Introduction to Precession Capital

My name is Adam Young and I wanted to introduce myself and our firm to the community. My hope is that this post and the accompanying document serves as a place for the community to get to know our firm better and through dialogue on the Forum, begin to understand how we can add value as a long-term partner.

I’ve spent time getting to know members of Centrifuge over the past months. Precession will be submitting a formal application through Centrifuge and also MakerDAO for review and hosting a community call and presentation. We look forward to meeting more members of the community in Centrifuge and more broadly in Defi over the coming weeks.

For those who want an immediate look into some more detailed information on Precession, and a work-in-progress of our eventual Arranger Application that will be submitted through MakerDAO, please dive in deeper here.

With that, let’s shed more light on who we are and why we think working through Centrifuge is a win-win for Maker and Precession.

Precession Capital Management LLC, or here just Precession, is an SEC-regulated, New York-based Investment Adviser specializing in asset-backed and structured credit portfolio management. Our management team has decades of experience in structuring, managing, and investing in asset-backed securities and private credit transactions backed by real estate, consumer, and corporate assets.

We deliver value through:

  • collateral & modeling expertise
  • flexible and forward thinking transaction structures
  • holistic risk-based underwriting,

Where we focus on:

  • risk-adjusted return optimization
  • capital preservation
  • relative value

Each transaction we undertake is unique in composition, requiring an adaptive yet disciplined form of investment management. Our extensive experience in analytics, risk-based management, and structural mechanics has been honed by decades of credit market volatility and opportunity.

Regardless of deal size or asset type, Precession also contributes junior capital to all transactions we manage through our private funds, providing credit support to senior counterparties.

I am a credit and fixed income manager with three decades of experience and focused exclusively on asset-backed investments at financial institutions such as Deutsche Bank, and Macquarie, and more before establishing Clear Haven Capital Management in 2012 and Precession Capital Management in 2021. My responsibilities are leading all investment activities including research & analysis, execution & allocation, and risk management. I hold dual undergraduate degrees in Mathematics and Finance and a Master’s Degree in Financial Engineering from University of California, Berkeley.

Our team has navigated asset-backed financial markets through both macro and localized economic cycles. By focusing on our core competencies and avoiding style-drift, we look to continue our track record of delivering value to our clients and our partners.

Why Centrifuge?

The integration of traditional finance and DeFi is an evolving process that may take place over many years. Financial markets in general strive to provide efficient capital allocation across sectors and between counterparties. An important component of this is the ability of buyers and sellers to connect and transact efficiently and with minimal friction. In established markets, transactions occur through brokers or over exchanges. In asset-backed markets, where investor sophistication is required, brokers function as facilitators for most transactions. This process can be inefficient, however. Evolving DeFi markets have the potential to unlock enormous value through increased efficiency and transparency. To-date, DeFi markets have given rise to various platforms that host Restricted Regulation D offerings as well as provide the infrastructure to allow these transactions to function properly. We believe this is just the beginning.

Centrifuge has emerged as a leading platform in the emerging DeFi ecosystem for asset-backed transactions.

  • Centrifuge has developed its infrastructure to replicate many of the traditional mechanics of asset-backed markets. Investors often prefer familiar investments with familiar components. Subordination, credit support, cashflow waterfalls and other components have been refined over decades of iterations, and Centrifuge has recognized how important precedence is to financial markets.
  • Transparency is a central theme in asset-backed investing because the value of an investment is directly linked to the performance of underlying assets. As Centrifuge grows and develops its infrastructure, reporting and transparency are critical. We have seen the Centrifuge team make iterative improvements to the way in which transparency is conveyed to investors. We believe that over time investors will recognize many of the same components that they rely on and expect from asset-backed markets.
  • Centrifuge is well-positioned to benefit from increased efficiencies in asset-backed DeFi via Centrifuge’s transition to the Polkadot chain. In the future we believe transaction costs will decline, cashflow mechanics will be flexible, and secondary market liquidity will increase. If and when this happens, we expect to see a growing share of ABS issuance take place directly in DeFi markets using blockchain rails.

Precession is excited to be part of this evolution in financial markets and are looking forward to working with Centrifuge now and in the future.

Why MakerDAO?

Currently Maker vaults use over-collateralized Crypto assets to protect MakerDAO from losses. However, events such as black Thursday have shown this is not a perfect solution. Real-World Assets (RWAs) are also exposed to macroeconomic cycles, but this risk is mitigated when the assets are properly structured. Ultimately a combination of both Crypto and RWAs can create a more resilient DAI peg. We believe Maker was aware of this when the RWA journey first began. In traditional finance, Asset Backed Lending (ABL) structures minimize senior risk above all else. ABL structures can be used to effectively control RWA risk - whether it comes from macroeconomic cycles or the underlying asset. ABL structures have existed for many years and are constantly evolving. At Precession, we have built our careers around asset-backed lending, and invest almost exclusively in these transactions. ABL structures have weathered all types of economic cycles and persisted - a testament to their efficacy.

We believe in the decentralized future of credit markets and the role that MakerDAO’s decentralized stablecoin Dai will play in delivering stable and resilient liquidity. DeFi alone has the ability to create shared incentives and penalties without creating economies of scale for single actors to become “too big to fail”. As DeFi infrastructure becomes an integral part of global markets, established forms of traditional finance can play an important role in this evolution.

We regard this as a once in a lifetime opportunity for early adopters like us and would like to submit an application for an “Arranger” style vault meeting MIP67 criteria.

More About Precession

  • Precession Capital Management, LLC is a SEC-registered Investment Adviser based in New York, NY USA and founded in 2021.
  • Precession is a fund manager first and foremost. We seek out investments that generate above average returns for our investors. The primary mechanism is by investing in levered or subordinate tranches in pools of assets. We put our own capital into every deal, as “haircut” or first-loss capital, and utilize senior financing.
  • We use a top-down and bottom-up approach to analysis to form a comprehensive assessment of both idiosyncratic and macroeconomic risk.
  • We are highly selective yet opportunistic. We screen asset classes, markets, and structures for specific features that we believe offer suitable risk vs return. We typically invest in less than 5% of the potential transactions we analyze.
  • We perform our own due diligence and cashflow modeling, and often form joint-ventures to reduce transaction-specific risk.
  • Over 80% of our transactions are domiciled in the U.S. We have legal counsel relationships across the globe, and are comfortable working in other jurisdictions, particularly with US, EU, or British legal systems.
  • Deal Structuring typically involves a DE Statutory Trust model, and/or a Bankruptcy-Remote SPV to hold assets. All-Asset Liens, Guarantees, Representations, and Warranties are standard transaction features. We understand that Centrifuge is working with MakerDAO on an indenture trust, and will strive to meet all requirements there.
  • Risk Management starts with asset-selection, diligence, and deal structuring. Ongoing management involves a toolbox of underwriting controls, exit clauses, and guarantees. We monitor our transactions as granularly as possible, and update our portfolio analytics in real time.
  • Our team is made of industry veterans with experience in structuring, trading, and investment management. We actively seek out new talent and ideas, and favor battle-tested experience. Each member of our management team has achieved success through bear and bull markets.
  • Economic cycles are unpredictable in size and frequency, but always occur. Certain types of assets and borrower behavior is recognizable across cycles. We screen asset classes and assess risk in a holistic manner. Below, I share our general economic commentary and thoughts.

Our Investment Thesis and Strategy

Precession’s Strategy: In a recession, Precession reduces or halts asset purchases, allowing cash to build up and then re-deployed when appropriate. Our transactions often feature triggers and covenants that can rapidly amortize the senior tranche in the event of adverse performance. We continuously search for relative value across different markets and sectors, which can also be useful in identifying credit cycles and patterns. We do not have a crystal ball. We position ourselves defensively so that we can proactively adjust to change.

Economic Cycles: Economies move through growth and contractionary phases in a cyclical manner. Precession believes in a prudent approach to underwriting risk. For example, Low-Risk Assets such as insured or guaranteed loans are modeled based on worst-case prepayment and interest rate scenarios. Direct Consumer Loans are evaluated based on their ability to withstand recession-like default rates. Secured Loans are underwritten based on conservative default rates and prudent collateral recovery projections. Loans to Businesses are evaluated assuming recession-like revenue scenarios and feature security pledges from the borrower.

Recession Probabilities: In Q3 2020, the U.S. Federal Reserve believed the probability of a near term recession was high, based on historical experience.

Federal Reserve - Nov 2020

Though a recession failed to materialize in 2021, the future is unknown. There is no way to accurately forecast economic cycles, but we know with 100% certainty that they occur.

Federal Reserve - April 2022

Our goal is to understand the risks we are taking while recognizing that not all risks can be avoided, but many can be mitigated through disciplined analysis, structural protections, and embedded optionality.