2023 Third Quarter Letter
We trust this letter finds you in good health and high spirits. In this extensive review, we aim to provide you with an in-depth analysis of the financial markets and the Merchant Cash Advance (MCA) industry during the third quarter of 2023, as well as a comprehensive outlook for the fourth quarter. In the midst of evolving global dynamics, we remain committed to helping you navigate the complexities of the investment landscape.
Summary of Highlights from 3Q23
In the third quarter of 2023, global financial markets continued to demonstrate remarkable resilience, steadfastly weathering the challenges posed by geopolitical uncertainties and economic fluctuations. It was a quarter marked by a cautious yet sturdy optimism among investors.
Global Equity Markets: Stability Amid Uncertainties
Throughout Q3, equity markets showcased remarkable stability. The S&P 500, a bellwether of U.S. equities, posted a solid gain of 5.2%, reflecting a market that was balancing optimism about the economic recovery with concerns over inflation and interest rates. The performance of global equity markets was by no means uniform. In Europe, the Euro Stoxx 600 showed robust gains of 6.8%, buoyed by a strong economic rebound in the Eurozone. Meanwhile, Asian markets faced headwinds as the Hang Seng Index in Hong Kong struggled due to regulatory concerns, posting a 5.1% loss for the quarter.
Interest Rate Trends: Central Banks Remain Cautious
Central banks across the globe maintained their cautious stance on interest rates during the quarter. The Federal Reserve continued to emphasize a patient and data-dependent approach to monetary policy. In a press conference following the September Federal Open Market Committee meeting, Chair Jerome Powell stated, “Our approach to raising interest rates will remain measured and data-dependent. We are closely monitoring inflationary pressures while prioritizing economic stability.”
This commitment to a gradual approach gave investors a sense of reassurance, helping to alleviate concerns about a sudden tightening of monetary policy. Similarly, the European Central Bank (ECB) and the Bank of Japan (BOJ) maintained their respective accommodative policies to support economic recovery.
In contrast, emerging markets faced interest rate challenges, particularly in countries grappling with surging inflation. The Central Bank of Brazil, for example, raised its benchmark interest rate by 1.0% during the quarter to combat rising inflationary pressures.
MCA Industry: Resilience and Adaptability
The Merchant Cash Advance (MCA) industry, known for its agility, demonstrated remarkable adaptability during Q3. By leveraging advanced technologies and data-driven strategies, it effectively navigated the economic uncertainties that persisted.
Supervest CIO John Donahue, a leading authority in the field, noted, “The MCA industry’s ability to swiftly adapt to changing economic conditions has been a critical factor in its resilience. Businesses, particularly small and medium-sized enterprises (SMEs), are increasingly turning to MCAs as a reliable and flexible financing option.”
This adaptability was further highlighted by the growing utilization of artificial intelligence and machine learning in MCA underwriting processes. By analyzing vast datasets, MCA providers could make more informed lending decisions, reducing risk for both lenders and borrowers.
Outlook for 4Q23
As we peer into the fourth quarter of 2023, we maintain a cautious yet optimistic outlook for both the financial markets and the MCA industry. Several key factors contribute to our perspective.
Global Economic Recovery: Steady Growth Expected
The global economic recovery is anticipated to maintain momentum in the fourth quarter. Fiscal stimulus packages, coupled with robust consumer spending, are expected to underpin growth. Governments around the world have continued to support their economies, with infrastructure spending and job creation initiatives further fueling economic expansion.
However, it’s essential to acknowledge regional disparities in economic recovery rates. While advanced economies, particularly the United States and parts of Europe, have made significant strides in rebounding from the pandemic’s impact, some emerging economies are still grappling with the challenges of vaccine distribution, limited access to financing, and supply chain disruptions.
Interest Rates: A Gradual Path Forward
The trajectory of interest rates remains a key focus for investors as central banks aim to strike a balance between combating inflationary pressures and supporting economic growth. While concerns about inflation persist, central banks are expected to maintain their measured approach to interest rate adjustments.
Supervest CEO, Jeremy Morton, suggests that “central banks are likely to prioritize economic stability in the face of inflationary pressures, which should translate to a stable interest rate environment in the near term. Any rate increases are expected to be gradual, allowing financial markets and businesses to adjust.”
Notably, the Federal Reserve has indicated that it intends to begin reducing its bond purchases in the coming months, a move widely seen as a precursor to future interest rate hikes. However, Chair Powell emphasized that the pace and timing of rate increases would depend on economic data.
MCA Industry: A Continued Source of Financial Resilience
The Merchant Cash Advance (MCA) industry’s adaptability and capacity to respond to changing economic conditions position it well for continued growth in the fourth quarter. As businesses increasingly recognize the value of MCAs as a flexible source of financing, we anticipate sustained demand for these financial solutions.
The growing collaboration between fintech firms and traditional financial institutions is expected to further enhance the accessibility of MCAs. These partnerships leverage technology and data analytics to streamline the underwriting process, ensuring faster access to capital for businesses.
What Does This Mean for Merchant Cash Advances (MCAs)?
The Merchant Cash Advance (MCA) industry continues to play a crucial role in the financial landscape. Its flexibility and capacity to cater to the unique financing needs of businesses have been a source of resilience during challenging economic periods. As the global economy continues to recover, businesses seeking working capital and cash flow solutions are likely to turn to MCAs as a viable option.
In particular, small and medium-sized enterprises (SMEs) have benefited from the speed and accessibility of MCAs. These businesses, often the backbone of local economies, have faced the dual challenges of supply chain disruptions and fluctuating consumer demand. MCAs provide them with a lifeline, enabling them to bridge gaps in cash flow and pursue growth opportunities.
As mentioned in our last update, Supervest has continued to see a robust volume of upstream deal flow and investor offerings as we’ve sought to increase portfolio exposure to higher-end, low-risk Funders. These targeted groups deal almost exclusively in affordable advance rates to a bankable customer base, and the results of their increased funding capacity have a demonstrable impact across the Supervest portfolio. As noted in previous communications when comparing 2023 to date to the first 3 quarters of 2022, Supervest’s underlying portfolio has seen the average advance size and underlying business revenues almost triple during that time span. Additionally, the average owner FICO score ranges have increased dramatically, where over 90% of the portfolio is considered higher end within MCA (650+), compared to just 50% the year prior. The two main factors driving this steady increase in quality offerings are the reintroduction of Funding Partners with more acute pricing and formidable underwriting into the Supervest portfolio that had stayed somewhat dormant in 2021 and the 1H of 2022, and the influx of bankable customers into the MCA space as a direct result of the reduction of available credit from regional banks.
With a laser focus on affordability and sustainable repayments, this relative sea change in advance offerings through SV’s network of Funding partners bodes well for performance in the remaining quarter of 2023 and into 2024. While the overall rates will reduce as a result, with higher quality customers accepting more responsible repayment terms, the outlook on improved performance far outweighs the reduced spread, setting up investors with the opportunity to significantly expand investment into less volatile, longer-term paper as a prudent balance to the higher risk/reward paper that has been prevalent in many portfolios from prior years.
We continue to monitor macroeconomic events and the potential for impact on the MCA investment class generally and industry exposure specifically. We continue to underweight exposure to smaller operators in the trucking and transportation industry and have taken a more critical view of the general contracting space. General contracting has certainly seen the effects of the rapid rise in mortgage rates and we will continue to monitor this industry group along with all others for any signs of softness.
In conclusion, the third quarter of 2023 presented its share of challenges and opportunities. The global financial markets demonstrated remarkable resilience, responding to evolving economic dynamics with cautious optimism. Interest rate trends remained closely monitored, with central banks maintaining a measured approach. The MCA industry’s adaptability and capacity to meet the financing needs of businesses reinforced its role as a vital financial resource.
As we move into the fourth quarter of 2023, we remain committed to navigating these complexities with diligence and a forward-thinking perspective. Our outlook for both financial markets and the MCA industry is cautiously optimistic. We anticipate continued economic recovery, measured interest rate adjustments, and sustained growth in the MCA sector.
We value your trust and confidence in us as your investment partner. Please do not hesitate to reach out with any questions or concerns. We look forward to keeping you updated on our progress and continuing to work together to achieve your investment goals.