This piece covers how COVID-19 froze private credit markets and where opportunities lie. Ali Hamed argues the definition of 'small business' has permanently shifted from dry cleaners to Amazon sellers and YouTube creators, which are actually less risky. He highlights ProducePay (helped farmers pivot from restaurants to retail, performed well), STEM (music streaming finance platform, got better deals as tours canceled), and ClearBank (exposed the new small-business economy). He also warns used-car auction prices fell twice as much as in 2008, but defaults haven't fully surfaced yet.
Ali Hamed provided an update on the current state of the private credit market amid the COVID-19 pandemic on the Invest Like the Best program. The core view is that the market is partially frozen, but opportunities exist. He discussed uncertainty, systemic risk, and trends in credit data, emphasizin
Ali Hamed is the co-founder and managing partner of CoVenture, focusing on private credit and alternative asset financing. The main thread of this episode is the freeze in the private credit market under the COVID-19 pandemic, the pricing of uncertainty, and the structural acceleration of the digital economy. The most weighty judgment in the entire episode: Hamed argues that the pandemic has permanently changed the definition of "what is a small business" — small businesses are no longer dry cleaners or pharmacies, but Amazon third-party sellers, YouTube creators, and Shopify merchants, and this shift makes these "tech-enabled" assets actually less risky than traditional brick-and-mortar retail.
Ali Hamed noted that the market came to a near standstill in the first 30 days after the outbreak. "No one has ever underwritten based on a pandemic, and no model applies anymore." He described a key dilemma: short-duration assets (with 60-90 day maturities) are actually riskier than long-duration assets—because as maturity approaches, the borrower's inability to pay must be addressed immediately; whereas a 5-year loan can be deferred for a few months, losing only 3 out of 60 installments.
Hamed characterized assets being sold in the market as "a bag of uncertainty." He gave an example: for a small business loan fund, how would the PPP affect it? Would the default rate be 10%, 30%, or 100%? "Someone is selling you a bag that looked fine in February, but no one knows how it will perform during the pandemic." Buyers are essentially pricing uncertainty, not genuine distressed assets.
Hamed shared a counterintuitive observation: default rates on deep subprime consumer loans have not risen significantly so far. During a call with a founder of a subprime consumer lending firm, the founder was surprised that Hamed had already anticipated this. Three reasons: borrowers may have just been laid off (not yet triggering default); stay-at-home orders have reduced consumer spending; or borrowers have seen news that "rent payments can be paused now" and are prioritizing other loan repayments instead.
Hamed warned: "Near prime may be more volatile than subprime, and super prime is also uncertain." The key lies in understanding the borrower's occupational composition—how many work in the hospitality industry.
Hamed emphasizes that the key difference between private credit and public market credit lies in the diversity of assets and the unique servicers and originators behind each asset. In mainstream residential or commercial real estate lending, if one servicer goes bankrupt, another can step in; but in specialized lending, each lender possesses deep domain expertise that cannot be easily replaced.
He lists the emergency measures originators are taking:
Hamed believes private credit will not trigger a systemic crisis, because the assets are sufficiently diversified—"How many people are financing perishable agricultural goods? Not many." However, he warns of a more insidious risk: a large amount of capital will first rush into assets that appear "safest," creating short-term bubbles. He predicts: "My biggest fear is bidding on things that look safe—too much capital will flood in over a short period."
The "slow-motion" nature of private credit: Defaults take 60–90 days to trigger (after two or three consecutive months of underperformance or a breach of the borrowing base), followed by legal disputes. Hamed notes that private credit faces no mark-to-market pressure and no forced-selling mechanism, giving participants more time to think.
Hamed provides two key data points to calibrate market conditions:
| Indicator | Current Data | Benchmark |
|---|---|---|
| Manheim Used Vehicle Value Index | Down approximately 11.8% | Maximum decline of about 5.5% during the 2008 financial crisis |
| Ally Financial Loan Deferral Rate | 75% of floor plan financing and 20%+ of consumer loans deferred | No historical comparable data |
| Number of Unemployed | 26 million people | All-time high |
Hamed emphasizes: "This doesn't mean 25% of people have defaulted—it just means you have no idea what's going on inside." The key issue is not how high the unemployment rate will rise, but how long it will persist.
When asked whether investors have adequately discounted the government's massive fiscal and monetary support, Hamed's answer is no. Market participants resolve uncertainty not by raising interest rates, but by lowering advance rates. For example, a loan originally made at a 90% advance rate and 15% interest rate now becomes a 60% advance rate at 15%—rather than keeping the 90% advance rate but raising the interest rate to 22%.
"No one is ready to incorporate government support into underwriting models until they see actual results."
Hamed argues that the pandemic has permanently altered the market's view of tech-enabled assets. In the past, tech-enabled assets were seen as "new = high risk," thus requiring a higher cost of capital; now, they are viewed as "higher variable costs, more flexible," and actually carry lower risk than physical retail.
He cites several key ecosystems:
Hamed highlights a counterintuitive opportunity: Traditional media companies are in urgent need of cash and are willing to sell their digital assets (such as YouTube channels, Instagram accounts), yet banks assign no credit value to these assets. Meanwhile, advertisers, unable to reach sports fans through ESPN, are forced to turn to platforms like Snapchat and Instagram, permanently altering advertising budget allocation.
"For a media company, its bankers will not give any credit value to a Snapchat account or YouTube channel—but these things are now more valuable than their physical assets."
Hamed observes that the venture capital market reacts far faster than private credit—because startups are always on the verge of running out of cash. If a company has a 6-12 month runway, no board member will tell the founder, "Things will definitely improve in a few months"—raise capital as soon as you can.
Current SaaS valuation multiples:
| Stage | Pre-Pandemic (2019–Early 2020) | Current (April–May 2020) |
|---|---|---|
| Series A (100% growth) | 20–30x revenue | 2–3x revenue |
| 80%–100% growth | Feasible but difficult to close | Nearly impossible to close |
| Below 80% growth | Extremely difficult to close | Essentially impossible |
The key question has shifted from "how fast is growth" to "can this round achieve profitability, or can one more round achieve profitability."
Hamed points out that many founders made a mistake early in the pandemic: attempting to "reopen the previous round" (raising at the same valuation as the prior round), thinking it was a gesture of goodwill to investors. But when that round failed, they had to come back for a down round, which sent an even worse signal.
The most successful founders are those who are completely humble—they say directly: "We don't know where the market is, we don't know what the valuation should be. We just talk to everyone, collect offers, and raise at the market price."
Hamed believes junior debt could become an attractive opportunity within three months. Junior debt holders do not control the situation—if defaults occur in the loan portfolio, the senior lender can declare a default, leaving junior debt with no choice but to react. Currently, junior debt positions are appearing on the market at discounts of 10%–20%.
However, Hamed warns that purchasing junior debt means buying not only the uncertainty of the loan portfolio but also the uncertainty of the senior lender's behavior: "Unless you know that senior lender very well—their position, and what else is going on in their life—it's hard to buy into their behavioral uncertainty."
| Position | Guest Sentiment | Key Data |
|---|---|---|
| ProducePay | Bullish (Invested) | Performed well during the pandemic, helping farmers shift produce from food service channels to retail/grocery channels |
| STEM (Music streaming financing platform for artists) | Bullish (Invested) | Gained opportunities to collaborate with higher-quality artists due to tour cancellations |
| ClearBank | Bullish (Invested) | Outstanding in revealing the "New Small Business Economy" |
| Ally Financial | Risk Warning (Data Reference) | 75% inventory financing and 20%+ consumer loans under deferment |
| Amazon Third-Party Seller Ecosystem | Bullish (Investment Direction) | Annual revenue of approximately $150 billion, accounting for 2/3 of Amazon's e-commerce revenue |
| Shopify Ecosystem | Bullish (Investment Direction) | Advertising ROI at an all-time high |
| YouTube Economy | Bullish (Investment Direction) | Viewership up 20%-100%, CPM down ~50% and then stabilizing |
| Snapchat/TikTok/Instagram Ecosystem | Bullish (Investment Direction) | Advertisers shifting from traditional TV/sports to these platforms |
1. "Short-duration assets are more dangerous than long-duration assets during a pandemic" — Ali Hamed
Rationale: Assets maturing in 60 days require immediate handling of defaults; a 5-year loan can be deferred for months, with losses spread across 60 installments.
2. "Default rates on subprime consumer loans have not risen yet—because borrowers may have just been laid off, are not spending, or are prioritizing loan payments over rent" — Ali Hamed
Rationale: A counterintuitive observation, indicating that the transmission path of the pandemic shock is entirely different from a normal recession.
3. "The decline in used car auction prices is already twice that of the 2008 financial crisis (11.8% vs 5.5%), but this is not default data—it's 'we don't know what's inside' data" — Ali Hamed
Rationale: The Manheim Index and Ally Financial's deferral data indicate the market is in a "black box" state.
4. "The market's way of resolving uncertainty is not by raising interest rates, but by lowering advance rates—from 90% to 60%, not from 15% to 22%" — Ali Hamed
Rationale: No one is willing to incorporate government support into underwriting models until actual results are seen.
5. "In the past, tech-enabled assets were seen as 'new = high risk'; now they are seen as 'high variable costs = more flexible = lower risk'—this cognitive reversal has permanently changed the cost of capital" — Ali Hamed
Rationale: During the pandemic, tech assets outperformed physical assets, and this perception will not reverse.
6. "Bankers at traditional media companies would not give any credit value to a YouTube channel—but these things are now more valuable than their physical assets" — Ali Hamed
Rationale: Advertisers are forced to shift from ESPN to Snapchat/Instagram, permanently altering budget allocations; traditional media companies are forced to sell digital assets at low prices.
7. "SaaS company valuation multiples have fallen from 20-30x revenue to 2-3x revenue—the key question has shifted from 'how fast is growth' to 'can this round achieve profitability'" — Ali Hamed
Rationale: Series A companies with 100% growth saw valuations drop from 20-30x to 2-3x; companies with growth below 80% are essentially unable to raise funds.
8. "The definition of small business has permanently changed—no longer a dry cleaner or pharmacy, but Amazon third-party sellers, YouTube creators, and Shopify merchants" — Ali Hamed
Rationale: These "new small businesses" performed better during the pandemic, and Hamed believes there is no need to look for other investment directions in the next 5-10 years.