Supervest is a US-based platform with a unique investment product for accredited investors - Merchant Cash Advances. In this interview, we talk to Supervest CIO John Donahue to learn more about the platform's background and plans, ownership structure and business model, and, most interesting of all, their investment offerings.
Could you tell us a little about when and why Supervest was founded?
Supervest was founded in 2018 by Jay Morton and Kris Kehler. Like many highly successful companies, Supervest was born from our founders’ desire to solve a problem that impacted them personally. The issue was that there was simply no efficient, transparent or reliable solution to monitor and manage the unique and complex aspects of investing in the Merchant Cash Advance asset class. Our founders’ skill sets were uniquely placed to solve this problem combined with their personal motivation to invest across the Merchant Cash Advance marketplace.
The platform, originally designed only for themselves to participate alongside a few select funders, quickly grew as friends and associates became aware of not only the potential for returns but the uniqueness and robustness of the technology platform. As the platform grew from primarily friends and family, so did the goals and aspirations of our founders. Realising the opportunity in front of them, our founders began the process of “institutionalising” the team, platform and the processes needed to accomplish these new goals. Since its inception, investors have participated in over 18,000 individual merchant cash advance deals through the Supervest platform.
Supervest Ownership Structure
How did you finance Supervest initially, and how is the ownership of Supervest structured today?
Supervest’s founders self-funded or bootstrapped the company's financing throughout its first few years. In 2021, we executed and closed a small seed round enabled by the crowdfunding platform SeedInvest. The SeedInvest financing was structured as a convertible note similar to a SAFE note. The note has a $15 million valuation cap and will convert to equity upon an additional equity financing round. We are beginning the process of an additional equity financing round at this time. Over 90% of the ownership is currently held by our founders, operating partners, and employees.
What is your background, and how did you become interested in the online alternative investment space
My current role at Supervest is as Chief Investment Officer. My background begins in the traditional investment banking world. I worked for several large investment banks including Citibank and Societe Generale. In 2008, I left the traditional banking world and founded a quantitative hedge fund based in Boston, MA. The fund’s strategy was a volatility-based tactical asset allocation approach, which we operated for over ten years.
Our team includes highly skilled individuals with backgrounds in the computer science and mathematics fields from both academia and the commercial world. Additionally, we created, spun, out and sold a high-frequency market-making business to a large Japanese holding company during the tenure of our fund management operations. Given my historical background in managing alternative assets for large institutions, it was a natural evolution to begin the thought process of how one could democratise certain alternative asset classes to provide access to smaller investors.
Who are the other management members? What overall thoughts have you had when assembling the best possible team to run Supervest?
Jay Morton is our CEO, Kris Kehler is our CTO, and Roland Burke manages our underwriting and risk team. Assembling the right team is crucial to our success as it is to any business wishing to grow and prosper. We believe that while talent or skill set for any individual role is extremely important, just as important as a cultural fit and a proven work ethic.
As a company, we strive to provide an environment where our team members are intellectually challenged daily and transparently incentivised to reach their own and the company’s goals. In the current tight employment market, particularly with respect to the fintech space, we know that to hire the best team, we need to offer team members the opportunity to grow and be extremely excited to come to work every day. We are constantly focused and driven in this respect and are always looking for talented individuals who could join our team and prosper collectively.
Investing Offering at Supervest
Could you briefly explain what investment types you offer at Supervest?
Currently, we offer two investment offerings or on-ramps to the Supervest platform. The simplest of the two is a 12% promissory note offering. Investors can invest in the note with a minimum of $100,000 and receive a 12% annualised rate of return for the note’s two-year term. The note pays quarterly interest or dividend payments of 3% per quarter, with the principal being returned at the conclusion of the two-year term.
Our other offering is what we call the “self-directed” model and is the original investment design when Supervest began operations. The self-directed model allows investors to participate directly in individual merchant cash advance deals on a fractional basis. The self-directed model breaks entry barriers by enabling potential investors to create profiles and participate in MCA deals that appeal or conform to their risk tolerance. Supervest has created a seamless, secure and transparent conduit for investors to access thousands of MCA deals originated from over 20 participating funders on the platform. Flexible investor controls allow an investor to customise deal opportunities based on a merchant’s industry, credit score, lien position, time in business, participation limits, etc. Investors can “opt-in” to each “matched” MCA in accordance with their pre-determined criteria and risk tolerances, which is presented automatically via the platform intelligence. Our Investor Dashboard provides a fully transparent and detailed repository, including deal-by-deal specifics, cash balance, deal performance history, daily remittances, general ledger reporting, funding status, etc.
Why do you think Merchant Cash Advances (MCAs) are an attractive alternative investment opportunity for accredited investors?
Certainly, the number one attraction for investing in MCAs is the ability to garner attractive returns balanced against the risk. We believe the potential return available to an accredited investor outweighs the associated risk in a well-constructed MCA portfolio. Additional attributes include historically low correlation and volatility relative to public equity and bond markets.
One of the most important attractions of our fractional participation design allows ample diversification for an investor. One can gain exposure to the repayment streams of thousands of individual merchant cash advance deals across, credit score, industry, or deal size, to name a few, to ensure optimal diversification. One of the truly unique aspects of an MCA deal structure is that merchants receiving a cash advance begin the payback of that advance immediately and typically on a daily basis to our investors. Consequently, the result is a daily compounding effect: the daily payments from the merchants can be redeployed into additional advances, generating a multiple of the original advance.
Investors’ capital is always turning over and constantly working, a bit like a supercharged dividend reinvestment program. Investing through our platform in the MCA asset class also provides liquidity and transparency to our investor base. There are no lockups, and we provide daily liquidity for cash balances. In fact, cash balances are FDIC insured up to $250,000 in partnership with our custody bank. Finally, there is certainly a scarcity value to an investor's ability to invest in this space. MCA is a highly fragmented and unregulated segment of the financing market with an attractive return profile that has historically been very difficult to access for even a sophisticated, accredited investor - until now.
If I decide to place money at Supervest and build a diversified portfolio, how much can I expect in net yearly return after losses and delayed payments?
As I mentioned, the self-directed model allows investors to set up criteria based on their personal risk preferences. With the ability to customise one’s portfolio based on such criteria, the spectrum of returns will vary across our investor base. Certainly, an investor taking on more risk may see a higher return, but that will likely entail taking on more portfolio volatility. We see a range of returns from our users based on their criteria profile setups. Conservative profiles tend to see low double-digit returns, while more expansive ones have seen returns approaching 30% annually. These estimates are net of all associated fees and defaults.
How do you calculate your returns? What method do you use to decide when a loan must be written off and accounted as lost or with minimal chance of recovery? Do you use an objective or subjective way of deciding when to write off loans in the actual returns?
To clarify, Supervest’s MCA offerings are not loans as there is no fixed interest rate or term. The MCA contract offerings made to our investors are a purchase of future receivables from the underlying business at a discount. The rate applied to the purchase amount, where the investors make their spread, is referred to as a factor rate, which calculates the total amount to be paid back by the business over time. This amount, or the investors’ “Right to Receive” (RTR) is represented as a balance due that reduces as regular payments are made to the Funder and subsequently back to Supervest’s investor base.
Returns to investors are calculated considering the factor rate or spread on the MCA, the commission amount paid to the broker, the investor's fee structure, and the projected losses. For tax purposes, we write off any remaining balance on a given MCA that has seen no payment activity for over 150 calendar days. While collections and recovery efforts can substantially reduce these delinquent balances over a 12 to18 month period, the likelihood that this recovery will be made within the same calendar year that the MCA went into a defaulted status is minimal. Any gains made on these through collections efforts are realised in the next tax year.
This write-off method is objective, as it takes into account repayment behaviour on over 17,000 historical contracts. This abundance of data allows Supervest to predict more accurately the ability to repay and potential loss rates on a book of MCAs based on the profile of the underlying businesses and ownership. There is a lesser subjective nature to these calculations when overlaying these projections on new Funders whose offerings differ in credit risk and advance terms than most of the historical portfolio. However, the repayment behaviour for advances from newly onboarded Funders assimilates with existing write-off projections methods over time to form a more comprehensive and objective methodology.
How Supervest Handles Risk
How do you ensure that the deals listed on Supervest are safe for investors to put money into?
Supervest undertakes a comprehensive process when evaluating Funders to bring on board that can take several weeks to multiple months depending on the size of the potential relationship.
While Supervest does not underwrite each individual MCA submitted to the platform, we put the Funder through an extensive review process that includes, but is not limited to:
- Funder underwriting and collections policies and procedures
- Funder pricing matrix or product suite
- Funder data tape or a static pool for the last three years
- Copy of funder’s up-to-date merchant agreement(s)
- Most recent company financials
- Background checks on the entity, principals, and/or owners
As a result of this process, Supervest will either approve or decline a Funder for onboarding. We reserve the right to limit or restrict certain portions of their portfolio based on performance and terms deemed below the acceptable threshold for investors.
Performance for the entire portfolio is monitored daily, and Funders are subjected to quarterly, and often monthly, reviews of their entire funding book for that timeframe to guard against adverse selection and confirm terms for all participated MCAs during that period. Supervest reserves the right to restrict, reduce, or remove all offerings from a given Funder if the result of these reviews, or the ongoing portfolio monitoring, yield subpar performance or returns for investors.
If Supervest, for some unlikely reason, should go out of business, what will happen to the investors’ money?
Supervest employs both a custody escrow manager and custody bank, First Midwest Bank. In the event of a scenario whereby Supervest ceased operations and investor dollars were still out and committed to current MCA deals, our escrow partner and First Midwest bank would step in as servicers to investor accounts ensuring all remittances and payments would flow back to each investor based on their participation in the underlying MCA deal(s).
What’s next for Supervest? Where do you see the platform in five years?
Supervest is at an inflexion point in its growth. We have seen an amazing acceleration in interest and participation in our current MCA offerings. We are currently completing a major technology upgrade across our platform, which includes an improved UI for investors and funding partners. We are also upgrading our technology stack, providing greater ease of use for our third-party vendors and partners. While we have been and will continue to provide the best-in-class platform for investing in the merchant cash advance space, we believe there are additional unique opportunities that our platform is perfectly designed for.
We currently have designs on offering additional asset class opportunities that would be truly unique in keeping with our culture at Supervest. We are exploring such asset classes as credit card processing residual portfolios, collectibles, and hard money loans. The common theme to all these asset classes is the unique and attractive return streams available to an investor and our ability to partner and underwrite strong teams. While five years is a lifetime in the fintech space, our goal is to be one of the prominent marketplaces available to investors, offering them truly unique investment opportunities that help them diversify and prosper financially.
You can learn more about Supervest on P2PMarketData, including a peek into Supervest statistics of their historical monthly funding volumes. Go ahead and check out our other interviews with leading crowdfunding and P2P lending platforms too!