like what the flow is going to look like from the maker holders perspective.

B

Yeah, but we will not be able to share more information. I think on the public side, because you cannot say that uh one corporate is as bad financials if it's under an nd.

A

Yeah, okay, yeah! I don't. I don't want to take up all the time, but but thank you maybe maybe.

H

A

H

Yeah I uh um uh to to to address greg your your question is the tin and the drop pricing already show you actually what the performance of the pool would look like and if you not just track and trace the the drop price, but also how how the tint round is performing, you really see if the pool is actually on target or not because you know tin, head to house has to outbeat the drop token to be.

H

You know, kind of developing in the right way and kind of make this thing working for the for the tin investors um so, and if you see that the drop price is falling below that the tin prices falling below the drop price, that already shows you hey. There is something wrong with the pool, and then you should really dive into the nfts which are in the pool uh may also reach out to the asset: originator, hey, what's going on with those nfts underperforming that the payment is delayed, etc, and that is all on chain.

H

You know you can really track and trace the single assets you see how they perform. What you do not see is, of course, what is behind the assets, that is the private information uh um uh uh bill blake, as uh brian has mentioned here in blake, because of course they do not want to reveal those business secrets like hey. What is my business counterparty? What are the details on invoice?

H

What is unit prices, for example, you know, so that is that's not on chain, that's not visible, but that it's, I think on request, especially then for for for maker, uh the the the risk assessment, team step and co and and phil they most likely would have accessed the data and can check that on on your behalf, yeah that answers.

A

My question mark how how often martin are the the prices updated.

H

uh We call an epoch and that is typically happening on a daily basis. There is a lot of demand for redemptions investments that can happen more often so the nav, although the token price, drop and tin, is typically updated on a daily basis.

C

Okay, cool and I'll chime in here and um maybe give the word to people's company to mark and.

I

See? Okay, that's my cue hello, everybody uh mark moore uh with people's company and thanks very much for uh participating and your interest in our sick six application to uh bring farmland, u.s farmland onto the uh maker dab platform. um We have very much time just a couple things we want to accomplish today. uh First, a brief introduction to people's company and then, secondly, an introduction to farmland as an investment asset class, some of the characteristics of it and what we find appealing about it.

I

um As you all know, the uh the application is to acquire u.s farmland and finance that, with uh you know the maker dow platform facility and to bring you know, farmland to the platform as a truly a real, a real asset and uh the uh the the goal is to the intent is to buy.

I

You know: high quality us, you know row crop farmland in the hearts of u.s corn belt, so focused around iowa and the surrounding states, where strong, soil and water availability come together in combination to create you know, very stable, farmlands from a asset value perspective, an operational perspective and land that can be relatively easily leased. Some farm operators who will operate it and make lease payments um so that that's the basic strategy people's company has a lot of experience in that.

I

Just to give you background on people's people's is a company whose roots go back to the 1960s. The legacy business involves.

I

All around farmland involves farmland, appraisal, farmland, brokerage and sales uh farmland management on behalf of uh third party owners and, more recently, in the past several years, we've gotten involved in investment management, where we work with investors such as family offices, institutional investors, to build portfolios of farmland that they want to own long-term short-term depend on their objectives.

I

So we help devise and implement and manage those strategies, and we also work with people's clients, people's company clients um to finance uh their acquisitions or refinance their farmland assets uh with a network of banks and non-bank lenders that we work with uh in total uh people's company uh each year, or I say over the past five years- has handled about one billion dollars worth of uh land sales, another one billion dollars worth of land appraisals, and we manage upwards of 50 000 acres of farmland on behalf of third-party owners and investors.

I

Those 50 000 acres have a value of approximately half a billion dollars, so as part of that land management, we work with a bench of farm operators, so individual farmers, family farmers, large, more professional farming groups to farm that land manage the leases, manage the process around owning the farm, so quite extensive network of farmers that we work with and have the ability to pull in farmers to to lease lands to renew leases to to find new lessees. So quite an extensive reach there.

I

That's the you know: people's companies based in iowa, um it's uh it covers 26 states, uh all the key agricultural regions of the us from the part of the hearts of the midwest around iowa, the upper midwest and the dakotas south of north dakota, down to the delta region, arkansas missouri and up to the pacific northwest in oregon and california, so cover all crops and crop varieties and crop systems. So quite extensive knowledge when it comes to different production systems.

I

um With that, I'd like to you know, be able to get into some of the characteristics of farmland investments. I won't be doing that, but a colleague of mine will and uh just to introduce you to a couple of other people, a few other people on the on the presentation here who are available for questions. um First of all, we have dave mooth uh who's. Here, he's the managing partner of alternative equity advisors.

I

He is the uh the aaa as we call it is the investment management platform that we have managing portfolios of farmland for investors.

I

We also have steve brewer, steve brewer is the president of people's company and the principal owner and has been in that role since 2003, both dave and steve are, as they'll say in their own words, iowa farm boys. They grew up on farms, their family have farms, and I believe, steve dave even for final weekends, goes out and still farms, his own farm, so they're, very active and knowledgeable around farmland, so hopefully get a chance to know them a little better in the coming time that we get to present you with information about farmland.

I

Last but not least, I'd like to introduce you to bruce sharrick bruce sharik is a strategic advisor to people's company. He is a professor, the leading professor of farmland, economics at the university of illinois and also the director of the tiaa center for farmland, research at the university, so by many measures, probably the leading expert on farmland as an as an investment asset class and knows it inside and out. So we thought no better than to have a an objective expert present to you, the characteristics of farmland as an investment.

I

So um without further ado, let me turn it over to bruce and uh myself. Dave and steve are here for questions too, as we get through this. So.

J

I

J

Yeah appreciate it hi everybody thanks for a little bit of time here, we'll go really really rapidly through a super high level overview of the asset class, but I think it's always a shock to people who haven't been in the space to kind of see some of the data, and we just wanted to give it to you to give a bit of a kind of a scale and a scope of. What's going on, I'm going to share a screen that has a little bit of data on it and ask can thumbs up.

J

Can you guys see it? Okay, a shared screen? Okay. So a lot of folks are kind of curious about the size of the asset class since about a three trillion uh with a t, three trillion dollar asset class heavily concentrated on the real asset side within that category, about 83 to 85.

J

Depending on what point in time, you measure it of the asset classes, what you would think of as real hard assets what's up here is just decade at a time from left to right till you get to the vertical line, and then three recent you know two year periods, the asset class has literally exploded in value, largely increasing with inflation and then after inflation is a kind of a production asset. Highly correlated with some other characteristics. I'll show you in just a second but kind of look down at the bottom right.

J

The telling characteristic is there's only 14 debt in the sector and, as the kind of you know, cost of capital has come in over the last couple of years. The interest in getting access to something that you can put rational leverage in and you know, get the expanded a payment for future income. It's kind of come off the chart. um I think mark, gave an introduction for my kind of academic role. The other thing I do is I'm on some, I'm on the board of one of the secondary markets.

J

So I'm pretty pretty used to securitization and farmer. Mac is the one specifically and we have like 21 22 billion a balance sheet with the idea of taking in first mortgages, pulling them and figuring out how to make money on the kind of realignment of credit risks.

J

So this is kind of down the middle of the fairway of what I hear being described here, but just the the amount of interest and the scale of the asset class, I think, is pretty impressive and sometimes hard for people to you know get their minds around if they didn't kind of grow up in that sector. Just a visual of this, the same thing we've had from 2008 forward during the financial crisis.

J

When account short-term rates really came in, you had an acceleration of the kind of capital gains if you will, or the growth in the asset class, but that never kept up the debt simply stayed at a very low level. This is a this. Is the chart that I'll kind of um focus on and kind of kind of end on a little bit in terms of you know, high level content than just have a couple of the pictures.

J

This is organized with a collection of assets down the left-hand side. I keep track of about 80 different categories, but for today I picked some indicators of agriculture.

J

You know the 32 states in the u.s that have meaningful uh agricultural production, then illinois iowa, indiana kind of the center of the people's footprint in terms of row crop done some equity categories, the eth s p and nasdaq. Then some fixed income 10 year treasury, high grade bonds and barely investment grade down to. I guess it would be a b double a on this one 30 year, 20 year, gold and then inflation and what's important to recognize- is that if you look at the annual rate of return, this is a reasonably long period.

J

It's not a you know: cherry picked period by any means, except that we have annual returns for farmland, so we can't include all of 2020, yet I've gone through fourth quarter gone through the end of third quarter and there's no change in this. We just like to do whole years here for agriculture again pretty high returns. Frankly, for an asset class that has such low standard deviation returns.

J

The cvs you'll see there kind of like we all know, for real estate, it's much higher generally, but for farmland it turns out to be incredibly low and then the minimum return and maximum returns from the last two columns. This is critical because you have this fixed coupon payment with ag the the rental income and ag is about the only category that has a hundred percent occupancy rate.

J

You just the price of the you know, think of it as a hotel, where you always get to sell every room, and all you have to do is change the price a little bit every night, but the drawdowns, um I think for the equities are what's most astounding and then the correlation is with respect to ag. What you see that is attractive to investors. Right now is that the farmland has a negative or low correlation with equities in general and a high or positive correlation with fixed income and inflation in particular.

J

So again, I know mark you wanted me to give a super fast fly-by on the asset class, a couple of other just real, quick pictures here. This one's always fun. You know how did it do with your time and you see any gaps in the earnings?

J

There's not the the the asset class is really hard to get access to, though uh just it's a very slow to turn over asset class, and you need some kind of boots on the ground to see the transactions, because only one and a half to two percent of the assets sell per year. So you have to have kind of a acquisition network, that's a little different than something where you could easily access within a single area, all the transactions.

J

This is again just a visual on the up and down, and then I think the last one to show is just if you think about the length of holding period the roll length really matters with this particular asset. That's not the case with equities per se, but it really matters with ag returns and that the smoothness, if you will, if you think about the statistical properties, it's a the rate at which you get an estimable measure of variability is very short you. You have very stable returns through time, and so they they work through time.

J

As well as within the year um mark, steve dave anything else, you want me to directly comment on before kind of turn. It back over to kind of a question point.

I

Yeah, I was thinking, maybe some comments about uh lease yields, because our primary you know strategy with the farmland, is to lease it out to farm operators. I don't know if you have some slides on that bruce, but um maybe comments about leasing and the mark and the economics behind that yeah.

J

It's easier to probably just give the the high level quick on that one um about 60 of the land is leased to a to an operator that is not the owner, and then owners have about 40 percent of the land they farm in their own portfolio, and that creates a bit of a buffer for payment police returns, but leases are incredibly stable and they don't move year to year with farm income.

J

It again it shocks, people that corn prices can go down and it doesn't mean much to a farmer's income, because prices go down when you grow a lot and they go up when you don't grow as much so there's a natural hedge there and then they're always looking forward, because you can't you can't shift the amount of acreage year to year and keep your equipment base employed.

J

So in total, since all the acres get farmed, it's kind of a rearrangement of you know where the tractors and combines live, but it's been absolutely shockingly stable. I guess I do have one I can go forward to. If you were to look at it. This way the rent-to-value um it's kind of mimicked or exceeded something like I always think, of the 10-year cmt, to which I add a term premium and a credit risk premium. And then you can, you know kind of talk about any asset class with indexing.

J

The rent to value ratios have been shockingly stable, but have stayed above the didn't follow the cap rate, all the way down, which creates a huge opportunity, because there's kind of room to run if rates go back up the bottom slide again. I know I'm going through this super fast, but just as a you know, starting point for a longer conversation if the bottom right graph here is just if you were to say how much should you pay for the asset?

J

If you just capitalize the income, you know agnostic to type of income and it turns out the the asset values didn't uh didn't get uh trapped in the multiple expansion that some of the equities did. There's still room to run. If rates go back up, so I don't know it's.

I

Not that long yeah, that's good, I mean that you know key takeaways, you're, very stable uh lease rates, um relatively you know, low in the absolute sense, but um premiums to treasuries and to other risk-free rates up in the market today. So very well, very good alternative. For that. um I also want to make you know made a couple comments about.

I

uh You know our uh our ability to lease the farms, as I mentioned before, is- is fairly strong, given our network of farmers and farming partners that we work with across the states, uh we'll also be in the heart of the cortland uh heart of the corn belt, uh where there are lots of farmer options and lots of you know, farmers always looking for farmland's police. So it's a you know, that's that's primarily we'll be acquiring uh uh farmland with this.

I

Another part about our strategy too. I'd uh suggest is that, um as you might hopefully could tell from my introduction about people's company, we see a lot of farmland transactions a lot of assets, so we can recognize value pretty readily.

I

We can recognize assets that maybe are underpriced, recognize assets that could improve in value with simple capital improvements or better conservation, better sustainable farm practices, and so we look for those kinds of opportunities and that's the kind of opportunities we use vis-a-vis the maker credit line and uh which means that we hopefully idea we accomplish our goals, buying buying farms at good values. Maybe discounted values put some upside there alongside just the stable nature, low volatility uh characteristics of the asset class as fundamentally to begin with.

I

So you know, I think lots of lots of downside upside potential downside protection, vis-a-vis the principal amount and from a leasing perspective, um buying out those better values, making improvements. um Maybe having farms leads to organic farm operators. We can achieve better lease yields than what the markets you know typical average might be um so that's part of our strategy and that we can employ as well so.

F

I

Those few comments- um I don't know.

F

I

Or dave, if you had anything else, you would like to suggest for the crowd that we've left.

C

um I'm just chiming in here um looking at the time, um but maybe it would actually make sense for um maybe I can coordinate with one after a community green light to then have like a full-on collateral, onboarding call just with people's company. I think that makes sense, um and if that's okay, I would probably um hand over now to nick from fortuna five. If there are any questions, maybe we can also gather them here and in the chat and we'll make sure that we get back to everyone, um but then turn over to nick.

C

If that's fine.

I

F

E

Great, hey everyone uh glad to be here. My name is nick first, I must say hello to bruce I'm extremely impressed and surprised to see you here. He used to be my professor at university of illinois, so love to see that uh life comes full circle. Sometimes it's just incredible. The world only shrinks.

J

E

Only shrinks good to see you thank you bruce. Thank you, um but uh yeah everyone uh nice to meet you. My name is nick and uh I'm the ceo of fortuna five, I'm gonna do a presentation here, so you guys can see some.

E

E

um Again, want this to be sort of a open type of form, so feel free to jump in with any.

E

Questions great, so we are fortuna-fi uh fortunate if I was founded by myself and my partner jason, uh we're also uh co-founders and general partners at a cryptocurrency hedge fund called space, wheel capital. uh We launched that back in 2018 and uh we started investing in crypto back in 2013, uh privately and individually, and then eventually launched this fund in 2018.

E

um we incubated fortunafy within space whale, um because we saw a tremendous opportunity to bring institutional real world yield into defy. um We have been involved with maker, not as much on the community side but more on the market side for quite a while.

E

Now we've been uh using the product trading the product um back since 2017, so extremely impressed to see you know not only the roll out to additional collateral within crypto, but now looking outside of crypto to a significantly bigger market cap potential, which I think is ultimately phenomenal for uh maker in general. We've also invested. You know across the board in other d5 projects and have been fairly involved, so we're very bullish on d5 overall.

E

um Hence, you know me actually breaking off to start this, this new company, that we find a tremendous amount of opportunity in so just again, our vision is to bring institutional yield products to d5 by rebuilding the securitization stack from the ground up.

E

We have decided to go with revenue-based financing assets as the first asset we want to bring into d5. We did a lot of work on this and ultimately settled on revenue-based financing assets because of their risk and return profile. um When you compare it against the capital stack, you know from government debt as the lowest risk and lowest return, all the way up to crypto uh being the highest risk and right now the highest return, not always the highest return.

E

But you know over a long period, it's been a phenomenal investment across the board, uh but then you look at revenue-based financing assets. It has a similar risk profile to senior debt. It's the first money out in a liquidation. It has seniority over any other capital in the company and it has a return profile, almost like an equity-like product. um So we thought this would be a great product to bring in to d5 it's a very large growing market that started about five to ten years ago.

E

I would say- and it's been incredible to see it grow in bloom, uh we're big fans so a little bit more on revenue, sharing, finance, uh revenue-based finance, um think about it as a percentage of the cash flows that a company generates on a monthly basis. So we fund the company in return for a fixed percentage of their grossly month revenue.

E

So it's a variable return, uh but we use uh algorithms through our ask originator that we've partnered, with which I'll go into in a little bit to price these assets um and put the offer together. um There is a risk uh score that we calculate on every underlying asset and only assets above a certain risk. Score are considered for investments in this pool.

E

um Typically, it's about one to ten percent of the monthly revenue of a company, it's usually in the three to four percent range um and the companies have an option to buy out this asset for typically one to three x of the principle of the asset. um You know. So a lot of companies they use this in between funding rounds to not get diluted. They use this while their revenue is growing um to finance growth.

E

That way, rather than further diluting themselves in equity, um happy to answer any questions here, but have a little more context here. You give on these assets um so there's 850 billion funding deficit for startups and small businesses in north america that is currently not being met at all by angels or venture capital or alternative lending or traditional markets.

E

We've partnered with a fintech originator called coral. They specifically focus on these type of assets um and they identified this back in 2016 and started building an incredibly technology platform to both originate and underwrite the risk of these assets. um You can also see, over the last uh I would say about five years, there's been a pretty big insurgents and other venture-backed fintech originators that are working in the space, including pipe uncapped, lighter capital and bootstrap.

E

There's several others, but it's it's quite a growing market. You can see the chart here on the right back in 2010. There was virtually uh zero of these deals going on uh these companies. Simply just did not have access to funding, um and you see now in 2018, this chart only goes to 2018, but the market has grown substantially and it's going to continue to grow with the emergence of these asset, originators and more capital coming into the market. One of the problems with new asset classes that are growing is the capital markets.

E

Infrastructure is just simply not up to speed there right. Good luck. Getting you know a warehouse facility for a revenue based financing, ask originator. uh There might be very few but it'll. Typically super high interest rates it'll be with a fund, not a bank, um and it's just typically inefficient, and we think that by bringing this into defined partnering with maker, there are significant efficiencies both for the the borrower for the asset originator and for ourselves.

E

So a little bit of information on coral, um whom I mentioned, we decided to partner with for this first cool, so they were founded in 2016 um and they do provide capital to these small and growing businesses. um So a borrower would sort of come online to their platform. They would submit an application, uh they connect to the platform via api.

E

So if you have your accounting system, your salesforce integration, your google analytics they take about 10 000 different data points through api, that a business typically has and they bring it into their system called cris, which is their algorithm. That calculates a score for each individual underlying asset, so they perform a quantitative assessment and then results that come over a certain score are brought to investment committee, which is inclusive of both coral and ourselves. We make a decision on every asset, and then we we fund it and we bring it into the pool.

E

Coral continues to service these assets on a monthly basis. They continue to bring in updated information on a monthly basis to recalculate the score of all the underlying assets. So we know in advance um how the assets are performing, how the pool is performing and can correct anything before it gets out of whack. We have a tremendous amount of analytics.

E

One of the reasons we actually decided to partner with coral was because their technology analytics platform is uh substantially better than anyone else in the market that we have seen um on this slide, which I think will circulate later, there's a link to a demo that we did for the centrifuge community, um where I brought in the ceo of coral and he did a demo through the platform, and I think it'd be really helpful for you guys to visualize that if we had a little bit more time today, I would have brought him in as well to do another one.

E

But uh it looks like we can schedule another another call to go into more detail, but you guys are welcome to click the link here and see see it for yourself. um So in 2020 coral launched a one million dollar proof of concept portfolio. um This is before we met them in the beginning of the year to demonstrate that their technology is working and they can originate. um It worked tremendously. Well, um you can see here on the right. They had a irr of 56 actually on this portfolio.

E

um These assets tend to perform very well um and so to continue on the success of the proof of concept portfolio. We decided to partner with coral and increase their access to capital um and fund a larger pool so we're starting with a million dollar pool, uh and we plan to scale it to 10 to 20 million next year. They have a tremendous pent-up demand for these assets.

E

uh Sorry they have a tremendous pent-up demand from their clients, and so we think we can substantially scale this pool with coral and we do plan to spin up additional tools in the future, with other asset originators both within the revenue-based financing space and, uh in other asset classes, uh generally looking to bring super high quality assets with strong yield and cash flows into the d5 community.

E

uh So, as leah said, we're planning on submitting our mip six uh and entering the january governance cycle and hope to spend more time to answer any questions you guys have there's also a link on this slide that to an underwriting report, we did a pretty in-depth, underwriting report on our ask origination partner coral. So you can see a lot more information, their history.

E

The team, uh their portfolio performance uh and more details around the asset and their technology, so I would encourage all of you to you know, take a look at that report, um but that is all I have for today. I wanted to keep it short uh but happy to take any questions.

A

Does this um the type of company um the profile the company that you try to fund is mostly um high recurring revenue type companies.

E

Correct they're, they're, typically they're, typically correct they're, typically sas based revenue, companies or e-commerce companies, um and you know, there's a tremendous there's, a ton of metrics. They need to pass to even qualify for investment. They need to have over a certain amount of revenue per month. They need to have a certain amount of operating history uh and and the risk score needs to come above a certain level which is based on their financials and their assets and liabilities. And so we look at everything before we make an investment decision.

A

Okay, sorry, it's phil! um How do you, how do you define the the sell-off price the one to three x.

E

So the algorithm automatically calculates the offer for each underlying asset based on the risk score and based on their cash flows and growing revenue. um Typically, it ends up being around 1.5 x on the buyout, but that will shift based on our target irr based on the profile of the company, but it should be in the 1.5 range it can be higher. Sometimes.

A

It's higher because of higher risk.

E

No uh because you know we might take a smaller percentage of the monthly revenue, it's sort of a math that comes out to a certain target, irr that we're looking for on each underlying asset.

A

Okay got it. Thank you.

A

I mean I have a ton of questions nick, but I'm not sure we have the time to cover them all, um mainly based on on risk and and how this this would work, the cash flows and, and all that so may will be it's very worth it to have you guys back uh in january, uh to discuss it more in that.

E

Yeah would love to. I can bring uh our partner from coral um who's been. You know focused on his asset class for the last five years and has a tremendous amount of experience in both securitizations and lending, so we can bring them on and we can answer all of your questions. You can also reach out via email and happy to answer any questions ahead of time.

A

Right now I want to be mindful of people's times. I'm sure that I don't know people have dinner or dates to attend, um so so yeah, let's keep the conversation going in the forum. I think your all your names are there. So yeah questions.

C

A

Welcome and yeah, I don't know if you wanted to to mention something before closing.

B

uh I want to mention that uh we will work on those three criterials starting january. Well, we have started for some already and maybe the first batch of craters may took some time to incorporate in maker, but the next one can come really quickly, maybe end of february. Who knows so expect things to move quicker.

A

Sounds good so yeah thanks again to the well harvard trade um for tuna, fi and people's company. It was great having you guys and let's keep the discussion going in the forums and see you guys next year have a great holidays thanks. Everybody.

C

Everyone happy.

A