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What's the Alternative? | Episode 6 | Private Credit 101 featuring Jamie Shulman
9 Plays9 months ago
Welcome to Banrion Capital Management’s What’s the Alternative Podcast! Join host Shana Orczyk Sissel, the “Queen of Alternatives” Founder & CEO of Banrion Capital Management, as she interviews leaders in the alternative investment space. Learn more about their firms, their passions and about the many different ways investors can use alternative investments to add value in their investment portfolios.
In this episode "Private Credit 101", Banrion Capital Management's, Victoria Bills sits in for Shana. Victoria is joined by Jamie Shulman, co-founder and fund manager at Meriwether Group Capital. Meriwether Group is a modern day merchant bank comprised of business acceleration, Hero Fund Lending and investment banking. The firm's focus is providing founders and brand leaders with the resources to help them fulfill their journeys. Their debt solutions allow lower middle market businesses and their leaders to capitalize on opportunities while maintaining equity and control.
A banking veteran with more than 25 years of lending and management experience, Jamie brings an entrepreneur’s level of energy, engagement and creativity to Meriwether Group Capital. Jamie’s diverse experience in management, mentorship and strategic business planning for growing companies makes him an invaluable and trusted advisor, going far beyond the boundaries of traditional lending.
Over the years, Jamie has built a reputation as a highly effective change agent, able to help founders and business leaders realize their companies’ potential through sound strategy, P&L oversight, and all areas of financial analysis and guidance. This high-level overview gives Jamie unparalleled insight into the opportunities and challenges of the targeted lower middle market businesses and will be a critical factor in MWGC’s ability to select the best possible slate of borrowers for the Hero Fund.
Jamie’s experience spans commercial banking, middle-market banking, retail banking and community banking with an emphasis on commercial & industrial and commercial real estate operations. Having spent 35 years in the Seattle and Portland markets, he offers a familiarity with the region that enhances MWGC’s understanding of the circumstances and hurdles of growing a business in the Pacific Northwest.
Off the clock, Jamie’s enthusiasms include mixology and BBQ (especially when they come together), rabid fandom for the Seahawks, and taking time to recharge with the family along the Pacific Coast. He spends significant time in the non-profit world, contributing his expertise to multiple community organizations.
Learn More About Meriwether Group Capital: MGC Website
LinkedIn: Jamie Shulman
Connect with Jamie on 𝕏: @jamieshulmanpdx
Learn More About Banrion: Banrion Capital Management
Connect with Shana on LinkedIn: Shana Orczyk Sissel
Connect with Shana on 𝕏: @shanas621
Important Disclosures:
The opinions expressed on the “What’s the Alternative Podcast” are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security.
It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results.
The guests featured on this program are participants on Banrion Capital Manage
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Transcript
Introduction to Podcast
00:00:02
Speaker
Welcome to Bonnie and Capital Management's What's the Alternative podcast. Joining host Sheena Orsik-Sicil, the queen of alternatives and founder, CEO of Bonnie and Capital Management, as she interviews leaders in the alternative investment space. Learn more about their firms, their passions, and about the many different ways investors can use alternative investments to add value in their investment portfolio.
Introducing Jamie Schulman
00:00:31
Speaker
Hello again, and welcome back to What's the Alternative podcast. My name is Victoria Deebils, Chief Investment Strategist for Banway and Capital. And joining me today is Jamie Schulman, Managing Director of Merryweather Capital Group. Jamie, it's a pleasure to have you. So excited to have you on for the show. Thanks, Victoria. Good to be here.
Jamie's Career and Merryweather Founding
00:00:51
Speaker
So Jamie, I'd love to first start off by talking about your background. You have over 20 plus years
00:00:58
Speaker
working in the private credit space. I'd love to learn more about just how you got started in this space. Walk me through your financial journey.
00:01:08
Speaker
Sure, happy to do so. So I am basically a career banker and career lender. That's my background. I spent a greater part of about 28 years in commercial banking prior to forming Merryweather Group Capital. I spent a number of years with larger banks, all really in commercial lending. And then I spent the last eight years in my career in community banking, which really led me to see the opportunity with what ultimately became Merryweather Group Capital.
00:01:38
Speaker
I spent the majority of those years working with entrepreneurs, small businesses, those who needed growth capital to help them achieve whatever they were seeking.
Addressing Lending Gaps for Small Businesses
00:01:49
Speaker
And I found ourselves in a good position to be able to help as many of those as possible. Nice. And in terms of your focus and in terms of just
00:01:58
Speaker
Let's talk about a little bit about the private lending space and what were kind of some of the pitfalls that you saw when it came to small and mid-sized companies and where you guys position yourselves in the market.
00:02:11
Speaker
Sure. So, you know, the biggest kind of idea that came around forming this is really the one I saw in community banking and really in large banking too, which is this niche of small businesses that I saw needed access to capital. They were just kind of on the edges what banks like to work on.
00:02:31
Speaker
And that can be based on the bank's underlying credit policy or pricing policy or just kind of guidance and strategy. And, you know, these borrowers that I saw were not bad borrowers. It just meant that someone needed to spend a little bit more time and attention with these kinds of companies, and they need to get paid for the risk too.
00:02:50
Speaker
And banks, as much as I appreciate being in that industry for a long time, build these boxes. And if you fit in the box, as many business entrepreneurs know, then it's great. If you don't fit in the box, then it's not great. And so where do you go? And so that was the whole idea that we had when we formed Merryweather Group Capital.
Niche in Private Credit for Small Loans
00:03:12
Speaker
The other thing that we noticed is that in the world of private credit, if you want to borrow, let's say, $7 or $8 million or more, there's a number of lenders that you can talk to. However, if you're on the smaller end, let's say loan size is $5 million or less, I mean, good luck. There's just not a lot of us out there. And so that was kind of the opportunity we saw was these really small business credits. Ultimately, we do loans between $500,000 and $5 million. But kind of in that space,
00:03:41
Speaker
that was really being underserved. And so that's the opportunity that we saw and we ended up forming a business doing just that. That's incredibly impressive.
Private Credit vs. Venture Capital
00:03:51
Speaker
And just to echo back some of the points that you were just mentioning, it's like I came from the venture capital world and I can like a lot of our criteria when we were looking at companies was they had to have a certain level of annual recurring revenue or the team had to be fully built out.
00:04:08
Speaker
We also, for example, there were plenty of companies that I saw that were on the earlier side where they could have just like needed a little bit of extra cushion or runway to get them through to that next step. And so they, so they could be profitable, but unfortunately that just never came to fruition because they weren't able to get to a small lender or they weren't able, like couldn't access the banks or couldn't get to, couldn't find BC or even like angel funding.
00:04:37
Speaker
Do you think that that's kind of like a flaw in the system that sometimes like depending on the lender, depending on the sector, perhaps like the hurdle might be too high or maybe like it's kind of causing this delayed in terms of who is actually able to afford capital or who's able to receive capital in this world?
00:04:57
Speaker
Yeah, I think that's a very good point. And I'll start by just clarifying that the businesses that we work with, our borrowers, they've already proven themselves to the public to
Target Companies for Merryweather
00:05:08
Speaker
some degree. So these companies are typically either profitable or at least EBITDA or cashflow positive. So startups, pre-profit, pre-revenue companies, those are real tough. Those are tough for anyone. And those are really companies in need of, generally speaking, equity, not debt is the form of capital to help them grow.
00:05:27
Speaker
But companies that have started to turn a profit, but maybe don't have the three, four, five years of historical net income that a bank might be looking for, that are on high growth trajectories, those are the companies we look for. Because we can really dig in and understand, is the growth trajectory that they're on, is it sustainable? And what are the risks involved with it? And then how do you compensate the risk for structure, pricing, et cetera? And those are the companies we really like.
00:05:57
Speaker
I'd say that the majority of businesses that come to us have either maxed out their bank or their bank has maybe maxed out them and they're looking for one more turn of EBITDA, what I would often call permanent working capital.
The HERO Fund Strategy
00:06:10
Speaker
So this is money to help these businesses take on a new product, new geography, expand a client relationship, or we're seeing more and more actually in the last year, acquisition financing opportunities where there's a competitor they're wanting to buy out
00:06:26
Speaker
But these can be tough for a bank to get their arms around, but we're willing to kind of dig in and really sit side by side with these entrepreneurs and owners and understand what they're looking for a little bit more deeply. Yeah, no, and that makes total sense. And I'd love for you to just talk a little bit about some of the companies that you've already invested in through the HERO fund. And maybe we can even get into a little bit of the investment structure of the HERO fund itself.
00:06:53
Speaker
happy to. So Meriwether Group Capital is the manager of the Meriwether Group Capital Hero Fund, using very basic terms. The Hero Fund is our mechanism to go out and make loans. And we can talk about the Hero Fund more in its structure. I think I would actually also love if you could, like why Hero Fund? Like why Hero Fund or why the name Hero Fund?
00:07:21
Speaker
versus any other name. Sure. So we founded the Maryweather Group Capital Hero Fund, somewhat based on the hero's journey and the entrepreneur's journey, which we recognize is a tough road. And people who have the gumption to go out on their own and set up a product or service, that's tough. And we consider these people heroes, which is why we call that the hero fund.
00:07:50
Speaker
And so since we launched the fund, which was in April 2022, we've made I think 20 transactions to date. These are either new loans, new borrowers, or we've done some increases to existing ones. We've also had, I think, three successful exits during that period of time.
00:08:07
Speaker
So we're really excited about the portfolio we built up. These companies, just to give a little bit more color around them, are all operating entities. So we don't do real estate loans per se, although we might take real estate as collateral.
Investment Focus and Loan Details
00:08:20
Speaker
These are all companies with a product or service. Geographically, since we're here, I'm here in Portland, Oregon. We're really Pacific Northwest-centric. Most of the businesses we work with to date have been on the West Coast, but we'll go anywhere.
00:08:34
Speaker
Um, these are companies, a lot of cases that make stuff, which we really like. So we like companies and you know, manufacturer wholesale distribution space. We can more easily understand their cashflow and sales cycle and get comfortable with how that works. Things that we stay away from are companies that we don't easily understand how they make money or how they're going to pay us back. The average loan that we've done to date is about 1.5 million.
00:08:58
Speaker
the average duration is about 18 months. So we typically serve kind of like a bridge for something else with something else being either a refinance of the balance sheet with a more traditional lender or an equity raiser, maybe even a sale of company. So that gives you kind of a flavor for the types of businesses we work with. You know, a couple of examples, we have lots of good success stories. I'll share maybe a couple, I can go as long as you want. Yeah, please.
Success Stories in Funding
00:09:24
Speaker
One of the companies we work with that's here in Oregon is a company called Sackcloth and Ashes. They're based in Salem, Oregon, capital of the state of Oregon, and they make blankets. So think, you know, high-end blankets. Their biggest retail partner is REI. So if you're in a city that has REI, you can find them in their stores. They also have a really robust direct-to-consumer platform.
00:09:51
Speaker
We really like this company for a couple reasons. One is it's really mission-driven. So this is not why we made the loan, but for every blanket that you buy, they also donate another one to a homeless shelter. Here in the Pacific Northwest, this is a huge issue. It's really a huge issue in many metro markets, but we see it here day in and day out. So it's a really cool story there. And there's a story of homelessness tied to the founder.
00:10:18
Speaker
their biggest supplier, their biggest buyer, approached them about a year ago and doubled their most recent order. So if you're a company that your biggest client wants to double what they're doing with you, how do you fund that? And while they had a banking relationship, that's a pretty dramatic change. So they came to us and we were able to kind of understand a little bit more of what they were looking for. And we structured a loan to really help them tie themselves to one specific client of theirs.
00:10:48
Speaker
And we've actually done a second transaction with them as well. So it's a really neat story. We have a good relationship with the founder and the owner. And I think it's a great success. And this is really one of those things where it's good for the borrower. They appreciate the access to capital. It's good for our investor, which we can talk about a little bit more later. And these are the kinds of small business entrepreneurial loans we want to be working on.
00:11:15
Speaker
No, I think it's an incredible story. And in terms of providing blankets again for homeless shelters, and especially we're entering into the winter season, it just shows how much more impactful their business is. And do you have any, would you say that you have a favorite company?
Challenges in Restaurant Lending
00:11:33
Speaker
Not to say that there are favorites in your portfolio, but maybe one that, or one that was also another, let's hear another compelling case as well.
00:11:44
Speaker
Sure. So I will definitely, you will not pin me down. I will not pick a favor because if I don't say them, the borrower will hear this and will call me and say, why am I not your family? But I'll give you another success story that I really like, which is, so we do mostly companies that make stuff. However, we'll do other service companies and we have one loan out to a restaurant group.
00:12:06
Speaker
And I would share with you that restaurants are difficult to lend to. My banking days, I probably did two loans of these in 25 plus years, really hard. They're either too small, kind of mom and pop, or they're too big, you know, a national chain that really doesn't need a bank like one that I would work for. So a company that we do work with is called Pearl West Restaurant Group. They operate 11 Latino and Mexican restaurants here in the Pacific Northwest.
00:12:33
Speaker
So they have a really diverse revenue stream. They've added on a couple locations recently, one in Southern California, and they're opening another location here in the Portland Metro area. Actually, it just opened a couple weeks ago. I love this company because, number one, they did very well during COVID, which is very difficult for a restaurant to say that. They have an incredible loyal following.
00:12:55
Speaker
the primary restaurants that they operate are called Margarita factories. They also have another brand called Dosalis, which is a little bit higher end brand. It's a minority owned brother and sister run company, which also I really like. And so they have a diverse revenue stream, history of good success, but it's still, that's difficult for a bank to get their arms around because of the industry and the growth trajectory they're on. And they would like to add more stores over the coming years
00:13:24
Speaker
And so we were really help them, we were able to step in and help them open the last couple restaurants that they started, but we can rely upon the whole group of restaurants is our source of revenue to repay our debt. And, you know, I would say with both of those.
00:13:43
Speaker
the owners and the entrepreneurs, you know, we're really close to that.
Role as Trusted Advisor
00:13:48
Speaker
So when we do a loan, we don't just kind of book it and forget it. First of all, we're collecting financial reporting pretty much monthly with all these borrowers. So we stay and we know how they're doing on a recurring basis all the way through maturity. But then beyond that, you know, we really try to be in that kind of circle of trusted advisors for entrepreneurs. So we're there to help them with other areas of mentorship that they could need. So, you know, with all these businesses,
00:14:13
Speaker
I would say, you know, no less than quarterly are we having really meaningful conversations about how's the business going, how can we help, what are other things that we can maybe introduce or who can we introduce them to that can be helpful. And, you know, these guys, you know, it's our goal frankly with all these borrowers that when they have their, you know,
00:14:33
Speaker
a key point of success and maybe sell the business. We want to move them over from that side of our balance sheet to really the investor side so that we can help them or they can help us help more entrepreneurs just like that.
Sectors Avoided
00:14:47
Speaker
Yeah. And I totally, I honestly, I love hearing about some of these success stories that you're having. And as I, the next time I'm in Portland, I will gladly come visit one of the restaurants. I am a huge fan of Mexican food. So you have the food is great.
00:15:02
Speaker
So, and I also wanted to talk a little bit about, cause you like, you have a couple of industries that you're really fascinated in or industries that you're really focused on. And I'm curious to know like, are there any industries or sectors that you're not really looking at or sectors that you, that you would say you kind of avoid and why exactly or what exactly are kind of the, what's the rationale behind why you would avoid those particular sectors?
00:15:29
Speaker
So I'm a big believer in the kiss principle. Keep it simple. Stupid is not maybe a great word, but keep it simple. So we start. OK, we'll go with it. So we really start any lending discussion with a potential new borrower by asking two basic questions. How do you make money and how are you going to pay us back?
00:15:48
Speaker
And if we can't understand the answers to those questions, forget it. You know, we're done. And so we have had conversations with businesses that, you know, I sat in a 30 to 60 minute conversation about how their business operates and I didn't get it. And I just, you know, said, I apologize. I just don't really get it. There's maybe another lender for you. So kind of our starting point is businesses that we can easily understand their cash flow cycle, business cycle, and how we're going to get repaid. Because we're always thinking about what our exit's going to be.
00:16:18
Speaker
Beyond that, the other obstacle for us would be businesses where basically we don't want to be on the front page of a newspaper. We tend to do things that are non-controversial, so we don't do anything in the
00:16:35
Speaker
crypto space, which I don't have an issue with, but we just don't usually understand those. We don't do anything with cannabis, firearms, adult entertainment, you know, kind of anything typically that banks tend to avoid too. We're willing to dig in deep, but there are some that are just not kind of an industry. You know, I'd say the technology space, I think there is lots of opportunity, but it is difficult to understand.
00:16:59
Speaker
there are more specific private credit lenders that focus solely on technology. So we try to stay in our lane a little
Partnerships and Modern Merchant Bank Approach
00:17:06
Speaker
bit. And we see so many opportunities that ones that might be a better fit for another lender, we're very happy to refer it elsewhere because frankly, we may get something in return in terms of a referral from them. So those are all things that we tend to stay away from. Not that it's bad. I want to make sure listeners don't think these are bad industries, but these are ones that are just
00:17:27
Speaker
not always a good fit for us. No, and I also agree that there's nothing that's inherently like wrong with those industries either. It's funny that you mentioned that technology is something that you, or technology, I'm assuming you mean like software as a service companies. Like those tend to be the ones that you avoid because surprisingly like in the VC world, it's the exact opposite. We see a lot of SaaS software as a service in terms of what VCs are looking for in investments.
00:17:54
Speaker
What would you say are kind of the reasons why like software as a service, at least for you, or in terms of private credit, private lending may not necessarily be a good fit?
00:18:05
Speaker
Yeah, you know, the software as a service industry, now I'll caveat. It's more of a curiosity because I just love that it's the contrast between those two. So I'll caveat by saying we actually have a software as a service company in our portfolio. It's small. There's other compelling reasons that we did that loan. So I don't want to say the word, you know, I don't want to be hypocritical here. No, I mean, it's not necessarily a full on no, but you really want to make certain you have your revenue cycle down.
00:18:33
Speaker
Having said that, companies that are really relying upon kind of monthly recurring revenue model, which is kind of software as a service, you know, a lot of times they come to us and they have recurring revenue, but not yet profitability or positive EBITDA. So that's kind of an easy, not an easy reason to say no, but you know, if they're not positive cash flow, really hard for us to get comfortable with them.
00:18:59
Speaker
So that's what I see most of the time with those types of businesses. So again, there's a lender out there for everyone. And I can think of a couple of lenders that do things that are all tied to recurring revenue model businesses. And I'd be the first to tell one of these borrowers, hey, here's a couple of names that might be a better fit, because that's what they do. They stay in their lane. I stay in mine. And that way, you get the best service and the best product from those who really know what they're doing the best.
00:19:29
Speaker
That's that's so valid. And I think you've kind of demonstrated a lot in this conversation how you try to be a true partner to the companies that you work with. And, you know, I, I think that that's like an amazing and admirable treat. It's something that like
00:19:44
Speaker
when again like when you're working with money when you're working with different companies like you know sometimes it's not just the lending or the capital that they need it's sometimes they just need help and understanding from like a ceo or from a managing standpoint how they can continue to grow their business because not only so they can repay you but so they can think about like future growth and trajectory
00:20:06
Speaker
What would you say are kind of some of the questions or some of the things that you advise companies on? Or what are some of the key pain points that you help some of your portfolio companies with outside of the lending space? Sure.
00:20:23
Speaker
You know, I'll share with you kind of in full candor, two of our partners that we work with. So Meriwether Group Capital is comprised of three general partners, myself being one of them. My other two partners, one is called the Meriwether Group. So they are primarily a sell side M&A advisory firm. They also do consulting work as well. And we share a lot of the same kinds of clients. And while there's not a requirement to use services back and forth,
00:20:51
Speaker
It's a very natural fit.
00:20:54
Speaker
A third partner is the parent company, First Fed Bank, which is about a $2 billion bank based outside of Seattle, Washington. And they're a very traditional commercial and retail bank. So a lot of the things that we recommend to our clients are services that they offer. And as you kind of think about the spectrum of a business and their life cycle, there's need for equity and kind of consulting services
00:21:21
Speaker
banking services beyond just lending. And then when there's the ready for a liquidity event, there's kind of the equity piece of that as well. And so between myself and my two partners, we can really encompass all those things. One of my business partners calls us kind of a modern day merchant bank, which is really what that is. So a business can come to us for really a breadth of services beyond just a loan.
00:21:45
Speaker
And that's something that we really enjoy and take a lot of pride in. I don't get compensated for things other than lending, but I take a lot of pride in getting my portfolio partners in front of the right other partners that I think would be good for them. And these things all come full circle in life. And so that's why I enjoy doing it. Again, I think that that's absolutely amazing.
Differentiation in Private Credit
00:22:08
Speaker
And speaking of competitors or speaking of kind of like additional, like the private lending landscape, private credit landscape, given just the size and scale of companies that you work with, who would you kind of, and also regional, like regional as well, what would you say are kind of some of the competitors that you identify in the space and what would you say are some of your key differentiators or how you think that you
00:22:35
Speaker
Better is not the word that I'm looking for, but how would you say that you differentiate yourself from other private credit or private lenders in the space? Sure. I won't name specific names here, but what I have observed is, first of all, private credit. These are commercial lenders, not commercial real estate lenders, but private commercial lenders.
00:22:56
Speaker
who do loans $500,000 to $5 million, you know, I can, off the top of my head, think of a couple in the western United States. So this is a really, they're really, you know, not that I want to say there's no competition, but it's a small and very fragmented space. You know, I kind of think about why is that? Am I maybe in the wrong business, everyone else is not doing it.
00:23:17
Speaker
And the reality is, like many businesses, as you start to grow, there's a need when you add people and real estate and things like that to start to move up market in lending. So I totally get that. But we love this small space. I think we have a really efficient model, which allows us to kind of stay small, stay in this space. And it's a kind of segment we really like.
00:23:39
Speaker
You know, the other businesses who kind of do some of these smaller private credit deals are kind of outside maybe the private commercial credit vertical, but I keep a deep rolodex of companies that do purchase order financing, asset-based lending, recurring revenue model lending, private credit that's technology focused.
00:24:03
Speaker
commercial brokers who maybe have larger networks of this kind of stuff. So as I think about a borrower, whether you're an individual or business, there's a loan out. If you want a loan, you can get one. I can almost guarantee it. But it's kind of what are you willing to sacrifice in exchange? And there's a really broad spectrum there.
Preparation for Loan Seekers
00:24:21
Speaker
And I'm the very first to tell someone, because I'm thinking more about the competitive landscape, we do get businesses that approach us that are much more bankable than they think they are.
00:24:33
Speaker
And I definitely see entrepreneurs that have their heads down running the business. And it's not up to them to determine, hey, will a bank make me a loan or not? They probably have an instinct or maybe they were turned down for something before, but maybe circumstances have changed. And so I'm the very first to tell someone, hey, I think you can get a loan through a traditional bank.
00:24:54
Speaker
And while I maybe could make a loan and charge them more than a bank could, it's not good for anyone to do that. So while banks are not necessarily competitors, they're really complimentary to us. You know, SBA 7A Lending is a very popular program that frankly
00:25:11
Speaker
many businesses that I talked to, if they have the patience and the timeline, you know, could go down that path much less expensively. And so there's, you know, again, this is a broad spectrum of the types of credit out there. So again, I don't worry so much about our competitors as to, you know, who's a good, the best fit for anyone borrower. Exactly. Who's the best fit? So when we think about other like opportunities when it comes to private lending,
00:25:39
Speaker
I know we've kind of talked a bit about other competitors in the space, or we've talked about the overarching landscape of why it's important to find a competitor that's right for you. What would you say are kind of some of those criteria, not just for the companies that you work with, but maybe for those companies that down the road might be looking to work and partner with Merriweather Group? What should they be doing to get prepared to have a conversation with someone like yourself?
00:26:06
Speaker
Sure. So that's a great question. So those that might not be a fit today, I really try to coach with, well, what will it take to get to a yes tomorrow or at some point down
Advice for Improving Lending Chances
00:26:15
Speaker
the road? And this is no big secret. Here is the magic secret of what banks really look for in commercial lending. There's three sources of repayment that banks look for.
00:26:27
Speaker
So most lenders, myself included, look for recurring cash flow as the primary source repayment. So if they're not profitable or even a positive today, that's really the number one thing that we're looking for to get them to a yes tomorrow. So as I kind of look at their projections, at what point they'll be even a positive, that's the time to re-engage. Secondary source repayment is typically liquidation of some form of collateral. So for example, we take a UCC filing on all business assets,
00:26:56
Speaker
We could be the only lender in the transaction or we might be subordinate to a more traditional lender. So we need to understand what is the underlying collateral that will support our request and in the event of a default, you know, how would we liquidate and be made whole? So that's, we're kind of looking for that too. And then the third sorcery payment or the tertiary sorcery payment is typically recourse to guarantors.
00:27:19
Speaker
So with the credits that we work on, in almost all cases, we have personal guarantees. So these would be, most of the businesses we work with are closely held, let's say three or fewer owners in the vast majority of the cases, and we expect them to stand behind the business just like they expect us to. So, you know, what's on their, what's their personal wherewithal is important to us also.
00:27:42
Speaker
Now, what I would share is that in not all cases do all three of those things be it kind of the best or optimal. But if there's a shortfall in one, we're certainly looking for a strength in the other two. And, you know, that's what I coach our borrowers to is if, hey, you know, if collateral is weak, well, cash flow needs to be stronger or you need more of a personal wherewithal.
00:28:06
Speaker
I would share with you that in actually two cases, we made loans to businesses where the first and second of those were not great, meaning a company was not yet even a positive had maybe a shortfall collateral, but what we recognize is the guarantors
00:28:23
Speaker
outside of the underlying business have outside sources of cash flow to help support the loan repayment. So we really look at things not just for the business, but really globally. So what are all the sources of cash flow to repay debt, not just the business? And that's, you know, again, the bank doesn't easily get their arms around that, but we can dig deep and think about, okay,
00:28:45
Speaker
What are sources of repayment beyond just our borrower? Can the guarantors add something? And that often helps us get to a yes, whereas another lender might not be able to. Nice, very impressive. And one or a couple other questions that
Future Growth and Strategy
00:29:00
Speaker
I have. So, Merriweather Group, you guys have been doing an amazing job. I honestly have been super impressed just from the due diligence work that I've been doing with you guys. And I'm a total fan.
00:29:11
Speaker
What would you say are the next steps or what is Merriweather group or Merriweather hero fund 2.0 in terms of strategy, of course, and I'll emphasize the hero fund is an evergreen structure, but what other strategies are you guys potentially looking into for with regards to private credit.
00:29:31
Speaker
Yeah, so great question. So I'll kind of talk about the fund side itself now. So like you said, we're an evergreen or an open-ended fund. Today we have about $14 million of assets under management spread across about 45 limited partners in the fund. This is really positioned as an income fund, not a growth fund. So this often can be very complimentary to those who are looking for a little additional yield in exchange for a modest degree of credit risk.
00:29:59
Speaker
We have a target return annually of 10%. We pay a distribution every quarter. Since inception of the fund, we've beaten our target return every quarter. So really proud of that.
00:30:09
Speaker
based on our pricing model and kind of how we manage expenses. While there's never a guarantee, we have a degree of confidence that we'll be able to continue to do that. So in just under two years, we've gone from essentially zero to $14 million. What I would share with you is that is not the optimal amount of assets under management for us to be able to service all the borrowers we would like to. So we have really strong loan demand, somewhat based on our reputation market, just
00:30:38
Speaker
demand in general, in our connections in the banking community. So I get just about a call every day for a new loan. And we try to do one loan a month. So you can do the math and you can think about how many times we're saying no to borrowers. So we'd like to be able to say yes to more quality opportunities.
00:30:56
Speaker
So over the next couple of years, we'd really like to grow the fund to $25 to $30 million, maybe a little bit higher than that. We feel like that's the level that we can manage with the people we have in place today. We also believe that that gives a little bit better amount of credit risk diversification for limited partners who don't pick and choose specific loans. They're investing pro rata across the portfolio of loans, and that spreads it around a little bit more. And beyond that,
00:31:26
Speaker
Our only limitation is our ability to find good investments in the form of loans to make. Right now, for private credit in the space we're in, loan demand is far greater, like I said, than our ability to meet it. We expect that that will continue, and I have some thoughts as to why if you want to explore that. So it's a good place to be, and that's kind of where I see us going.
00:31:48
Speaker
Now, having said all that, you know, there's fun to do what we do that are a billion dollars, five billion dollars or more. That's not us. We don't ever want to be that size because we like the smaller segment. We think we can do it efficiently. And frankly, we want to be able to roll out the red carpet for our investors and our borrowers. Everyone's a big fish in our pond.
00:32:09
Speaker
You know, so we appreciate that. I know every one of our investors. I know every one of our borrowers, you know, we intend to keep it that way. So as I kind of think about our evolution, yes, we do want to grow assets under management, but we want to do it thoughtfully. You know, I would share with you in great transparency, as you know,
00:32:25
Speaker
that we're a partner with boundary and capital. We're super excited about it. We feel like one of the markets that we really not tapped into, but we see opportunity is in the RIA space, which is, you guys are very focused obviously on bringing alternative investments and wealth managers together. We think it's a great model. I also recognize that the world of alternative investments is a broad space. Private credit is only one of multiple verticals in that.
00:32:51
Speaker
And if you're a registered investment advisor, where do you go to do the due diligence on all these? And so that's why we're super excited about the partnership and frankly, then the opportunity to be able to service more limited partners that have those established relationships.
00:33:08
Speaker
Yeah, and I think, I mean, not trying to plug battery in but I mean, this is about you today Jamie. But I think one of the things that kind of like we are also very excited about with our partnership with Merriweather Group is the fact that you guys work with those small midsize businesses.
00:33:27
Speaker
And of course, there are, like you said, billion dollar funds that we could be working with in the private credit space. But I don't believe that like the impact that they are bringing or providing to the table is nearly as I think measurable as I would say for the smaller companies that are in need of this capital or in need of that basically that push in order to get to that next stage or that next phase of growth in their companies.
00:33:50
Speaker
And I think I wanted to tap on the point that you had mentioned earlier, so talking about interest rates and kind of future growth of where sort of like the private credit space is going right now.
Impact of Rising Interest Rates
00:34:03
Speaker
As you are well aware, anyone who has been following the news, interest rates have been going up to about their 20-year high.
00:34:12
Speaker
And so in order to combat inflation and so how exactly, if anything, has that impacted your business model or how has that impacted your ability to lend to these smaller businesses that, again, some people may perceive them as more risky or not willing to take on that risk now that interest rates keep going up. So cost of borrowing essentially is going up along with it. So just quick thoughts on that or curious to know like how that has impacted you, if at all.
00:34:40
Speaker
Sure. So maybe I'll touch on this from kind of a pricing perspective and then a demand perspective. Maybe I'll do that in reverse order. So I'd say right now it's a great time to be in private credit.
Rising Demand for Private Credit
00:34:52
Speaker
I started my baking career in 1995. I think since then we can look back at the notes, but I think there's been four recessions during that period of time.
00:35:01
Speaker
So the typical cycle that I see banks go through during a recession is that when there's even a threat of recession, whether it happens or not, big banks get more conservative. This is very normal. And it's not a surprise. I'm not bashing a big bank.
00:35:20
Speaker
But that's just kind of what we see is leading towards conservatism with these kinds of lenders. Normally when that happens, or in my past when I've seen that happen, smaller banks, so think regional banks, community banks, they typically pick up the slack. Well, what's different this time around is really a run on deposit issue with some of these smaller banks. So think about Silicon Valley Bank, First Republic Bank,
00:35:47
Speaker
The number one reason banks have failed in the history of banking is credit issues. Neither of these banks failed for credit issues, in my opinion. They're really liquidity management ones. And so smaller banks that typically pick up the slack in some cases are finding capital restraints within themselves. So while they may want to be making more loans, they in some cases don't have the available capital to do it.
00:36:12
Speaker
layer one more thing on top of that, which is COVID. So we saw in the onset of COVID this phenomenon called the Great Resignation. And if you look back through the data in terms of business formation, the onset of COVID or the first kind of year was one of the greatest periods of time for new business formation and kind of the history of this data.
00:36:33
Speaker
So while not all those businesses are successful, okay, fast forward three years later, some of them are, and some of them are seeking access to capital for the first time. So when you layer on top of, you know, all this, you know, more demand for lending, conservative or limited capital to lend from banks, where do you go?
00:36:54
Speaker
So here we go, private credit, which today is, I think, depending on what report you look at, a $1.6 trillion industry forecasted to double over the next year or two. And so that's kind of the space we plan. So then I'll kind of layer on top of that than the interest rate environment, which is certainly a consideration, but really doesn't have that much of an impact on us.
00:37:20
Speaker
The reason why is we really set our pricing based really on a supply and demand model. We have massive demand and limited supply, so kind of do the math. I mean, so we have an expected minimum return from our borrowers of at least 14% between kind of upfront rate and fee.
00:37:39
Speaker
That allows us to ensure that we can meet or exceed our target return on investors to 10% annually. That's how the math works. The reality is we're doing far better than that today. When interest rates start to go back down at some point in the future, there could be some impact to us.
00:38:01
Speaker
really what would drive changes of our own pricing would be demand. And if there was other private lenders who maybe do bigger things, started to go kind of down market in terms of size alarms or banks getting into this space, which I think is highly unlikely, but is always possible. These are kind of the things I think about. So from a borrower's perspective, yes, we are expensive, more expensive than bank debt.
00:38:27
Speaker
But if you're a business who is trying to grow, you need access to capital. Where do you do that? You can sell equity in your business, which is far more expensive than debt and is diluted, ownership. Or you could go down the debt path. And if you kind of max out your bank, or your bank has maxed out you, you want some additional working capital to help you grow, what do you do? And that's kind of the need we fill. Thanks.
00:38:52
Speaker
And my last question for you today is, and I would love for you to just kind of talk a bit about in terms of how you, or so our podcast is called, What's the Alternative?
Merryweather's Mission Summary
00:39:08
Speaker
And so if like you could give us kind of like your pitch for why Merriweather Group?
00:39:16
Speaker
What would you say like, what is, what is the alternative and basically what is Merriweather group? So that way we can have that as well. Sure. So, um, you know, we're all about, um, entrepreneurs helping other entrepreneurs. That's what we do. We feel like we offer a, on a risk adjusted basis, a strong product.
00:39:40
Speaker
It's helpful to our borrowers. It's helpful to our investors. It's good for ourselves, too. And we feel like we're filling an underserved niche that there's just stronger demand than the ability to fill. And we're really proud to be able to do that and to do so in a way that helps those who want to invest with us in above market return. Excellent.
00:40:04
Speaker
And everyone, thank you so much for listening to our podcast today. Again, my name is Victoria Bills and you're listening to Jamie Shulman, managing partner of the Meriwether Capital Group. Jamie, again, thank you so much for everything. We appreciate having you on and learning more about the amazing work that you're doing in the private credit space. Thanks so much, Victoria. I appreciate it.
00:40:29
Speaker
The opinions expressed on what's the alternative podcast are for general informational purposes only and are not intended to provide specific advice or recommendations intended to deal with or in any specific security. This is only intended to provide education about the financial history and determine which investments may be appropriate for you to consult with financial
00:41:12
Speaker
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00:41:18
Speaker
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00:41:43
Speaker
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00:42:13
Speaker
you