Gabby Jones | Bloomberg | Getty Images
Two trendy areas in finance – fintech and private credit — are coming together in a new multi-billion dollar joint venture.
Affirm Holdings is getting its largest-ever capital commitment with a new partnership from private-credit firm Sixth Street, which is investing in $4 billion worth of loans over the course of three years.
Sixth Street is committing capital upfront for Affirm to underwrite short-term installment loans – between 4- to 6-month timeframes. Once paid back, the capital rolls back into the pot to make more loans — amounting to more than $20 billion that could be extended over the three years of the partnership. The deal encompasses a ramp, and the loan sale won’t start until 2025, according to a person familiar with the terms.
As private credit has exploded in recent years, alternative-asset managers are increasingly looking at non-bank, fintech companies to invest capital. And the fintech firms are opting for what they see as more-efficient sources of financing that can scale up or down based on the demand from their end users.
Unlike banks, which rely more on deposits to make loans, Affirm and many of its peers opt for a variety of funding models, including warehouse facilities, asset-backed securitizations and so-called forward flow agreements, such as the one it signed with Sixth Street. What this means is Sixth Street intends to purchase loans originated by Affirm for consumers as they buy items online through platforms ranging from Amazon to Apple. PayPal announced a similar deal this summer with KKR for loans originated in Europe.
But traditional banks aren’t completely out of the financing supply chain. They indirectly finance these loans, alongside the private-credit funds, off of the banks’ own balance sheets.
Affirm, YTD
The whole ecosystem is funding higher capacity for more short-term installment loans and buy now, pay later products in anticipation of demand growth. As of September 30, Affirm’s funding capacity was $16.8 billion, 130 percent growth over the last three years. Gross merchandise volume growth for the first nine months of the year was 34 percent – higher than last year but below 2022 levels.
Affirm provides credit to consumers at APRs between 0 and 36 percent, depending on what’s being purchased, the merchant and the implied likelihood that the consumer will pay back the loan. If a consumer is late or misses a payment, they don’t owe any additional amount, which means there’s no extra yield for investors in the event that the loan isn’t paid back on time. Affirm’s delinquency rate of more than 30 days as a percentage of active balances was 2.8 percent as of September.
