Fintech and private credit, two emerging sectors of finance, are joining forces in a new multibillion-dollar joint venture.
With a new agreement, private credit firm Sixth Street is investing $4 billion in loans over three years, giving Affirm Holdings its largest-ever capital commitment.
For Affirm to underwrite short-term installment loans with terms ranging from four to six months, Sixth Street is making an upfront financial commitment. After being repaid, the capital is reinvested in the fund to make additional loans, potentially totaling over $20 billion throughout the partnership’s three years.According to someone familiar with the details, the loan sale won’t begin until 2025, and the transaction includes a ramp.
Alternative asset managers are increasingly turning to nonbank fintech companies for capital investments as private credit has skyrocketed in recent years. Fintech companies are choosing what they believe to be more effective funding sources that can grow or shrink in response to end-user demand.
Affirm and many of its competitors use a range of funding sources, such as warehouse facilities, asset-backed securitizations, and so-called forward flow agreements, like the one it inked with Sixth Street, in contrast to banks, which rely more on deposits to provide loans. This means that Sixth Street plans to buy loans that Affirm has created for customers who shop online at sites like Apple and Amazon. This summer, PayPal and KKR established a similar agreement for loans with European origins.
However, traditional banks still have a role in the financial supply chain. They use the banks’ own balance sheets to indirectly finance these loans in addition to the private-credit funds.
In anticipation of rising demand, the entire ecosystem is financing increased capacity for additional short-term installment loans and buy now, pay later items. Affirm’s funding capacity was $16.8 billion as of September 30, representing a 130% increase over the previous three years. The first nine months of the year had a 34% increase in gross merchandise volume, which was greater than the previous year but lower than 2022 levels.
Depending on what is being bought, the merchant, and the inferred likelihood that the customer will repay the loan, Affirm offers credit to customers at APRs ranging from 0% to 36%. There is no additional yield for investors in the event that the loan is not repaid on time because a consumer who misses or is late with a payment does not owe any additional money. As of September, the percentage of active balances that were past due by more than 30 days was 2.8%.
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