Since 1993, Channel 4 in the UK has broadcast an “alternative Christmas message,” typically a spoof and generally coinciding with Queen Elizabeth’s annual holiday address. This year, the broadcaster aired this message.
It may look and sound like the Queen, but it is not. She’s a deep-fake. This synthetic medium is becoming more powerful and pervasive. Soon, this technology could start to exert new pressures on our open societies, which are already grappling with surreal assaults on fact, data, and science. Ironically – and appropriately, the key request from the fake Queen – “trust in what is genuine and what is not” – is both ominous and challenging. How does one distinguish real from bogus, especially in a world where alternate realities can be fabricated and disseminated quickly, and facts dismissed outright?
We are fortunate to practice a profession whose raw material is numbers. HCG’s asset class – Fintech-enabled, small balance, short duration, amortizing private credit – offers inherent mitigation against fabrication and falsehood because it is centered around harnessing numbers and data…lots of them. This attribute has led to insights that enable informed and efficient decision-making not possible a few years ago. An investment manager now has granular transparency around a single small balance loan with an average size of $10,000, which in turn makes it possible to construct, manage, and monitor a sizable portfolio containing tens of thousands of individual positions. Such a portfolio, curated from millions of unrelated borrowers across the U.S., enjoys uber-diversification, whose chief benefit is a high tolerance for idiosyncratic risk. This is a powerful antidote against deep-fakes.
In 2020, these intrinsic risk absorption features played a prominent role. Based on our observations, micro-businesses who used Fintech-based financing solutions experienced better repayment profiles and/or lower default rates than expected. This was principally an outcome of data-driven, rules-based underwriting and technology-centric servicing. The average U.S. consumer – written off by many a priori – also outperformed expectations, enjoying some of the highest household savings rates ever recorded and at the same time historically low default rates. Once again, data availability allowed servicers to engage with borrowers at lightning speed, calming their anxieties by offering proactive payment relief solutions, that ultimately reduced delinquencies. One example is marketplace lender LendingClub, where the share of borrowers on payment programs went from near zero at the end of March 2020 to 12% in May. By September 30, the figure had dropped to around 2%. Based on the numbers, the asset class has demonstrated the power of data to enable resilient performance.
As investment managers, we are stewards of capital, and our core product is trust. It is our raison d’être. We rely on an investment process anchored by integrity and backed up by facts and data. It is our responsibility to communicate what the numbers say – good or bad, profitable or unprofitable. Fintech-based credit is all about numbers, and as Jay-Z reminded us with his lyrics “Men Lie, Women Lie, Numbers Don’t.”