We had a deep and engaging conversation with Todd Billings from USDV Capital about how innovation and technology drive change in private markets.
In the first part of our conversation, we covered how USDV Capital uses technology to combine loans from a number of different service providers.
Katipult: Great to meet you, Todd. First, please tell us a little about yourself and USDV Capital.
Todd Billings: So USDV Capital is a private equity firm based in South Florida, about 45 minutes north of Miami. We have invested primarily in the mortgage and real estate space, funded by private investors.
Before running USDV Capital, I managed a Multi-family office where I managed all the financial affairs for six wealthy families, taking it from 10 million [dollars] in liquidity to over a billion [dollars] of liquidity. During that time, I was the quarterback of their financial lives so they would send me their deals and opportunities from friends, families, professionals, etc. And one of the deals and opportunities that came across my desk was a pool of non-performing mortgages during the last great recession in the US.
We ended up taking the first pool of distressed mortgages around 2009. We bought those for about 26 cents on the dollar, which was a 19 million dollar investment and a year later, we were out for 30 million dollars for the families.
From that partnership, the families said, “Can we do this full-time?” And then we had bought somewhere around 65 million dollars of distressed debt. There was over a trillion of distressed debt at that point, so we knew the opportunity wasn't going away anytime soon.
So we decided to start a private equity firm called US Debt Ventures or USDV Capital now, and the goal was to go out and buy this distressed debt in real estate.
We ended up buying 7,854 loans across all 50 states here in the US through seven different funds. And then in 2015, we launched our eighth vehicle, which went out and started originating loans and fixing flips and new construction [such as] Airbnb places that banks were lending to that heavily at the time.
We've always been an opportunistic private equity firm looking for unique ways to use our skill set and get an outside return.
I grew up in Los Angeles, California. I was the first person in my family to go to college. I originally went to Johns Hopkins to study pre-med. I got an internship at Wall Street. I transferred to Stanford, got a degree in economics, and have worked in finance since.
Katipult: In terms of the distressed debt piece, could you tell me a little bit about how tech and innovation play a part in your world, in particular, maybe some other ways that your firms created or used innovative solutions and the kind of tech you use these in as well?
Todd Billings: So the thing that we realized getting into this space was technology is a great equalizer. It was an opportunity for us as a small firm to deploy capital but, more importantly, manage capital in a much more efficient way than big legacy companies.
We bought a pool of loans from a major top-four bank in the US. I won't name any names because of confidentiality reasons. We bought a pool of over 6,000 loans and had 13 servicers servicing the loans. So we whittled that down to three services.
But most importantly, we built our own custom database using a Software-as-a-Service solution called QuickBase. It allowed us to really focus on the things that we needed to be able to report to our investors, the things we needed to manage from the standpoint of portfolio management. From deal sourcing and managing deals that were coming through our pipeline and providing quick pricing so that we would win deals.
And the key thing we realized was we didn't necessarily need to manage servers and hardware. Instead, we needed to manage the user interface and the system's functionality. And so the solutions out there allowed us to do that and focus on where we could add the most value versus worrying about security and hardware.
One of the unique things that we realized was every service provider had a unique solution that they would try to sell us. And every one of them, and we had 13 service providers, all wanted you to log into their servicing system, and that's just not an efficient way to manage capital or reporting as everyone does something a little different.
So we would get the reports transposed into our system, and we ultimately chose the three service providers that were willing to work out of our system and that saved a tremendous amount of time and allowed us to be very efficient. Quite frankly, that is something that a large bank probably had 75 to 100 people working on these 6,000 loans, and we were able to do that with 10 people.
So that in itself is a huge cost and time saving that technology has allowed us to make. And it probably puts us two to three years ahead of the most innovative investment banks. So it's been a big head start for us.
Katipult: And have you been able to continue that kind of nimble approach of being very responsive and staying a couple of years ahead of big banks?
Todd Billings: Regarding the big banks, we're probably four to five years ahead of where they can be at a given time. Even compared to more innovative banks or large hedge funds that are more aggressive, they're able to innovate faster than big institutions.
But the fact is technology is a great equalizer for everyone. Obviously, it's great for us, but it allows our competition to do the same things, so the difference becomes leadership. So no matter the solution, technology is a tool, but it takes great leaders to implement those tools.
We like to put the right people in the right seat to provide that function, and technology doesn't replace people in that. So I found that I ended up hiring fewer people and got more qualified, talented people.
My initial approach to managing these types of loans was to hire people that do the job, and I realized very quickly that it would become cost prohibitive and less profitable for us.
I brought in a consultant to help us build out our own technology solution, which allows us to use technology to manage people and processes much more efficiently and save money. From there, we can plug in analysts or lower-compensated people to do specific functions and make sure they're not missing simple things.
Technology is very efficient at telling whether someone checked a box or not. So it’s not subjective. We look for it every day when we open up our online banking. So there’s a transaction, there’s a ledger and its either right or its wrong, and sometimes it can be wrong, or there’s a mistake, or there’s fraud in the same way leveraging technology to allow us to be efficient and monitor not only our internal workers but in this case having our vendors work in our system it allows us to monitor our vendors work as well.
Check out for part two of our conversation when we discuss investor experience and the importance of leadership.
