Delving deeper into the macroeconomic environment, Core CPI inflation slowed to 0.163% in May—the slowest monthly pace since August 2021. Rent remains the largest contributor to inflation. As these indicators align with the Federal Reserve’s expectations, many voting members of the Fed have expressed a desire to lower the Fed Funds Rate, currently at 5.50%. Historically, since the 1960s, we have averaged about 21 months between the start of rate hikes and the onset of a recession; we are now 27 months into this cycle. While this does not guarantee a recession, it suggests a need for a conservative approach as to where the economy could be heading in the coming years.

One of the larger concerns I’ve raised in previous Investor Updates is the rising federal deficit, which has now surpassed $35 trillion, compared with GDP at $28.6 trillion, resulting in a debt-to-GDP ratio of 120%. This is the highest level since World War II, when it reached 250% of GDP, before stabilizing around 40% in the early 1990s. The continued government spending without restraint presents a significant long-term systemic risk to the U.S. economy. The declining GDP growth rates are also troubling; while we averaged 4% in the 1950s and 3.2% in the 1990s, looking to more recent times this has steadily decreased to around 1.9%, from 2008 to 2023. The declining GDP growth rate, coupled with the rising levels of debt, are increasingly concerning.

Hiring growth has been growing at the weakest pace since the beginning of the year, with ADP data indicating that private payrolls increased by just 152,000 in May—below forecasts. Jobless claims have crossed the 250,000 mark and appear to be on an upward trend. In terms of consumer health, the poorest households have seen a 20% deterioration to the negative in cash and cash equivalents, since December 2019, while our end consumers have improved their financial health by 10% since COVID-19. The top 20th percentile has experienced nearly 20% growth. Another key metric that we continue to watch, is the share of credit card debt that is past due, which peaked at just under 14% during the 2008 financial crisis and currently stands at about 11%, up from around 7% in 2015. The rising delinquency rates could indicate increased demand for our lenders’ products as higher credit quality customers start to face financial pressures and apply for loans.

Over the past seven years, we have helped originate over 150,000 consumer loans in partnership with our lender partners, giving us a wealth of data on consumer behavior and financial well-being. Our discussions with former Federal Reserve President of Atlanta, Dennis Lockhart, and current President Raphael Bostic, have provided deeper insights into our end consumers' financial health.

For our higher-risk customers, direct access to their bank transaction feeds is required. This data reveals some notable trends. From Q1 FY2022 to Q1 FY2024, the average consumer’s income increased from approximately $44,000/year to $57,000/year — a 29% rise. However, at the same time, the median quarterly checking account balance dropped from $446.72 to $218.69, a 51% decrease. Meanwhile, over the same period, median monthly expenses rose by 20%, with grocery spending up by nearly 15%. While our end consumers have certainly felt the effects of inflation, their experience has been significantly less severe than that of the average U.S. consumer.

From 2022 through the last quarter, we’ve seen a significant increase in demand at the top of the funnel, allowing us to drive consistently high-quality customers to our lenders’ products and significantly increase deployment from 2023 through 2024. We anticipate working with our lenders to increase deployment from $25 million last year to approximately $44 million this year, representing a 76% growth rate. We are approaching this with a degree of caution due to the election cycle, as certain capital expenditure investments may slow down while companies and capital markets await the election results. Our Net Unit Margin, defined as the percentage of each dollar lent that remains after accounting for defaults and expenses, has remained stable at 23%, significantly exceeding our long-term target of 18%. We do not expect this margin to fluctuate significantly as we continue deploying capital throughout the year.

For those who have invested with us since we started lending in July 2017, cash-on-cash returns have exceeded 100% — an exciting milestone. As I often say, it’s a good position to be in when you’re “playing with house money”. As you know, Hive provides lines of credit to small-dollar online installment and line of credit lenders across 36 states in the US. Our strategy focuses on creating a strong rate arbitrage while reducing underlying asset risk over the long term. By reinvesting our firm’s equity, we take the first loss position, thereby reducing the risk for our investors. To date, we have experienced no defaults with our lending partners, largely due to our stringent underwriting measures and robust risk controls.

Our fund's benchmark is the Intercontinental Exchange Bank of America High Yield Index, for which our performance is significantly above that beta. Over the past seven years, our returns have also outpaced the S&P 500, and although we do not expect that to be our goal long-term, it is great to see that we have properly priced the debt to provide a strong yield to our investors. Compared to top-performing large private credit funds, our year-to-date return of 7.31% outperforms BlackRock’s (BDEBT) 5.12%, Blackstone’s (BCRED) 6.00%, and Apollo’s 6.11%. In the hedge fund world, we are right in the mix even though we do not compete and should not be directly compared against trading funds. While hedge funds such as Citadel Wellington, Point72, and Schonfeld Strategic Partners have posted higher returns at 8.10%, 8.70%, and 10.30% respectively, we were able to beat the diversified Millennium fund at 6.90%, PivotalPath Hedge Fund Index at 5.80%, Balyasny fund at 5.50%, and Baupost Group at 4.00%. Our returns are competitive, particularly when considering those funds' return figures gross of incentive fees, which could reduce net returns by up to 20%.

Our focus has always been on building a relationship with our investors and understanding where we fit within your strategic asset allocation. In a market where yields have been strong, we’ve focused on enabling investors to capitalize on these opportunities, which we believe will continue in the years ahead. Without a solid allocation to private credit, investors may miss out on the opportunity to achieve superior risk-adjusted yields and performance that exceeds the volatility of the equity markets.

The word about our growth is spreading. In addition to individuals, we now count among our investors: family offices, Registered Investment Advisors (RIAs), and two ETFs. With AUM crossing $110 million this past quarter, we are well-positioned to pursue significant diversification into new lenders and expand our fund’s deployment capacity. With over $15 million committed, we anticipate reaching $150 million by Q1 FY2025.

We are continuing to identify lenders in the market that offer excellent yields and risk-adjusted returns while maintaining underlying asset controls. By providing our lenders with strategic direction and risk management across areas such as marketing strategy, underwriting, origination policies, compliance, customer servicing, and collections, we are not only deploying more capital but also ensuring that we manage risk effectively as we scale. We believe we have the capacity to reach at least $250 million in AUM by the end of 2025, more than doubling our current assets under management. To achieve this, we are in discussions with multiple lenders and are conducting due diligence. We are also scaling up our internal resources to manage the growing demands of due diligence, ongoing deal support, and the exponential increase in data we expect to process.