Launched in 2019, Coromandel Capital offers flexible, non-dilutive, growth-oriented asset-based lending solutions to businesses in specialty finance, fintech, and technology-enabled sectors that generate predictable, recurring revenue. As one of the few non-bank lenders specializing in small-ticket debt capital solutions, Coromandel Capital and similar entities—willing to provide financings below $20 million—are vital players for capital-intensive specialty lenders. The firm's financings typically range from $5 million to $50 million and have a three-year term.

Co-Founder and Managing Partner Rob McGregor and I engaged in discussions on a variety of topics, including:

- The role of debt financing in empowering startups and other early-stage and growing companies, particularly in relation to venture capital funding.

- The risks associated with double pledging assets, including explanations thereof, especially in light of the recent collapse of First Brands.

- The utilization of debt as a strategic tool for business growth.

- The hidden costs related to venture debt.

- The untapped potential inherent in the specialty finance sector.

- The significance of diligent monitoring within lending relationships.

- Strategies for growing as a private lender while safeguarding and maintaining capital.

- Navigating the crowded and competitive private, non-bank lending industry to establish enduring relationships with borrowers and investors.

Among the characteristics Coromandel seeks in ideal borrower partners are:

- Balance-sheet intensive businesses (those originating or acquiring assets, tangible or intangible) that would otherwise finance these assets through equity.

- Companies that have raised equity from Seed to Series B (or similar stages within their lifecycle), possess adequate capitalization to support operational expenses and maintain sufficient 'runway,' with a portion of this equity potentially serving as a contribution (also known as "haircut capital," "first loss capital," or "overcollateralization") for Coromandel's credit facility.

- Subject matter experts and/or executives who are trailblazers with deep industry roots, a robust track record, and a validated business model.

- Companies operating within sizable markets and differentiating themselves through cost-effective customer acquisition strategies, as well as firms that have identified an untapped or "greenfield" opportunity to address underserved or unserved markets.

Key Takeaways for RIAs:

• RIAs have primarily used direct lending to gain private credit exposure, and this conversation delves into the opportunity offered by asset-based lending as a diversifying and complementary strategy for client portfolios.
• RIAs seeking to diversify in growing areas of private credit, such as asset-backed and asset-based strategies, can benefit from understanding how the fund manager underwrites, structures, and monitors their underlying credit exposures.
• Asset-based lending as a non-dilutive financing solution for growing specialty finance, tech-enabled lending businesses, and other growing firms in sectors generating predictable, recurring revenues, is an essential tool for strategic growth.
• Diligent monitoring and assessment of asset-backed loans are crucial in mitigating risks associated with double pledging, as evidenced by the recent First Brands collapse.
• The specialty finance sector harbors untapped potential that will only grow as more lending migrates away from banks, requiring RIAs to develop an in-depth understanding of risk management and strategic growth methodologies being employed by these alternative fund managers providing debt financing.
• Maintaining a competitive edge in the private lending landscape, even in emerging and exciting areas such as asset-based lending and asset-backed finance, requires building enduring relationships with borrowers while preserving capital for fund LPs.
• Venture debt, while a viable option for some startups, carries hidden costs that must be critically evaluated in the context of overall business strategy and capital structure.
• A thorough understanding of the unique dynamics of asset-based finance and asset-based lending strategies is essential for lenders, borrowers, and fund allocators as they navigate the complexities of this evolving market, where alternative investment and non-bank lending industry experts predict significant growth in the years ahead.

Thank you for joining the ATLalts and Asset Backed podcast. To catch all the latest content of ATLalts or Asset Backed, our sister show, subscribe today and follow Endurance Strategies and Andres Sandate on LinkedIn or the Asset Backed YouTube Channel. This audio represents Endurance Strategies' intellectual property.

Podcast Disclaimer

This podcast is produced and hosted by Andres Sandate, and is the property of Endurance Strategies, LLC.

Andres Sandate is a Financial Advisor with Gramercy Park Wealth Advisors, LLC, and a Registered Representative of GPWA, LLC, a member of FINRA/SIPC.

Gramercy Park Wealth Advisors, LLC and GPWA, LLC are not responsible for the content of this podcast and do not offer investment, legal, or tax advice, nor do they recommend or endorse any securities, products, or strategies discussed.

No part of this podcast may be published, reproduced, transmitted, or rebroadcast in any media or any form without the express written permission of Endurance Strategies, LLC.

This podcast does not constitute an offer to sell or a solicitation of an offer to buy any fund interests, securities, or other financial instruments, nor does it constitute a solicitation on behalf of Endurance Strategies, LLC, its affiliates, or any third-party investment managers, their affiliates, products, or strategies. Any such offer or solicitation may only be made pursuant to the delivery of formal offering documents.

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Welcome everybody to another edition of Asset Backed.

This is your host, Andres Sendate and I'm joined today by a friend and also a really experienced banker and private credit professional, Rob McGregor, who's the co founder and managing principal at Coromandel Capital.

So we're going to cover a lot of stuff.

Rob's been a good friend for a few years.

We met actually doing a transaction.

So I think this is going to be a really fun and informative next 45 minutes or an hour.

I'm excited.

We've been talking about doing this now for some time and we finally found some time.

So with that as a background.

Rob, welcome to the Asset Backed podcast.

Yes, thank you for, for having me, Andres.

It's always a pleasure syncing up again and talking shop and I'm looking forward to.

No, no better way to close out a long, long week, especially with sick kids than, you know, catch up with an old friend.

So I'm excited.

Yeah, right on.

We both have kids.

Mine are probably running around downstairs, who knows.

But yeah, we're in the midst of a busy fall.

I'm based in Atlanta and you know, this is my favorite time of the year down here.

It's like turning into like I call it the, the pre crazy fall winter.

The weather outside is, is terrific.

So no better way to spend an afternoon with great weather than with you talking specialty finance and, and abf.

We should have done this outside like with a beer in hand or something.

Exactly.

Yeah.

A Celsius will do for now.

But I digress.

We, we.

Yeah.

I think what would be helpful is I mentioned in the opener, you know, we met doing a transaction which is always, I think a great way to, to meet somebody.

We'll leave the, we'll leave the names nameless for now.

But one of the things that I thought would be beneficial was we have an audience between asset backed, which are a lot of folks in private credit, but also we, we have a second sister show that we're going to put this content out on called ATL Alts, which is really focused around this conversation that's everywhere in investment management and wealth management, which is alternatives and people really clamoring for more education and information around specialty finance, also asset based lending or asset based finance.

So I thought let's get Rob on and let's get into this thing.

We met during that transaction.

We didn't have a prior relationship.

I'm learning about fintech lending at the time and you're coming in having looked at a lot of really earlier stage growing Innovation companies or companies using technology.

But before we dive into that, like, give us a little bit of the background.

I mean you, you've been doing some version of this for some time and, and I think it's easy to gloss over kind of how we get to where we're at.

So I'd love to hear you tell a little bit about your background for our audience to kind of understand a little bit about who Rob is and, and the team.

Yeah, of course.

So Rob McGregor, you know, I, you know, most kids want to be an astronaut.

I wanted to be a specialty fine tunnels apparently.

So, you know, as, as that is.

So I started my career really in earnest working at Moody's and the financial institutions team.

What I thought was a curse ended up being a blessing.

I got stuck, not stuck.

I had the privilege of working on non bank lenders.

So payday lenders, auto lenders, you know, title lenders, student lenders, credit card companies, all the unloves of the financial institution world, which was a lot of brain damage, especially for, you know, as impressionable I was at the time, but I learned a lot and my wife was incredibly patient with the long hours and you know, actually spend the time to digest and truly understand what we were looking at.

So I was grateful for that experience.

Like most people though, you know, rating agencies are awesome places to start your career, but most times you end up going to work for an investment bank.

So very cliche in that respect.

Another cliche is I wear a vest.

Finance pro on a call.

Right.

So all the, all the, I was.

Gonna call you out on that, but I, I thought, you know, hey, it's, it's, it's Friday.

I'm gonna be nice, but I think all of us probably want to best too many in this business.

Yep.

Yeah, that's right.

Guilty.

So with that, you know, I went to go work at Credit Suisse for about four years.

Primarily focused on the asset based financing, providing basically the warehouses that allow people to accumulate assets.

And then every quarter, every other quarter, you know, they go from 0 to 250 million.

You package up to an back security, they quesit, bit sell to institutional investors.

Our firm would earn a nice structuring fee.

Our line would go into zero and we rinse and repeat.

Right.

Let me stop you there though before we jump in because I pride myself on really pushing our guests to help to break down this wonky arcane terminology that we use in our business, you know, just in secondhand, because you said warehousing and when most people hear warehousing they think, you know, dusty, dirty, industrial and warehousing.

But when you use the term warehousing, help help the folks because again, I, I want to make sure that, you know, we're hitting, we're hitting multiple constituencies.

We're going to talk about specialty finance and asset based lending probably ad nauseam today.

But I also think there's a real opportunity to help educate the RIA community and the family office community who continue to show appetite and interest in this area of private credit as a way to diversify their private credit exposure, which is something else we want to talk about today.

But maybe you can just talk about that process you just articulated what you guys were doing at Credit Suisse in terms of financing lenders and, and specialty lenders at that.

Yeah, that's awesome.

So it's important to pull me back, everyone small because I get really excited about what we do and where I've been and I forget that people don't live and breathe this stuff.

Yeah.

So, okay, so warehousing, basically think of it as, you know, in a warehouse.

You're keeping goods, right.

You're keeping stewardship, custody and goods.

Same thing as it relates to financial assets.

So, you know, I'll use a name.

But like the SOFI is the world in the future.

Not so far.

Today they're bank, they got bank financing.

They don't deal with credit funds anymore, I don't think, at least.

But think of like the, the next SoFi, before they get to that bank financing and become a bank, they need to grow their loan portfolio.

Right.

Whether it's consumer loans or credit cards or mortgages or what have you.

Right.

In order to do so, they raise finite amount of equity.

But in order to warehouse or create these loans, they warehouse it with someone like us, mean that we will fund the sort of accumulation of loans over time, which if they're doing their job correctly, they keep increasing that number month over month, which means we give them more money and make more money, which is nice.

So instead of them sort of just funding it with all their equity, they work with senior secured lenders such as ourselves in order to create these warehouses or credit facilities where these loans are stored.

And we're giving them, you know, three quarters or maybe more of the cost of those loans.

So unbeknownst to SoFi or you know, their customers, the next SoFi, not actual SoFi, don't sue me.

So far, we'll give them 75 cents on the dollar, right?

Yeah.

They will take 25 cents of their own dollar.

Yeah, own equity to create one dollar.

They'll push that out to their customers.

And their customers are none the wiser of who we are.

Sure.

And we use that term credit facility warehouse as a means to allow these, these lenders that we're lending money to, not term, but we call it lender finance, to accumulate assets and store those assets over time.

Yeah.

And those assets we're going to get into all this.

But you know, you went from a rating agency to then a large financial institution, a bank.

And now did you have another stop after the bank before forming Core Mandel with your partners?

Yes.

Yeah, I did.

So I worked at a, another credit fund for a period of time and with the fortune of moving from New York to la, after five months of being there, the fund blew up.

So at that point my wife had a job and found a job in la.

We just a small pub, decided to plant some roots because good weather, good looking people and good food.

Yeah, right.

So it was.

That's where it stops though, in la.

I'm kidding.

My brother lives there.

So we joke about it.

No, there's some serious stuff going on out there.

Yeah.

And we found the business out there.

So my partners, Alex and Luke, while we were out there.

Yeah, I say out there and I sort of immediately go to where we used to live.

And I used to live in the Palisades and our apartment actually burned down on live tv, but we found the business out there.

The whole idea of before COVID we end up getting capitalized by an alternative asset manager who gave us a bit of money.

And this is all before the pandemic had started.

So we were very fortunate from that perspective.

These grand illusions of having an office in Beverly Hills or in Santa Monica or something along those lines, and then boom, Covid comes, have capital available to deploy, and we kind of look at our pipeline.

We're like, what's going to survive this?

Like in our week?

Well, first of all, are we going to survive this?

Yeah.

Right.

Are people we potentially might give money to, will they survive this?

Yeah.

So we basically killed off, I would say 80, 85% of everything we were looking at.

Which as an entrepreneur, you know, we're three co founders, three guys that were all jacked up about finally finding money, having all the operations infrastructure in place, you know, to having to step back and say, okay, we're so close to getting a business, but like, let's really pause to make sure that, you know, we kind of have everything solved for.

Let's not screw up something that could be great.

Yeah, so I think with that, we, you know, we're incredibly thoughtful about the deals we're doing just because we were putting our own money sort of behind this too, and treaded incredibly cautiously for the first couple years, navigating this, this new world we were all living in.

Yeah, well, I think so much goes into the team, the business model, but also the name of the company.

Now I know the name and the backstory of the name, but I think there's probably people that will listen to this and wonder not heard that name before.

I see the, you know, the peak, the mountain it looks like in the logo.

But, you know, give us 30 seconds on, on the name itself.

Yeah, yeah, so it's a good question.

So, you know, pretty much everywhere in the US the names are taken in terms of, you know, websites and your company.

So it helped actually, in this case, being a New Zealander.

So I wasn't born there, but I'm a dual citizen.

So most kids were doing Disney World, Disneyland in the summers and breaks.

My parents were packing us up and shipping us to New Zealand every summer, which, which was fun, but it would have been nice to see Mickey a little bit sooner instead of when I was like 31.

So you spent a ton of time down there.

And one of my favorite places in New Zealand is a peninsula on the north island called Coromandel, the Coromandel Peninsula.

And in particular this is actually a rock formation.

So the blue piece is kind of like a rock that, that is at a place called Cathedral Cove.

And then you have another rock like in the water just out there thereafter and some beach and.

Cool.

This is our kind of our original logo.

Yeah, I love it.

I think, I think it's super cool.

I mean, you're right, though.

I mean, all the finance, asset management firms, you know it either something Greek and mythological, or it's a rock, or it's a stone, or, you know, something very aspirational.

Sometimes it's a river or a creek.

I don't know, it's.

It's just funny how we sort of think in that, in that way.

But this conversation will be helpful because I think you guys approach asset based lending and specialty lending and, and this whole process in such a different way.

Which is why, you know, I was excited to be able to do the conversation because I think we can really use this time to help educate both originators who are thinking about, hey, I need to find financing partners, right?

But also on the other side of the business, right?

Limited partners and prospective investors who are Looking for ways to diversify their portfolio.

And so I think from multiple fronts, we have an opportunity.

So no pressure, but I want to dive into how you built the team.

Right.

And so much of the asset management business comes down to, you know, the first question is, tell us your backstory.

But in the case of, like, you know, investors, they need to know who are we putting capital with or originators that are partnering with you for, let's say, a warehouse relationship or a senior secured facility.

Are these the type of people we're going to work with?

Like, over a long period of time, we're going to enjoy working with them.

So how did you and Luke, your.

Your.

Your.

Your partner and Alex, how did you guys all come together?

Yeah, so we basically realized that we had incredibly complementary skill sets.

Right.

So Luke has deep roots in financial technology, having been a capital market, the first capital markets, higher prosper marketplace, which is kind of like a fintech OG as you know.

Yeah.

Which is for everyone else on the call all.

Or as one of my favorite podcasts, as listener.

So for the listener.

Yeah.

And this is Luke.

Not.

He does have a last name.

This is not Luke Skywalker.

This is Luke Powell.

Yes.

Right.

Yeah.

Super great personality, very colorful guy.

But.

So that's Luke Powell.

So early stage fintech og.

Yep.

And like, deep roots and like, raising capital.

So something I knew nothing about.

I'm just kind of the.

The investment guy.

Alex is our, you know, specializes in quant.

And I say, like, I'm talking about, like, what we all kind of do, but, like, the reality is, like, we're a team of five people.

That's gonna be six in a matter of, like.

Yeah, you're growing two weeks.

So, like, we're doing way more than that and a lot less glamorous stuff.

Yeah.

But we also, you know, align with a lot of third parties that allow us to kind of scale more efficiently and take a lot of stuff off our plate, make sure we're being smart.

This is Alex Wu in risk management.

And he does a lot of analytics.

You know, very long pedigree, background in academia, and then worked in the private sector as well, too.

Most notably, like, including Morgan Stanley.

So I like to say that he.

He likes to.

Or not he likes to.

He actually unwinds all the institutional brainwashing that I underwent because I feel like, you know, we.

As.

As.

I kind of fell into talking about, like, jargon and stuff.

It's like you get excited and like, you lived this life for so long and you just kind of talk about Stuff and look at things through the same lens, and you don't sort of think about, like, first principles and fundamental ways of, like, building blocks to get to stuff.

And I think in a lot of respects, he, you know, is the yin to my yang at the end of the day in terms of, you know, complimenting me and challenging me throughout the investment process.

Because we work incredibly close on structuring deals.

Yeah, yeah.

And then you added to the team in the last couple of years.

I know when we first met, you know, I remember doing numerous calls with you and Luke and Alex.

You guys even visited my then firm down in Atlanta.

But you've.

You've now added to the team.

George Scott, right, joins you guys.

Yes.

Works with you on the investment side.

Yep.

He does.

He does awesome job supporting me on the investment side.

Ex Capital One Lender Finance.

So he knows the space.

Him and I had actually worked close on using the other side of the table about perhaps doing a deal when he worked for an operator and developed a great relationship through that.

And we were fortunate enough to be able to have them come join us on this journey at Cormandal and to round up the team.

Lady Carol Jupiter on the west coast supports Luke in.

In the fundraising side of the house.

So we are a small team, but nimble, and adding a sixth and, knock on wood, pardon me, a seventh person.

So growing fairly quickly, but still small.

And I think that that's important, though, right?

Like, we don't want to become this.

We have no aspirations to try and become one of these bloated organizations that does everything for everyone.

And you feels like you lose your character in some respects right.

In your identity, and you just start chasing fees instead of focusing on your core competencies.

So we very much know our lane.

We very much know what that lane, you know, what we desire that lane to look like five, ten years from now.

And it'll look pretty darn similar to what we're doing right now, just because we believe that the addressable market in this very small niche that we're playing in still gives us heaps of Runway.

All we got to do is just drop in more, you know, drop in capital, drop in people, and, you know, attack the market.

Yeah.

So I think we built a really good foundational team, and I'm excited about some of the new joiners and, you know, how they're going to be able to add a tremendous amount of value to, you know, helping grow this enterprise further.

Yeah, well, and we.

We get to do this at a really fun time because Again, I teed this up at the beginning.

There's, there's so much hitting us daily from the wealth manager side like in my seat.

And I've shared some of that, you know, background with you around diversifying out of just core private credit.

Right.

So when people think private credit in the context of, let's say wealth managers, financial advisors, if they're doing alternatives and they're doing private credit, they're probably doing and have been doing cash flow lending.

Right.

They've been allocating to like a BDC or then the interval fund or some type of structure.

It could be a private fund.

But that, that strategy has largely been for the last decade really dedicated to either sponsor finance.

Right.

So they're providing financing to private equity sponsors who are using the debt.

Right.

To go and finance these middle market lower and upper and everything in the middle companies.

And that allocation has been generating kind of a, you know, it used to be an 11, 12, 13 yield.

Now it's come down and it's more like an 8% right.

Yield.

But that is what we call sort of in our business like the meat and potatoes, it's the center of the plate.

Right.

And around that I am now thinking, and I don't know if I'm ahead or right in line with all these advisors.

I'd love to hear your take.

But like now we need to start to think about how do we diversify the private credit allocation and what are some of these other areas.

And that's one of the reasons why I want to have you guys on because you are not there to replace, I would argue the private credit allocation to sponsor finance or direct if you don't go sponsor.

But to compliment.

Right.

So that's kind of giving some of that additional context.

Before we talk about allocation and diversified, tell me a little bit about what does Cormandle do.

Right.

You guys are a specialty lender to other specialty lenders.

I would argue in a way, but I want to hear it in your words.

Yeah, And I'll just comment on, on the.

I totally agree.

In terms of the complimentary instead of competitive versus traditional direct lending, we, we say the word private credit a lot just because, you know, keeping it super high level in order to differentiate versus people who are trading like Q Sift or Isin securities.

Right.

Like these are all bilateral sort of negotiated deals where we're the agent, we're the lender across our vehicles.

Right.

We might participate, risk out, but we're the ones sort of steering the ship and we're kind of like this tiny little niche market that exists in the asset backed, asset based finance world.

Right, Asset based lending, asset backed finance.

And there's some distinctions that exist there.

Sure.

But as compared to traditional direct lending, that'll say, hey, let's do like five times of, you know, cash flow leverage.

We're definitely attaching to cash flows, but we don't really care whether someone's sponsored or, you know, has a VC or private equity.

Right.

In my opinion, you probably care more about Mark down the street instead of Mark Andreessen.

So.

So, you know, in terms of protecting your money.

So I might prefer the guy who raised a bunch of money from his friend Mark down the street who just happened to be rich.

Right.

But we, what we do is, you know, not that cash flow leverage, more balance sheet leverage where we'll provide senior secured credit facilities or basically think of it as senior secured lines of credit.

Right.

Yeah.

To kind of like, kind of falling back into the jargon.

So pull me out again.

Where someone who originates that small business loan to a small business or lends to a consumer, whether it be a credit card or traditional principal and interest amortizing loan, personal loan.

Right.

We will say, hey, if these loans are current, if they are not defaulted, if they meet other types of what we call eligibility criteria, meaning parameters that we believe promote good financial wellness of those loans, then we will consider those, you know, eligible to finance with our senior secured lines of credit.

Yeah.

So that's where we plug in, I would say, you know, some people say, oh, like venture debt.

Like if we're getting involved with these series A, series B companies and a little piece of me dies every time someone says that.

We are, we're certainly getting involved with earlier stage companies, but we're taking, I would say the least risky part of the capital stack as opposed to worrying about people, you know, growing fast, worrying about margin expansion, worrying about them acquiring customers as quickly as possible.

We tend to focus more on the unit economics at some points.

You know, we're, we're at odds.

Right.

Because you know, a traditional venture debt or equity for a lot of these companies might be in the capital stack and you know, they might want to grow faster than we otherwise would prefer.

Just because being a, you know, early stage lender, you know, we've seen people time and time again, not at corn luckily, but in prior lives and even deals that we have not decided to not move forward on where you get a whole mess of money, you try and say, okay, what are we going to do with this?

And they Put it out to everyone.

And they aren't as thoughtful about the underwrite associated with the deployment of the capital.

Easy to put it out there, difficult to get it back.

Yeah.

So we try to spend time with our clients, to educate them and have them resist the urge, honestly, of trying to do that.

Because you have one shot at this.

Right.

Much like as we kind of reflect back on being entrepreneurs and realizing we had one shot of not screwing this thing up.

Right.

Like the formative years, you want to be incredibly thoughtful about how you're underwriting and the deals you're doing and how you're constructing your portfolio.

And we try and practice what we preach in that respect by imparting that same approach with our borrowers because we want them to be successful as well, too.

We want them to take as little amount of dilution in future rounds as possible, and we want them to, you know, grow in a healthy fashion.

Right?

Yeah.

So kind of rambling.

No, no.

I mean, I, I, I think it's an important, I think it's important dialogue because again, we have the opportunity to talk here to two kind of distinctive communities.

On the one hand, your comments were really to that originator, right?

So that founding team that is in the business of providing capital, whether it's equipment finance or it's receivables finance, or it's inventory finance, or it's, it's, it's some type of real estate capital that they're in the business of providing, but they need capital to fuel their business.

Right.

So that's, that's where having relationships with debt providers, in this case specialized lenders.

Right.

Like Cormando, makes a big difference.

And ultimately they could go raise a bunch of equity to try to do that, but that's going to be super expensive.

And they're giving away a permanent portion of their company that's hopefully growing from an enterprise value standpoint.

Or there's now emerged these specialized lenders with groups like yourself who have gone out, raised capital, and they are in the business of underwriting the collateral, specifically of what you're originating.

Right.

So whether that's vehicles or it's credit card receivables, or it's real estate collateral, etc, like you guys specialize in that.

And then you can advance them some type of, let's call it, line of credit.

Right.

With covenants and other protections, I'm presuming for a period of time to help them grow and scale up their business.

Is that fair?

Yeah, that's completely fair.

Yeah.

Okay.

And we lose deals because you know, we, you pointed out covenants.

Sometimes people have covenants and you look at sort of what they are and there really aren't teeth and there might be more covenants than you need.

So we spend a lot of time trying to be thoughtful about the covenants that we want to use and how that actually the implications associated with that on the collateral that we're financing that we ultimately may need to end up owning if things don't go right.

Right.

You want to use those covenants as an early warning signal.

So when we're underwriting someone and just for, you know, back up, just to give people visibility into our world as I physically back up, like give myself directions here.

So what we'll do is we'll look at these loans that we're providing to people and we're going to look at all the originations that someone has created over a number of years and we're going to supplement that by looking at rating agency methodologies and new issue reports of pre sales.

We're going to look at other deals that we've worked on in similar industries in order to formulate based on certain, you know, FICO scores or terms like how long the loan is or the APRs or the geographic distribution.

We're going to use that in order to say, okay, what has performance looked like for this operator in the industry at large?

Let's come up with that base case loss estimate that we have.

Right.

That is, you know, and I'm kind of saying this because I think that managers that are evaluating folks such ourselves should get in the nitty gritty and understand these principles and feel comfortable challenging managers to understand that process.

Yeah.

And that's part of the other audience that we're talking to from the standpoint of ATL alts, which is I, you know this, I'm very passionate about the, a lot of things but one thing I'm very passionate about is taking the 15 now 16 plus years in alts, being on the asset manager side, the GP side and now bringing all that to bear for the benefit of clients on the LP side.

Right.

So when, so that's a little bit me pumping my own book or whatever, but just trying to help.

Let's just break through all the jargon, right?

Let's just get to how do we underwrite these asset based lenders because now they're coming out of the woodwork.

Everybody's got an ABF business, everybody's got a, we got a direct lending business, but now we got an ABF business and we've got a niche.

Right.

And you're seeing it proliferate.

And what we, I think as advisors and wealth advisors have to do is we have to be not only fiduciaries and stewards of our clients capital, but we have to be educated around how do I underwrite these firms Just because it's a big name and they've got tens of billions or hundreds of billions under management, does that make them basically better at pricing, risk and structure and all these things just because they have a big stick?

So I really am glad you made that point.

And I, and I do want to dig in a little bit today around that and how we think about underwriting.

But I digress.

So you were talking about the importance of covenants and monitoring and, and, and structure.

But I'd love for you to continue around some of these distinctions.

Yeah, of course.

So you know, we basically observe all this data as it relates to, you know, X, Y and Z.

Consumer lender, you know, so we're lending the, the company money, that is lending money to the consumer.

Just as a reminder, they might lose 10 of all the loans the, the dollar amount of the loans they originate.

Right?

Yeah.

What's up?

Those are charge offs, let's call it.

Right, yeah.

Yep, yep.

So they might, might sound like a lot to people.

Right.

But like that's just the reality of the situation.

Especially when you look at like more subprime markets, like there's a fair bit of adult default that occurs.

You look at the fact that, you know, most of America doesn't have more than $400 to withstand unexpected expense.

It's, it's not as pretty as, you know, people lead you to believe in some respects, especially in LA where people are driving around G wagons and stuff.

But, but I wanna, but I wanna pick up on one point.

I hate to interrupt my guest, but you said this is a tiny, small little.

What we are all waking up to the reality is is that finance drives our lives daily.

Right.

One of the reasons why this space has gotten so much attention in the last two or three years is we could have a whole separate conversation about the banks and how that's changing and why it's created opportunities.

I think that story is already out there on other shows and other podcasts.

But what I think is happening is more and more specialized lenders like Cormandl have, have emerged and grown not out of, hey, let's go try to raise a bunch of money.

There's a real need for these earlier growing lenders to be funded so that they can provide financing in areas of our economy that really need it.

Yep, yep, I completely agree with that.

And in some respects, like, you know, having grown up, my dad was a small business owner.

Still is to this day, you know, seeing the low lows associated with that and the inability, especially for people who aren't from this country to be able to access capital.

Right.

So you came here with.

Not much from New Zealand along with my mom and you know, gives a pretty decent sort of, you know, life.

And I'm forever grateful for that bet.

But one thing I noticed is, you know, you have the ability to get bank financing, right.

If you're a small business, if you have deposits, you can give them treasury, you can give, you are consistently generating net income.

Right.

But if you are someone who might have, you know, you've only been in business for two, three, four years, you haven't been this long standing accredited business and maybe you had a bit of a hiccup at some point.

You're currently losing money, you're trying to dig out of that hole.

But there's visibility to getting out.

Banks just, they have an endless stack of applications, they have no time for that.

And then the other side of that coin is you look at merchant cash advance companies and having been in this space and being so regulatorily sensitive.

Right.

And seeing what I was at Moody's and other companies that, you know, some of these businesses, they are serving a need but they are permanently on regulators radars whether it's a state or federal agency of which I subscribe to all these bulletins on.

Sure.

And just from a moral perspective, I just don't really love the product of MCA more generally, but is what it is.

So it's almost like business usury type of format.

Right.

Like we don't want to take shots at businesses.

But at the end of the day what you guys are providing is it is more expensive financing that what's than what's going to be provided by a bank.

I think everybody gets that and understands that.

But it's not permanently giving away the company.

It's not equity.

Right.

There's a limited amount of upside and you guys are financing companies that can obviously provide, you were talking about this data, they can provide historical performance information.

I'm sure there's other things that you are going to have to underwrite to identify those companies.

You can't say yes to everybody but, but I want you to to expand on what goes into underwriting and then I want to spend some time talking about when you structure a Loan.

How do you hopefully monitor?

Because that's been in the news recently, and servicing and transfer of servicing.

Like, it's not just about putting the money out, it's about collecting it.

And then ultimately you want to rinse and repeat.

But let's talk a little bit about some of the other underwriting elements.

Yep.

Yeah, for sure.

And I look forward to the servicing piece of it.

So as I was saying beforehand, we might look and say, okay, on average, this company loses 10% of everything, every dollar they put at the door.

Right.

To a consumer.

So we use that from our perspective, to structure our loan to value our ltv, or also referred to as advance rate in our documentation, meaning how much the rate in which we would advance on certain collateral.

So in that example, you might have a consumer lender that is, you know, originating loans at, you know, let's just say round numbers, 30 APRs, you know, which some people might go, oh, my God, that's really high.

But the reality is, like, most people look at their credit cards, at least.

Rob McGregor, you know, my credit card is like 21.99, and I have a pretty decent FICO.

Yeah.

So you start adding on, spread on top of that, and you kind of get to these higher numbers.

So let's just say in this example, 30% APRs, they're losing 10% a year.

I might be charging someone, you know, let's say 16% for round numbers.

So if I'm lending them, you know, 75% or my LTV is at 75%, three quarters of every dollar that gets originated, you know, my cost of funds is not on the entire loan.

It's on that 75.

So my 16 loan turns into an effective debt yield of, you know, 12%, right?

Yep, yep.

16 multiplies by 75%.

Yeah.

Reason why I'm breaking this down is because if I'm giving someone 75 LTV, I have 25 of equity in that deal to supplement my 75 right.

To get to a hundred dollars for that loan.

But they're also generating a yield of 30%.

Yeah, but that yield has a debt service associated with it.

That 12 I mentioned, right?

Yep.

So, you know, you have, you know, 30 minus 12 will be 18.

We refer to that as excess spread or net interest margin.

That is additional credit enhancement on top of that equity that someone has.

So you got the 18 plus the 25, right.

That gets us to over 40% of loss, absorbing capital.

Like, God forbid something, you know, happens that losses go beyond 10%.

Like, we could basically withstand four times multiple a stress factor which is what rating agencies and you know, bankers and lenders in this space look at because they want to think about okay, in a global financial crisis this all happens again.

Sure.

What happened with performance back then?

And you have all these different rating agency methodologies that will say hey, you know, a three times loss coverage multiple will equate to a rating of double A or single A.

And that's what we use to inform ourselves is like say okay, well if you know the GFC stress factor end up going to two and a half times.

We want to make sure that if another GFC happens again, which I certainly.

Hope doesn't sure.

That you know, we have sufficient coverage so that 10% going to 25% losses that we have that loss absorbing capital of 40% over 40% to absorb that variability.

So that's like our lifeblood.

We spend our lives looking at all this data idiosyncratic to the company industry related, overlaying it with similar types of asset classes and securitizations in order to inform are we structuring these deals correctly?

So that's first and foremost like you're the best, best defense is offense.

Right.

So like we're making sure that we're offensively getting the structures we need instead of trying to.

In a lot of cases, you know, when a competitive process and we don't have a lot of these for this reason it becomes a race to the bottom.

Who can provide the highest ltv, who could do it the cheapest price, who could have the least amount of covenants and those covenants that they have, let's make them loose as possible.

We're just never going to win those deals.

And that's totally fine because yeah, you set me up.

Because you know, I think we are seeing now when you fast forward we're let's say eight, ten years into the cash flow based lending.

Yeah.

You know, maturation of that whole space.

Right.

What has happened?

You go to these events and there's 300 firms literally that all do middle market direct lending and they don't want to do large corporate because they can't do unit tranche and they can't write a $500 million, $750 million check.

Like the gigantic publicly traded asset managers who are talking about scale and who are gathering up 90, 90 plus percent of all the assets that are being raised in private credit.

But there's 300 firms chasing after, you know, there can't be infinite amounts of good credits.

I do subscribe to the Theory that the private credit space is still quite small relative to where I think it could go.

So I think as I said to you yesterday, like I think there's plenty of room for everybody to have a little bit of the pie but I think it's really what you like.

It's.

Do you like the crust?

Do you like, you know, do you.

There's certain aspects of this.

And so for me I think you really are going to see this proliferation of specialty lenders like yourself who really do have an opportunity to hopefully educate and then grow their business as a result of really being early to commit to the channel.

Right to the family office private wealth.

Right.

Space.

Those groups are largely allocated to direct lending.

I don't think there's a lot more you can kind of coach them up on there.

But I think when it comes to these asset based lending and asset backed and specialty finance areas, I think there's a lot of room for us to you know, to hope hopefully inform the crowd to some extent.

You talked about the drivers, right?

So it's.

You're lending based on value liquidity and maybe even to some extent the pledged assets like this collateral pool the stability.

Is that fair?

Yeah.

Of those pledged assets versus like say the cash flow of the underlying company and its ability to kind of generate free cash flow based on, you know, whether it's seasonality or what, what have you.

Yeah, that's exactly it.

That's the right distinction.

So we are one tool in the tool now of the overarching business.

Right.

It is in a lot of respects going to be mission critical lifeblood for them.

But the best part for us is that we're senior secured so we're high up in the capital structure and God forbid something happens to the company at large, we're happy to take our assets and go home and run those off.

And you touched on this and maybe the time's not touch on it but in terms of servicing.

Yeah, let's talk about that.

Yeah, the covenants are a, a I mean I was a banker earlier, earlier in my.

But you know we had two or three covenants in a deal and they were, they were there to right.

Keep people from swinging wildly to the fence or going for the proverbial home run.

But they were also there to just give us basically like a warning sign.

Something is not going right at the company and if you breach this right there has to be some type of cure.

Do they work the same way in, in, in, in at Core Mandel and the specialty finance and kind of Specialized.

Lending area, exactly the same.

So think of it this way.

So we, I'll touch on the servicer piece first because we kind of touched on servicing the best person available to service your loans that you're financing on behalf of Zone is the originator.

So you want to actually have covenants that mean something like we have some people that we bump into every once in a while.

They have, you know, tangible net worth tests.

On some of these businesses, it's like, well, the company's burning cash.

So like that immediately is going to erode the equity.

You're basically, you know, kind of getting to a point of how much, you know, burn can they withstand, you know, running through the all the equity.

So what we do is focus on a Runway ratio, right?

You know, quantitatively you want to make sure that people have sufficiency of Runway, you know, just because you don't want to run out of cash.

Pretty straightforward.

But qualitatively, generally speaking, your best people, if you have less than six months of Runway, are going to start updating their resume, they're going to start looking for the door and you know, you might lose key people, right?

So you want to do the analysis to make sure that, you know, true free cash flow burn, not necessarily what's going towards supporting origination of future collateral because you can always throttle that, right?

But the operation, how much cash is being burnt relative to unencumbered cash on their balance sheet.

How many months do they have?

Ideally someone has, you know, 12, 18, 24 months.

The reality is where we're operating is most series A companies may only have 12 months, right?

And they're generally looking at debt facilities such as ourselves because they want to create Runway extension.

Because historically they might have used equity to originate those loans which has taken away the total amount of cash they have that can support burn.

And then a lot of what we, we sort of sell by education is, listen, you're crazy to one sort of not take on capital.

That, that is not equity.

Because taking on debt you're not having to open up your cap table as you noted earlier.

But also the fact that when you have debt there to finance those assets, you much more negotiation power versus your VCs, your private equity.

Because you can say, listen, like I would like to raise equity, I know we will need to raise equity, especially in regards to our growth aspirations.

But Mr. VC, I don't have to because I have this debt facility here that can scale the vast majority of my balance sheet.

So we provide a lot of value to operators from that perspective, I'm digressing a lot as you've gotten to know about me, Andres.

No, no, I, look, I think, I think would be to take that one step further is.

Let's talk about the monitoring because there's a notable case that's hit the news where transferring of the servicing and some of the dynamics.

Right.

That have come into play when, when we say servicing, somebody is doing the collections.

Right.

So when you all set up a facility with, with, with a borrower and they're doing some type of lending.

Right.

And you enter into a bilateral, bilateral relationship with them.

How do you guys structure and think about that aspect of this?

Because the money's out.

Yeah, but there's probably some mechanisms, I mean, I know them, but I think we could share those with the audience.

There's probably some mechanisms that you put in place around you're tranching how much can be drawn.

You're putting a lockbox in place.

There's sweep mechanisms like all these things, you know, I think are informative around monitoring.

Yes.

Your client's capital that's ultimately, you know, funding this loan.

Yep, yep, yep.

That's a great point.

So you know, just to close out the point I was making, you want the servicer to be around because they're going to be most intimately familiar with the collateral and monitoring it and you subsequently be monitoring what they're doing.

So once, twice a month we'll get reporting in the form of borrowing based certificates and monthly service reports from our clients, our borrowers, which basically give us a data tape is, you know, kind of what's referred or a loan tape.

Probably the easiest way to frame it for this conversation because it's a, a tab within a workbook, you know, which is a bunch of other formulas, but a tab of raw data that tells you all the transactional, all the transactions, all the loans that someone has originated that subsequently go in towards creating what you referred as your borrowing base.

The base in which one of your borrowers is able to borrow off of.

Yeah, the word borrow again.

So that's, that's part of it.

So we live and breathe within these files in order to, exactly to your point, ensure that, you know, someone hasn't double pledged something.

So you want to get your reporting on managed portfolios because if someone has alternative financings or additional SPVs, then you want to make sure they're not, you know, as Tricolor just got in trouble for, you know, double pledging assets.

Right, right.

That means like party A has lent this group funding, they originate an Asset, it fits eligibility criteria for that lender, but they're taking that asset and they're pledging it as collateral, as eligible collateral to another lender.

Is that what you're saying?

Yep.

Yeah, exactly.

Not good.

Caught in the jargon.

Not good.

But.

So that's why servicing and data and monitoring, all of this stuff, super, super critical.

I mean, that's why for me, when, when, when a group emerges that's like, oh, we're pivoting, we're going to go from, you know, cash flow based lending to spinning up a specfin lending platform.

I'm like, okay, well let me meet that team.

Because it can't necessarily be that same team that was just doing, you know, sponsor finance.

Like, this stuff is just way too complicated and there's just so many different categories of considerations.

I think.

No, I agree.

And just be candid.

Like, we sometimes have to remind ourselves of not falling victim to that fallacy because like, you see a new asset class and you're like, oh, it feels like this.

Like, I bet we can wrap our arms around it.

And I'll say, like, for film finance or music royalties.

And we spent years like talking with a bunch of operators not having actually really funded deals in the space and swinging and missing a lot because like, we have so much trepidation of making the wrong move.

And now we've looked at so many deals, we have relationships, we know what to be looking for.

It's like, all right, now we, after years of doing this stuff, we feel comfortable actually doing it.

Whereas a lot of people are just like, ah, I think I got this.

And just like, you do the deal.

It almost feels like some cases people are kind of, not to be derogatory but like kind of tourists, right?

Like, yeah, how hard could it be?

And it is hard.

You're seeing that with all these areas, it's like, oh, we need an aviation finance group or we need a, a sports finance group or we need a royalties finance group.

And I'm sure there's a lot of talented teams out there.

I'm not saying that any of these people aren't, aren't gonna, you know, do really, really well by their strategies and their clients, most importantly in their capital.

But I think that's just why this conversation and more like it from our peers that are out there doing this right is so critical to really move past the sound bite, move past the take on a conference panel and dig in and actually talk to the actual issues around monitoring and servicing and things that aren't super sexy.

And don't sell sponsorships, but like really actually protect the capital that's funding all this, which is, you know, in many cases is individuals, it's people's retirement, it's their pensions and what have you.

So that's, that's my, that's my victory speech.

I completely agree with what you're saying.

I grew up lower middle class.

We've made a lot, a decent amount of money, not a ton like these big guys.

And we invest it side by side with our investors.

So not that we wouldn't protect investor capital, but these are our nest eggs, right?

So we're also locking arms with folks taking the same exact risk they are.

And I think that people should ask managers how much they have sort of invest in their strategy and how much that means, you know, in aggregate relative to their net worth and stuff would be instead of someone who's just chasing fees or, you know, looking to crystallize, carry or things like that.

And I'm not being critical, I'm just one thing I always do and I think my wife is very patient.

But I, I always talk about everything in life, whether it's work or personal, how our incentives aligned at the end of the day.

And if you can make sense of that, then, then I think you're qualitatively in a better position.

And the math, if the math, maths, then you're in a better spot.

But if you don't have alignment, like we don't do forward flows, like you touched on this earlier with some folks that might have access to the large players.

I know folks I used to work with prior lives that work at some of these larger players.

They're just buying, you know, unsecure consumer loans or small business loans, maybe paying a premium, doing less that these days, and then owning those assets.

And then what they're doing is putting leverage from a bank or maybe another private credit fund or an insurer at a lower cost in order to financially engineer the return.

Still only netting investors after their fees and stuff, 8% or so and taking way more risk than what we are, despite the fact that we're getting involved in series A, Series B, those sorts of periods of time.

So, you know, it's.

But I mean, relative value game, right?

I mean, I think that's a term, that's a jargon term, but I think it's worth helping people understand from the allocator listener.

That's lp, right?

There are a lot of folks who want to do more alternatives, but the fact of the matter is, until they Feel like they can explain it to their client, they're just not going to touch stuff.

Right.

And so when they get educated then they feel like, okay, I can sit down and explain this to Mr. And Mrs. Rodriguez or Mr. Jones or whoever the client is and feel like if they challenge me and ask me why are we lending money, that means they're like if they're borrowing money, that means they don't have any money.

Right.

And it's like no.

Think about how we're financing our day to day lives today.

Right.

Most of us have several credit cards.

Most of us like getting points.

Most of us when we buy a loan, you know, we buy a car, we finance it.

Right.

So yeah, this is just how the world is getting financed is.

And it's just more and more of that is no longer just being owned and controlled by banks.

It's being right.

Originated by fintech lenders and specialty lenders.

And those firms require capital to make those loans.

Exactly.

And banks candle would rather give us money to then go lend out to these operators.

So I think that that bifurcation between bank and non bank lenders is only going to continue to expand.

Right.

And you're even seeing it with partnerships where banks are using their origination channels and teaming up with your non bank lenders credit funds in order to basically balance sheet that risk.

Because you know, after, you know, not things certainly could have had more rules in order to prevent the crisis.

I think we could all agree there.

But the often swings too far in the RWA or risk weighted assets.

So any asset that a bank originates.

Right.

Like has a capital charge associated with it.

Yep.

And that's, that's how banks run their business.

If there's a large capital charge associated with it, they are going to steer clear of doing those businesses.

And that's where you've seen this.

You know what previously might have been done by a bank moving to non bank sectors in order to prevent that, that rwa, you know, punitive aspect.

Sure.

So I believe that not only for core Mandel, but for all the other non bank lenders, private credit funds out there, there's going to be so much opportunity and there'll be banks falling over themselves to give people like us money and we're going to be the ones who are actually affecting change and you know, providing credit, credit intermediation.

Sorry, that was a tough one for me.

Apparently to small businesses, to consumers, to allow them to fund their lifestyles to whether it's buying a home, whether it's buying a car, whether it's, you know, an artist who doesn't want to do what Taylor Swift had to do and give away all the future earnings, even though she managed to buy it back.

Right.

You've seen these folks who are actually providing non advances to artists so they can kind of bootstrap their marketing cost and their merchandise and all these things.

And I think that private credit funds and other non bank lenders are going to continue to play a vital role in those sorts of ecosystems.

Oh, yeah.

I mean, you take one that I think impacts, you know, millions and millions of, of, of Americans.

And I'm sure this is now an international product, is this whole earned wage access model.

Right.

Or take home equity.

Right.

You're seeing massive, massive growth in these two particular areas.

What is earned way to access?

Okay, I have a paycheck coming, but it's not for two more weeks.

I can get an advance, if you will, on those future earnings for a period of time.

That's all over Wall Street.

Right.

The company, the employer, is not providing that money like some big credit manager is providing that capital.

Take the other one, the home equity deal.

Right.

Rise in, you know, home values.

But people aren't moving.

Why?

Because interest rates are too high, Real estate values are up.

Right.

So what do I do?

I tap my equity in my home and get an advance and I go do an upgrade or pay for college or buy, you know, pay for a wedding.

Right.

I mean, it's all this innovation, but at the same time, like, there's got to be covenants, there's got to be a lot of underwriting, there's got to be a lot of data.

I want to hit on two more things before we talk about the investor side for the last five minutes.

And that's recovery.

Right.

So all things don't work.

And that's not to say at your firm at Cormandel, right.

You guys don't have like a really good track record.

We don't have to get into it too much.

But I want to talk about, like, the distinction between, like, how interest is being structured.

Right.

So you've got cash, pay interest.

You guys are getting paid back monthly, I presume.

Yep.

And you know, a loan is made or a pool of loans is made, they are eligible criteria against the borrowing base.

So they can get a.

They can, they can say, hey, I need $10 million because we just originated these loans or going to originate these loans, but they're going to be paying you monthly against that draw, correct?

Yep, that's correct.

And doing things like pick Right.

We're gonna pay you in kind.

I mean that's, that's all the rage on, on the cash flow based side.

Right.

Like we're going to create a way to pay you that isn't really interest, it's.

It's payment in kind.

And we actually George on our team wrote a, wrote a piece on this and that's a function of, of weakness.

Right.

In terms of the company.

You know, if someone needs to pick, then they don't have the wherewithal in order to do the current cash pay.

I know a lot of people get enamored to go.

We can compound, you know, our return over longer term horizon with pick.

It's like, well, pick is great if it's there when you go to crystallize it, but if it isn't there, then like you've been diluting yourself.

So we try not to dilute ourselves.

So yeah, we, you know, we don't do any pick if we get warrants like we're.

Some people we compete against, they bark them up because I guess they want to charge fees on them or show a better performance or something.

But the reality is like warrants aren't always worth a lot.

Right.

Was really more of home run insurance to us.

Not something that subvents or subsidizes our current cash pay.

But to go back to the cash pay point and the blocking tact and the portfolio management, we have basically these collection accounts where you know, our small business lender that we're lending money to their small businesses will make payments in that collection account.

We'll generally have what's referred to as like a blocked account control agreement, which, okay, you know, just basically means we control the cash.

No take anything out unless we say you can take the money out.

And then we run, you know, once or twice a month what we refer to as our waterfall.

Right.

So to allow that operator, that small business lender to access that cash, we'll say awesome, you can take that so long as you're borrowing base covenant compliant and you pay us our accrued interest.

Once you do that, the residual is available to you.

Residual mean the remaining cash after our interest and stuff, right?

Yeah.

And I think that's a lot of the blocking and tackling that in some cases people might miss.

Right.

Is having your account control agreements in place because you're lending money to people who are creating loans and those loans are going to pay principal and interest over time, which means that your receivable is converting into cash and you want to make sure you have control over that cash.

Otherwise the reality is if you don't, then you're basically kind of under collateralized in some respects perhaps if someone is at their maximum.

LTV.

Yeah.

And I think one thing that advisors and folks, you know, can, can wrap their heads around is the notion of like real estate is a good one.

I always like to go with when you go buy a house, right.

And you're, you're going to apply for a mortgage or trying to get a mortgage.

Right.

There's nobody out there that's really providing 100% loan relative to the value of the house.

Right.

There's generally different programs, yes.

That are out there for, for residential mortgages, but most of the time, you know, the lender wants you to put up a little bit of money and.

If there's someone out there, I'm happy to have a conversation with them.

Yeah, but I mean in your case, they're underwriting against a bunch of like a whole bunch of data, right?

Like they know what's that house worth in that zip code in that neighborhood.

Based on all that data, they can make a pretty good calculated bet based on your FICO score and your credit profile and all this, they can make a pretty educated bet on advancing you and giving you an interest rate and points and all that stuff.

Data sounds like it's very, very vital to making this work and then having belt and suspenders around oversight and controls.

I don't want to oversimplify it, but this is not only lending to, you know, sort of earlier stage, mid stage growing companies, but it's also putting in place like a ton of, of controls and mechanisms to ensure that your capital is, you know, is, is secured and is protected.

That's right.

I think there's a balancing act, right, because you want to protect yourselves as a fiduciary of capital, like protecting your own capital, protecting your LPs capital.

But given the fact that we're largely the first institutional check in for these folks, you don't want to overwhelm someone.

It is, and we want to be sympathetic to that too.

Just because, you know, we've lived in this world, we understand how complicated these deals can get.

You want to solve for the risks as you perceive them, not inundate someone into creating the perception or the actuality that you're trying to prompt the footfall of some sort.

So don't obfuscate.

We're not creating these, you know, weird covenants and setting the test levels, the thresholds in which might cause like an event of default for Someone like in, in isolation.

We're working with our borrowers in order to calibrate that.

Some lawyers hate us because in our term sheets we might like tbd, a covenant.

They're like, oh my God, don't sign a term sheet with a TBD covenant.

Because like they could change it once you sign.

Like they could do whatever they want with it.

It's like we've never done that.

Right?

Like that is a surefire way of like nuking a relationship by like getting someone to sign up a term sheet just so like you could take it off the street or something.

The reality is like these are things you're going to work hand in hand with someone in order to basically tell them where your needs exist, where your underwrite is looking at and being considerate of their needs.

On the other side of that, right.

If you're looking for ways in order to just make it as best as possible for you, you're going to have no clients and you're going to earn no one's trust.

And on top of that, these people are backed by venture capital firms and private equity firms and you're going to have nuked those relationships.

And it is such a small world.

It is.

So you want to do your best to be a good sort of player in the ecosystem and show that to people.

Right.

And be like, listen, you are part of this process.

We are coming together and embarking on a multi year relationship.

You have a family, I have a family.

We're all just trying to get by and do what's right and maybe make a little bit of money in the long term.

You know, I think it's, we're all subscribing to the get rich slow sort of approach.

Yeah.

Especially for the, you know, the, the startups.

All right.

Because, you know, it'll take, you know, seven, ten years to really.

Yeah, it can take a long time.

But I think you, I think you, I think you bring up one good point then, and then we, we will finish by talking a little bit about the, you know, just the overall investment environment and how this asset allocation conversation may play out for, for, you know, for, for investors who are thinking about, hey, I want to learn more about asset based finance and I want to dig more into these specialty finance lenders and really understand how, how do we, how do we underwrite them?

And that's this notion of like growing companies.

And I, I've heard this, you know, out there, it's like, well, VCs, they're really on your side as the owner Right.

They're there really to be founder friendly.

And these lender guys, they're there to take your company.

So be careful.

And I think there's a real miss there around the, you know, particularly for those that are in some form or fashion lending money.

And I think some founders aren't even clear are they building a technology company, are they building an asset management business?

Or maybe they want to build both because that's doable.

But I think that they have to be real clear he or she and their team around where do they want to play?

Because there's a technology business model, there's an asset management business model where you're building a balance sheet.

You're really living and breathing this world you and I have been talking about.

And then there's maybe something somewhere in the middle where you're selling off some of your loans.

But maybe you could spend just a minute or two talking to founders, right, who may tune in, hopefully will to learn more about this, this arcane, sometimes like high, highly like difficult world to sort of access.

There's tons of knowledge out there around vc.

There's tons of people out there that want to talk about seed and pre seed and Series A.

There aren't a lot of guys like Coromandel out there that are like banging down your door saying, hey, let me, let me help, help educate you on specialty finance and like, you know, alternative lending.

Yeah, no, and that's, that's right.

And there are a handful of folks that we sort of compete with here and there.

Right.

And you know, for the most part everyone's pretty good participants in the ecosystem.

We spend a lot of time with these early stage operators because we ourselves were early stage operators.

Right.

So everyone wants to retain as much of their business as, as they can without giving it up as much.

But you also want to be good and make calculated risks about, you know, creating a bigger pie and owning less of that bigger pie.

But you know, the reality is it's, it's still better than like owning much more of that smaller pie.

But we try and tell people, listen, that VCs are motivated and this is a knock against VCs, like generally motivated to give you more money.

Right.

Because with that comes more control.

Right.

And that, that money is permanent.

I get it.

Right.

And debt capital is not permanent.

So I, I understand that we're filling two different needs and there are a lot of VCs out there that will help people, you know, find service providers will be additive from finding additional investors in the future.

And you know finding key hires in order to help grow the business and get it not from 0 to 1 but 1 to 2 and 1 to 100.

So that is, I don't want to be critical, but there is a however here, however, they do want to own as much of your company as possible.

So we try and educate people on is let us be a tool in your tool belt.

Not only should you raise equity, you should use the debt to fund the balance sheet intensive parts of your business from us.

And candidly, you mentioned forward flows.

I was just on another podcast recently with someone who does this like does basically buys collateral.

So forward flows, people should do that too.

You want to look at this, you know, this holistic machine where you have multiple forms of, you know, capital that you're able to pull in as needed and as it suits you.

Right.

So with a forward flow, even though we don't do that, we're just senior secured lenders, you'll in a lot of cases be able to clip premiums up front, less so these days in the past.

But you could take those premiums, sell a loan that is $100 loan sell for 105.

Right.

You could take that extra $5 and put it towards being the haircut capital or the equity in our credit facility.

So you have reduced your enterprise value over a longer term horizon, but you have basically created equity out of thin air that five points.

And if we're giving you $90, you only need another five points of equity to go into supporting that credit facility to originate more loans.

So sure, I could tell everyone take out senior secured loan lines of credit from core mantle and that would be awesome.

But I would be derelict in my duties, you know, without recognizing the benefits of equity of forward flows.

And even in some respects is as you grow one of my clients, like say single, single points of failure.

Right.

Reducing single points of failure, maybe having another special purpose vehicle or spv, which is just another vehicle that you can, to use the term warehouse, you know, put, put other loans in.

Yeah.

And I think after the regional banking crisis a few years ago, people, people woke up to the fact that, wow, we need to maybe diversify our funding relationships.

There's lots of stories out there for folks after the GFC or any number of crises that have popped up that are sometimes short and episodic, but they happen right where funding lines were pulled or programmatic JVs changed overnight.

And it's like, whoa, we don't, we don't have a business unless we have, you know, funding.

And so yeah, I Think you speak to a very important point which I think is good for all of the industry and all of the originators out there that are growing specialized lending platforms is like, know your options, get educated, think about who are the right advisors to help you get into the marketplace.

Right.

We've helped some, but there's lots of really great people out there.

And just be aware of your options.

Right.

And, and you may need multiple tools in the tool belt.

Right.

As any carpenter would know.

Let's finish by talking about the, you know, the, the LP side of this.

Right.

So you look at a typical, like alternative allocation.

They may have a little bit of real estate, they may have a little bit of private credit, they may have some stuff on the growth side like venture and pe.

Right.

And PE is getting hammered.

Right.

In, in the last couple years because, oh, we're not returning capital.

They haven't had the, you know, liquidity events and they haven't returned as much money.

But that's going to pass.

Right?

Not making light of it, but on.

That point I heard awesome term months ago called deity.

So people using debt in order to create extension on the equity and.

Yeah.

And you're seeing all this creativity, Right.

That's the nature of Wall Street.

Right.

Secondaries.

Why have they emerged?

Because people need to give capital back.

Right.

Continuation funds.

I mean all this stuff.

I feel like retail is so.

Right.

There's so many different options.

But I want to talk about the private credit allocation in particular.

Right.

So I subscribe to the theory that we are going to see growth in private credit.

We are going to see growth in areas beyond just sponsor direct lending.

And I think one of the areas is going to be ABF or asset based lending.

Talk a little bit about your conversations with, with investors and when they're trying to figure out how do I marry private credit with this, am I going to get overlap?

Am I going to see some of the same exposures?

Right.

Because everybody wants to be diversified and everybody wants to, you know, not have this massive correlation when, you know, something happens.

But at the same time they want to grow and they want steady Eddy coupon and steady Eddy yield.

So what are you seeing and how, how do advisors and financial professionals really need to be thinking about how to build this allocation out?

Yeah.

So we are an income product.

So states like California are not awesome for us just because taxes are so high.

Yeah.

Texas and in Florida, places with no state income taxes are more favorable.

Yeah.

Yep, yep, yep, yep.

Exactly.

So this is if you have clients who want sort of above market.

You know, I say equity like returns, but for debt, like risk.

Like we're an awesome addition to a portfolio.

I don't really bump into a lot of people that have a ton of specialty finance.

There are some and even some investors in our fund that you'll have allocated to other specialty managers.

And that is definitely an easier sales cycle because they understand the process and in some cases, like truly dig into the memos, which is fun because you get to kind of geek out.

Right.

Like actually it's like, oh my God, like they know exactly what I'm talking about.

I'm going to use all the acronyms.

I'm gonna say warehouse a hundred times.

You know, all these sorts of things.

Yeah, but, yeah, but the reality is like I would say most people don't live and breathe this stuff day in and day out.

Sure.

And that's where especially from like my own perspective, it's.

And you, even as you and I just kind of riff, right.

Like having you pull myself out of the weeds to speak more higher level about the stuff and put it in more digestible fashions.

Yeah.

And just explaining to people exactly as we kind of discussed here.

Right.

Like there aren't people who are serving traditional small businesses needs, they're not serving consumers needs.

And there's this massive void that's created as a result.

So we are here to support part of an ecosystem with a massive addressable market to help these people who are attacking those voids and allowing them to provide liquidity where needed, which allows people to.

Basically, you look at three cores of the US Economy is with consumer spending and for people to go out and continue to spend money and buy goods.

And whether it's through retail installment contracts at checkout, which has now been kind of replaced in some respects by buy now, pay later.

Right.

Those sorts of things.

Or an auto loan.

Or people who are in some cases, like we've looked at deals and.

Or you have autos that are unencumbered now, but someone would otherwise have to turn to payday loans.

One of our clients and you know, basically said, hey, don't do that.

Like we'll make, make it a secured loan that you can tap the equity in your used car.

And it's exciting and intellectually stimulating a lot of innovation.

Yeah, yeah.

To sort of see these products and ultimately us build a finance them and us to get excited with LPs to say, Listen, like this is where we are plugging into the economy more generally.

This is how we think about risk.

This is what keeps Us at night and we encourage people to challenge us and not just sort of, you know, let us off the hook.

Right.

I was looking for a better term, but like, that's just the reality, right?

Like, yeah, if you don't understand something, we, we're not doing our job.

We should be educating people on this because it is such an exciting part of the market and we should be conveying that to people in a digestible fashion.

Yeah.

So in terms of LPs, the things I would say that work best is, you know, visuals.

So we're walking through that example earlier about how bad the world could get, you know, for us to still not lose money.

We are principal preservation focused lenders.

You could do payday loans or title loans and make a lot on interest.

Right.

Or merchant cash advance.

We don't do that.

That would keep me up at night.

I have two young kids and another one on the way.

I need to sleep.

Yeah, you do.

Especially my wife needs to sleep since one's on the way.

But I think emphasizing and banging our hand, you know, on the table, like showing people that were principal preservation first.

Because we're lenders, right?

Yeah.

The moment that you lose a dollar of principal, it doesn't matter the interest that you've generated because it's never going to fill that hole if you do.

If you lend money to a payday lender who is, you know, someone might deem your collateral to be unenforceable and that will evaporate your principal and when it made a lot of interest, but it's not going to fill that hole.

So I think not only going through the stuff we're doing, but being incredibly honest and forthright about things that we won't do.

Not just the stuff we do and why we're doing it, but also explaining how we think about portfolio construction, that's one thing that resonates in at least when we talk with LPs, they want to understand, hey, why are you doing this deal for in debt relief?

We do it because, you know, vast majority of the US if you don't qualify for bankruptcy, you're destined to make minimum payments into perpetuity until you ultimately break or borrow or earn your way out of your predicament.

Right.

But you have this subset of companies that actually gets hired by consumers to ultimately provide a good to the consumer to get them out of these situations, while also providing a creditor with a better situation than charging off that paper, selling it to a debt buyer at cents on the dollar.

Yeah, yeah.

Same reason why we don't do, you know, like mca, like, because we just don't think it's the risk that should be taking given the regulatory dynamics that exist.

But we see this massive void and maybe it's a function of like reflecting back on my childhood and how difficult it was to see my dad, you know, kind of, you know, scrape his way through to sort of making ends meet and realizing how neglected that part of small business lending is and facilitating liquidity for these operators who are filling that void and doing it in more of a. I don't want to use the word moral because it sounds like I'm beating up on the other people, but in a more sort of ethical manner.

Right.

Yeah.

You want them to grow out of your capital.

If everything went well, there's a period of time when they need you guys.

And if everything is working well, they're going to be able to drive down their cost of capital over time and eventually go to the ABS market, which is the securitization market, which is the lower cost of capital or potentially the bank market.

Right.

But you serve a vital need for these growing businesses, particularly when they can't access the banks and they can't access a rating agency because they don't have like gap audit yet.

Right.

And other reasons.

So this is super relevant point, last question.

The, you know, as you look at where you, you know, where you guys have come to now, right.

You talked about how you started the company pre Covid, and then you just said, we're just gonna really batten down the hatches.

We're going to be very, very careful.

And, you know, God willing, we're going to come out on the other end of this thing and we're going to be able to really go step on the gas.

But as an asset management firm, you.

You have to make business decisions.

You got to figure out when to hire, when do we try to scale up, when do we try to go after this particular market opportunity or win this deal?

So has it gotten any easier or do you feel like you've gotten wiser as you and Luke and Alex and your team have, have navigated building this business over the last, you know, four or five years?

I just love to have you reflect on that to, to wrap us up.

I honestly don't think it will ever get easy if I'm being completely transparent.

It's, you know, it's a grind.

Like you look at stuff like Pitchbook, where, you know, the managers who have less than $250 million comprise almost half of the market in Private credit, but they basically consume something like 3% of all the capital raised.

It's not easy.

And we're super fortunate, right?

And we have an awesome team and we're adding to that team because we see a massive opportunity.

Yeah.

But you know, I'd be lying if I said like, we knew, like we had it all figured out.

The reality is we're three guys who started a business and we've been super fortunate to surround ourselves with good sort of capital providers.

People have been, you know, helpful and who've done this before, who've saved us from some headaches and just trying to be thoughtful, ethical participants in the system.

Right.

So not turning things into knife fights, not being a weak hand like with our borrowers when things go boom in the night.

Right.

And just realizing that people are people.

And the same thing goes with LPs, right.

Like you mentioned it earlier, this is someone's retirement.

This is someone's life savings in some respects.

Yeah.

That isn't something that is lost upon us.

Right.

Like, not remotely the same reason.

Like, this is our life savings.

This is what we're building our futures around as well too.

And I don't think it's going to get easier and I don't think it should because that.

No, yeah.

And I agree.

Yeah, it shouldn't.

And I think that's one of the reasons I asked you the question is because it's very easy for us to watch the luminaries show up on TV and all that.

And it's all great.

And the questions are very soft, very soft.

You know, I'll be candid.

Like I want to have real conversations with operators in the first third of their life that are in the trench.

Right.

That are, that are building it and they're collecting it and they're recycling it and making this economy work for more than just, you know, a handful of, of, of private equity firms, for example.

Again, I think you guys are in it, right?

You're in that phase.

And that's why I thought this conversation was, was timely and relevant and, and hopefully people will find, you know, shed a lot of light on a lot of the things that go into making these credit decisions and investment decisions.

Yeah.

And listen, I would welcome anyone, you know, whether it's an LP or a specialty lender, anyone.

Even if I'm not making money, I'm happy to be a resource.

Right.

The reality is the more education, the more thoughtful people are in this ecosystem, the better off we'll be.

Instead of, you know, if you have bad actors Then you get stigma and some sort of tarnishing associated with it.

The same thing in terms of like, you know, tri color and some bizarre stuff.

Like, I know that people are going to have pause and that'll reflect on us and we're going to have to convince people why we're not susceptible to the same stuff.

So I think it's in everyone's best interest to do what you're doing, right?

Like challenging me, having me explain stuff, because that accretes to the overall ecosystem and allows people to understand what's really being done.

In some cases, when they're valuing in a manager, maybe what that manager isn't doing that they should be doing.

And if you, Mr.

Specialty Finance Lender, like if you're looking for a credit facility, even if, like you're past where we are, like in your life cycle, I'm happy to be a resource.

My team is happy to be a resource.

Same thing too.

Like, I had a call with an elp, hopefully, knock on wood, future LP this morning and they're just getting into these sorts of spaces.

I was like, listen, like, pick up the phone, call me.

I'm happy to walk you through one, it's a small world, so I can let you know if someone's a bad actor or not.

Not many out there, which is good, I think.

But two, helping you educate them on what they should be, you know, asking from a question perspective, getting from a diligence perspective, all these sorts of things.

Because I think the reality is everyone's just trying to get by, right?

Everyone's trying to make sure they're not making mistakes.

And, you know, I think people forget that, you know, as I just touched on earlier, like, this should never get easy and I don't think it will because even when we're being a steward for an LP's capital, that aside, like, that shouldn't be easy because that's someone's life savings in some respects, like, or someone's career at a larger company.

But when we're lending some money, if we're not there for them and we're not able to support them, and clearly we're going to make mistakes along the way.

Like, I'm not naive enough to think that we couldn't do things better.

We've certainly made some mistakes and could have done things better in hindsight.

But these are people with families.

They're hiring people that have families that are going out and buying homes that are trying to plan.

So I take that incredibly seriously because, you know, it's a lot riding on the line and this isn't just like one.

This isn't a paycheck for, for me and my team.

I guess what I'm saying.

Yeah, yeah.

So incredibly well put.

We could continue this conversation and perhaps we will in a future episode but for today I think we've given hopefully the folks that tuned in like an opportunity to really take a tour through what is happening at a growing, you know, alternative asset manager that's focused in this specialty finance and you know, growing area of private credit that we call asset based finance and asset backed finance.

So with that I want to thank you, Rob McGregor Managing Principal Co founder along with Alex Wu and Luke Powell of Core Mandel Capital for joining me today on asset backed.

Yeah.

Thank you for having me.

This is a lot of fun, Andres.

Yeah, definitely was.

I look forward to doing it again.

Yeah, likewise.

Be well.

You too.