Private Equity’s Essential Partner: Inside the World of Direct Lending with Greg Cashman

[00:00:00] Lloyd Metz: Get ready to peer behind the curtain of the private equity universe with each episode of best, but never final. Hi, I'm Lloyd Metz, joined by Doug McCormick and Sean Mooney. Together, we'll navigate the quarters of private equity, revealing the uncommon knowledge, challenges, successes, and lessons that drive the world of private equity and business forward.

[00:00:30] Let's go.

[00:00:36] Sean Mooney: It is great to be back with Doug and Lloyd.

[00:00:40] Lloyd Metz: Hey, Sean. Hey, Doug.

[00:00:42] Doug McCormick: How are you guys doing today?

[00:00:44] Sean Mooney: Doing well. The year as always is moving quickly. And so here we go. This is another really good episode guys, because not only do we have the one and only Doug and Lloyd, but we've got a special guest. So we'd like to welcome Greg Cashman, Senior Managing Director and Co-Head of Direct Lending with Golub. Greg, thanks for joining us.

[00:01:04] Greg Cashman: Great to be here, Sean. I'm looking forward to it.

[00:01:06] Sean Mooney: So I think all of us kind of go back in time a little bit to various degrees with Greg here. So we'll dispense of all the niceties before we really put Greg on the spot here.

[00:01:17] Lloyd Metz: Don't worry, Greg, we'll be nice. We'll be gentle.

[00:01:20] Sean Mooney: Really, Doug and Lloyd, we're here to really talk about what the spread over SOFR they think you need to be at for the next deal.

[00:01:28] But that'll be maybe a side conversation. One of the things that we thought about. Who would be really interesting guests to bring on as we kind of peel back the curtain on private equity. And one of the key, key constituents in the overall kind of health, wellness, and success of the industry have been the capital partners within the capital structure, the direct lenders that really kind of symbiotically go hand in hand with private equity as they're kind of building and growing companies.

[00:01:55] And the Golub story is a really interesting one, particularly as it Was one of the early, early direct lenders to focus on the private equity industry. It really is like, and kind of one of the heads of the Mount Rushmore on the people that support the industry and have done so for a long time. And Greg and I can tell some war stories in 2008 and all sorts of stuff like that.

[00:02:20] We'll do that in the episode, but maybe to kick things off, Greg, it would be nice to get a little bit of your background and kind of your take on the story of Golub and how it's come to be what it is.

[00:02:32] Greg Cashman: Some basics. So Lawrence Golub started Golub Capital, actually Golub Associates at the time in 1994. And I joined in 96 and we actually started as more of a private equity firm.

[00:02:45] We were doing small buyouts. Growth capital financings, some spicy mezzanine debt, and we were generalists. We did fine as a private equity firm. I think our fund at the time was top decile, but we were generalists and we saw that the industry was really changing and it was getting harder to find opportunities to buy things well and create value as generalists.

[00:03:13] And at the same time, we also found that particularly for the small end of the private equity, Environment. It was hard to find financing for buyouts. This was when there was a lot of regulation around banks. We went through the dot com bust and that resulted in a lot of traditional middle market lenders exiting the business.

[00:03:37] I still recall Lawrence and I were working on a take private transaction and we got a mezzanine financing proposal and we looked at it and we said, you know what, I'd rather do the mezz than the equity in this deal. So, We said, why not? We know a lot of the players in the industry. We have leverage and why don't we go after that market?

[00:04:00] So we really saw an opportunity to cater a sophisticated non bank financing product to the middle market. And one fun fact from that time is a company that we bought in 1998 is still a portfolio company as a lender. In our book today, three different private equity owners later.

[00:04:26] Sean Mooney: I never knew the story that you all started off in the PE business, so that's an interesting add to the lore.

[00:04:33] Lloyd Metz: I didn't know that either. Just curious, did you need to change or evolve your mindset as you pivoted from a private equity firm to a lender?

[00:04:46] Greg Cashman: We did. I mean, we knew how to do deals. And I think this is part of what's made us successful is we had a pretty good appreciation for the sorts of challenges that private equity firms were going through to get deals done.

[00:05:00] I think that was really beneficial. We also came into it maybe with a mindset of control, and we needed to learn how to sort of sit in the back seat, so to speak, and let the professionals drive the boat.

[00:05:15] Doug McCormick: Hey, Greg, as you think about that journey, I'm curious, there's two really powerful trends going on.

[00:05:19] The first is the private equity market's grown substantially. And the second is you've got this regulatory environment, which I think pushed these kinds of financings to institutions that are organized like you all, how do you kind of discern or do you between those two drivers as they've impacted your business?

[00:05:37] Greg Cashman: It's been a combination of things. The two things that have been incredible tailwinds for our growth, well, almost three, really. Has been the disappearance, if you will, of traditional commercial bank lending to the private equity space. That's number 1 and that's ongoing today and we see it not only in.

[00:06:02] Traditional commercial banks, which buy and hold loans on their balance sheets, but also investment banks, which. Underwrite and syndicate loans, they've both been hit. Secondly, just the growth in the overall private equity ecosystem was dramatically smaller when we started doing this in the early two thousands today.

[00:06:25] For example, one stat I do know we quote pretty frequently is that there's over a trillion dollars of unspent private equity commitments out there. So that's been a real driver for us. And the third, and this took a while, is The institutional investors, when we started, we raised most of our capital from high net worth individuals, family offices, folks that could really appreciate our story.

[00:06:54] Institutions were a little more wary because they didn't exactly know what to think. They didn't know whether we would go into a fixed income bucket, whether we would go into a private equity bucket, because We were debt. We were not liquid the way a liquid loan investor would be. So all those things combined have really driven the private credit markets.

[00:07:18] Sean Mooney: When you were making that kind of shift, I'm curious, how did you kind of say, no, we're going to focus on PE because your choices are like, Oh, we could create a bank and let's go buy a community bank. Or you could be Where you would focus on companies that aren't backed by private equity, so sponsorless, where you get more return, or you go all in on PE.

[00:07:41] What was the decision matrix?

[00:07:44] Greg Cashman: We didn't start out necessarily saying we wanted to not do unsponsored deals. In fact, we essentially had been doing some of that already. We did really want to focus primarily on the private equity market because when you think about it, private equity firms bring a lot to the table in terms of the first thing they bring is money.

[00:08:11] So they're coming to a deal and they're investing whatever they're going to invest at close. But we also know that they have a fund sitting behind them where if the company gets into trouble and needs some liquidity, they're likely to support it with additional capital. You don't really have that in most.

[00:08:28] Unsponsored deals. We saw the growth in the market. So just thinking about it from a strategic standpoint, we saw that it was a growing market and we wanted to be part of a growing market and private equity firms. And it's part of why we sort of transitioned out of private equity. They were beginning to become much more specialized.

[00:08:48] So they brought a tremendous amount of industry knowledge to the table. So if we were looking at a healthcare deal. We knew a little bit about healthcare. The private equity firm would have really deep domain expertise in healthcare or financial services or software or consumer products. You name the end market.

[00:09:10] And so it gave us a lot more confidence that when we were investing with them, even though we do all of our own diligence, they would do deeper diligence and have more expertise. And you combine that with the fact that they've got capital that's junior to us. Yeah. In our opinion for a pretty good debt investment.

[00:09:31] Sean Mooney: That makes a ton of sense. And I remember when I first started in PE and this is the first standalone fund. I was first within an investment banks firm, and then I went to a standalone firm and what we were doing is kind of like the full stack. We would do a buyout, we would do mezzanine, we would do preferred anywhere in between, and we would just keep on giving the business owner different term sheets until they picked one.

[00:09:55] And it worked really well at the beginning. It was just like, Oh, you want this? How this recap bio recap, but you just keep on doing it. And they're like 2002. It was like crushed it. It was really, really good. And then, you know, as the industry matured, it was like, okay, well, we have to make more choices.

[00:10:11] It's hard to be good at the whole stack. You're talking about the specialization. And I remember at one point we were even thinking with the mezzanine product that we had. Maybe we'll try to even do sponsor funding. And what we've realized was it's really hard to wanna kind of, we talked about being like have your hand on the wheel and then go along on the ride, and we just couldn't move as fast.

[00:10:34] We couldn't take one hat and move the other. How did you kind of manage that transition to saying, you know what, we had our hand on the wheel in the out world to now we're along for the ride, we're given fuel and we're supporting in a critical part of that ride, but just not front and center as much.

[00:10:49] Greg Cashman: We started principally doing mezzanine like it sounds like you did.

[00:10:53] That's what worked for our funding sources at the time with mezzanine. You did have a little bit more, I don't want to say control, but transparency or visibility. We typically had board seats or board observation rights. And our philosophy has always been before we even underwrite a deal, we underwrite a sponsor and we try to really understand how good they are, what they do, what's their track record.

[00:11:22] In different sectors and so to a certain extent, it's getting comfortable that they will do the right thing, but they will do a lot of diligence and they'll make the right decisions and we'll make our own call as to whether we think it's good debt investment. But that if they decide that they want to put their equity dollars behind a situation that it was in all likelihood, probably a deal we'd want to do.

[00:11:49] I frequently recall the days when we'd be working on a deal for months and towards the end, the sponsor would call us up and say, I got some bad news. We're going to step out of this process. We found some diligence we don't like, or we think that valuation has gone too far. And I always told them, I'm like, You know what?

[00:12:11] That's great. I mean, I'm sorry for you. I know you did a lot of work. We did a lot of work, but the fact that you have enough conviction to step out of a process, even though you have so much invested, just gives us a lot more confidence. The next time you bring me a deal that you're going to make the right call

[00:12:29] Lloyd Metz: with that example.

[00:12:31] Would you then. at Golub, stop pursuing financing that transaction, or would you continue with another branch or another tree? How does that inform your view of that actual opportunity, even though that sponsor stepped away? It's a

[00:12:48] Greg Cashman: tricky question. Depends a little bit on what they found and what they share about what they found.

[00:12:55] If it was a valuation issue, that's different than if they found something negative in diligence. And obviously we have to be really careful. If we're working on the same deal with multiple sponsors to keep the tree separate, but it would certainly weigh pretty heavily on our credit underwriting. For sure.

[00:13:14] Do you go through like a

[00:13:14] Sean Mooney: Sophie's Choice episode where you're like, I don't know,

[00:13:21] Lloyd Metz: I guess part of my question is coming from. How does your view of risk change because you're either Mez or maybe even Unitronch more senior up in the capital structure so that things that may be problematic for the equity might not be so problematic for you.

[00:13:39] Greg Cashman: I know what you're saying and a large proportion of the time if it's problematic for the equity, we're probably going to step out is sort of the answer. But we're enterprise value investors. We're not asset based lenders. We're not lending on the value of collateral per se. We're lending against the overall value of the business.

[00:13:59] So we look at loan to value on every deal. What percentage of the enterprise value are we lending against? And we think about not only what it is at close, but what might it be down the road if something bad happens. So if we see potential bidders starting to get nervous about what the real value of the business is, then that makes us nervous.

[00:14:25] Lloyd Metz: This episode is brought to you by HCI equity partners, a lower middle market, private equity firm focused on partnering with family and founder owned manufacturing service and distribution companies. ICV Partners, an innovative private equity firm supporting management teams of leading companies at the lower end of the middle market.

[00:14:47] And BluWave, the business builders network, connecting the most proactive business builders in the world with the best of the best service providers for critical, variable, on point and on time due diligence and value creation needs. Now, back to the episode.

[00:15:07] Sean Mooney: Greg, one of the things that I'm sure you look at and maybe further on in our conversation, I'd love to hear kind of what your scorecard is, what you're looking for in companies as PE firms bring deals to you.

[00:15:17] But as you think about partnering with PE, no doubt in today's age, there's the big component that involves and in some ways requires value creation. And so through the large number of PE firms that you're fortunate to have this kind of purge and view into, how is it that you are seeing PE firms today?

[00:15:39] Build value. What's kind of the approach of kind of the best in class right now as people are creating something versus maybe arbitraging in the years before.

[00:15:49] Greg Cashman: It varies from sponsor to sponsor and deal to deal, but it's one of the things that we focus on a diligence. What's their plan. What are they going to do with this business?

[00:15:59] Are they buying it because there's really strong organic growth? Are they buying it really as a platform for doing acquisitions? And within that, there can sort of be a couple of different flavors where you might have a residential services platform, and they're just doing lots of acquisitions, lots of small acquisitions.

[00:16:21] It's very cookie cutter, if you will, versus a business where there might be only two or three really good acquisition candidates and are those acquisitions designed to build scale so you can take costs out or expand into a new market or an adjacency. So understanding all that is pretty critical.

[00:16:43] Sometimes it's, they're buying an orphan division of a public company that wasn't getting a lot of attention or didn't have the right management team. It was always a little bit harder, candidly, to underwrite because you don't have the historical track record, per se, to sort of say, well, can they. Do what they think they can do.

[00:17:05] It really matters what that plan is and different plans have different implications in terms of the risk that we as lenders are taking. If it's just, Hey, this company has a great management team, has a great market position. It's growing like crazy. We're going to pay a big price and all we're going to do is more of the same.

[00:17:26] That's a pretty easy underwriting. If it's a, this company had some problems, we're going to replace management. We're going to fix X, Y, and Z. That's a lot harder.

[00:17:38] Sean Mooney: If you look at the mix of opportunities that come in today versus call it like 20 years ago, like let's go to the way back machine. How much today are still like, we're smart.

[00:17:47] We're going to buy low. We're going to sell high, which was a lot of the industry. Then it was still hard, but it was. Identifying arbitrage opportunities, which was an easy by any means back then. There's so much information asymmetry versus today. Whereas they're going to say, no, we're going to buy something and we're going to transform it.

[00:18:08] How would you kind of handicap that mix of products that come in today versus like, yep, it's common course direction. We're going to buy well, versus like, we're going to actually turn this moth into a butterfly or something.

[00:18:19] Greg Cashman: It's a really good question. It kind of gets to what is the value proposition for.

[00:18:25] Investors in private equity these days, it's definitely gotten way more competitive, I think, for private equity firms than it was maybe 20 years ago, notwithstanding the recent increase in interest rates, we went through a 10 year period plus 12 year period of essentially zero interest rates, which meant that financing was very cheap and made it a lot easier to invest in.

[00:18:50] As you said, buy low, sell high, even if you bought medium low and sold medium high, you still did pretty well by generating cash flow and paying down debt. I think today there's much more of a premium on knowing the industries, really being able to come in. Most of the firms we work with that are some of the larger firms.

[00:19:14] Have teams that are spending all their time trying to identify target areas to invest. And so they have like a deep investment thesis on we want to be in the data center management space and they know all the players. They've gone out and met with a lot of management teams. They know what they want to buy.

[00:19:39] They think they have what their plan is. That's very different from the early 2000s when. Joe manufacturer, who was a machinist who grew up and build a business and now is looking to retire and his son's not a viable option was coming to market. And you'd be like, okay, well, now I'm a aerospace expert or.

[00:20:04] Fire equipment specialist, whatever I think it's harder for private equity firms in this environment to find the. Uncut jam or the diamond in the rough and. Buy it good and sell it high. It's still doable, but I think it's a lot more institutionalized now.

[00:20:25] Lloyd Metz: Hey Greg. I wanna circle back to something that you mentioned earlier, which was underwriting the sponsor.

[00:20:32] How do you all go about that? Just from some of your comments? Sounds like you know some sponsors pretty well. How do you get that level of insight? How do you underwrite a sponsor? What's your internal research process like?

[00:20:45] Greg Cashman: We do a lot of things and if we can. We like to get track record information.

[00:20:51] Some sponsors will provide that. Some sponsors won't. We've been in the industry long enough and we track the deals we do. We track the deals we don't do or we tried to do. We know what happens to them. It is still a small market and as you guys well know, word travels fast if things go poorly. And if a sponsor does something heroic, you know about it, if the sponsor steps away from something, you know about it, but it's track record.

[00:21:20] It's how partnership oriented are they? Are they the kind of firm that shares information with you and is very transparent or. Do you feel like you're always having to dig, dig, dig to figure out what's really going on again, some of the industry expertise, but it's, it's definitely an art, not a science.

[00:21:42] We'll talk to other lenders too, and we're not proud if we haven't worked with a sponsor before, and we know that someone else has, we'll say, Hey, what do you guys think of XYZ firm? What's your experience been? We know you've done deals with them. Did they know what they're talking about? Did they share all the diligence with you?

[00:22:00] If they had problems, how did they handle it?

[00:22:04] Doug McCormick: Greg, I'm curious, it's a little bit of a two way street in terms of the relationship where you get to underwrite and you want to be able to piggyback with the same sponsor relationship in an ideal situation. And at the same time, I think they would expect you to show up to the party consistently.

[00:22:19] And so how do you manage that dynamic where like, you like the sponsor, it's a good relationship. This isn't a great fit for us, but at the same time, you're trying to be supportive and constructive. How do you manage that dynamic?

[00:22:30] Greg Cashman: It's probably one of the biggest challenges. Our mission statement at Golub is to be the best at sponsor finance, but that doesn't mean to say yes all the time.

[00:22:39] And I think our reputation is that we tend to focus on the cleaner credits as opposed to things that have a little bit more of a story or have some hair on them. The key thing is you have to build the track record of closing and doing what you say you're going to do. You guys know this. Thanks. Some firms only do a handful of deals a year, and you can't afford to have a lender that you're relying upon fall down late in the process.

[00:23:06] So, being very dependable and reliable and standing behind your term sheets is critical. We focus on, if we're going to say no, the most important thing is to say no quickly. It's to say right up front. Hey, this looks great. I see why you're excited about it from an equity standpoint, but it doesn't really fit what we do from a debt standpoint, and we don't want to get in your way.

[00:23:31] So we're going to step out. But there's no doubt that if you say that too many times, you might not get the next call on the juicy deal. So it's definitely a line that we have to walk and walk carefully. And to a certain extent, it's. Providing that level of certainty, but it's also trying to go above and beyond on the ones you do like, whether it's coming up with creative financing solutions or being really good partner in a tough situation, that's where you sort of make it up.

[00:24:05] Sean Mooney: And Greg, how do you think about building your portfolio of loans across the sponsor universe? Are you looking to kind of spread the chips or build deeper relationships with fewer or? What's kind of that mosaic look like as you think about your share of this kind of dynamic industry?

[00:24:24] Greg Cashman: So we've closed deals with close to 400 different sponsors over time.

[00:24:29] And I want to say we've closed more than one deal with well over 250 different sponsors, like any business, you don't want to have a concentration. We all know that concentrations aren't good for value. So we like to have a broad base of sponsors. And But really comes down to, is there a good overlap in the sorts of businesses they like to buy versus what we like to finance?

[00:24:57] So we've had really good success with a lot of firms. We're very deep in software, which Sean, you would know. I think we've closed over 800 different financings for software deals . And so we have very deep domain expertise there. So obviously we cover all of the. Brand name software investors, we do healthcare and healthcare services.

[00:25:23] So we cover the healthcare sponsors, but that's a trickier industry for us, because I think there's a wider dispersion of what's a good credit within that sector. We do restaurants, which a lot of lenders would never do and have a stated policy. And we have a good track record there. There aren't that many private equity firms that do restaurants, so we cover them.

[00:25:47] It's getting that group of sponsors that we like, covering them intensely, and then trying to see everything that they see and sort of picking the best. That's kind of how we approach it. We're big enough now we've got close to 400 different portfolio companies. So any one deal doesn't really move the needle from a diversification standpoint.

[00:26:10] Doug McCormick: Great. How do you think about participation in the equity story? So when I think of software, I'm not a software guy, but it feels like there's tremendous upside. It goes bad. It goes really bad, but when it goes well, it kind of goes really well. So, and so like, would you consider co invest in 5 percent of the things you do?

[00:26:28] 15 percent of the things you do? Is that an important part of the alignment?

[00:26:31] Greg Cashman: We like to do equity co invest frequently. It's a struggle to get it. We make the pitch that. It does increase the alignment of interest. So I'd say we would like to do an equity co invest in virtually every deal we do.

[00:26:48] Practically speaking, it's probably a significant minority at this point. Private equity firms are in business to make fees and us doing an equity co invest is taking a little bit of food off their plates, so to speak. It's not always the easiest story, but we've had some really nice wins. A couple of strategically placed bets here and there.

[00:27:11] Lloyd Metz: Greg, private equity firms are in the business to generate positive returns for their investors and generate carry for the partners. It's not about the fees. Fair enough. But I do have a follow up question is tell us a little bit more about how a sponsor gets on Golub's good side, right? You've mentioned a couple of times sponsors that we like, how do you get on that list?

[00:27:37] Greg Cashman: We evaluate every sponsor that wants to show us a deal. I don't know that there's a Naughty list in a good list, but we're open to all firms.

[00:27:46] Sean Mooney: How do you view, like, there's going to be certain firms that are high velocity. They do lots and lots of deals. And then there's some that are more of like the few, but like when they get it, they're going to go after it.

[00:27:59] And that's how Greg and I got to know each other back in oh eight. I was with a PE firm where we were lower volume, but like when we saw something, it's like, we're going to get it. That's our deal. And maybe it's just a quick aside story. Like when we first did a deal together. 2008 and for those of you don't who weren't around or don't remember what happened 2008 the entire financial system was imploding and this was us.

[00:28:27] Everyone was running for the hills and into golf credit they were i think. The only lender that was open for business because you all were really thoughtful about diversifying your capital streams. Everyone else is like lines of credit from wells fargo was shut down. And you had all these other things were like, oh, my Golub's open.

[00:28:45] And we came across this business that it was going to be a double digit, multiple business in 2008 when the sky is falling. And we didn't know if there was going to be cash in the ATMs. And so, but to your credit, you all stepped up for that, but that was also, I think the year, any brown hair I had left went totally gray, but, but we, we did it and you did it, but you wouldn't think of us like a summit.

[00:29:08] Where we're going to do tons of deals. So how do you even think about that where there's going to be some shops that are going to be kind of more of the specialist boutiques and then others that are going to really generate quite a bit of flow.

[00:29:20] Greg Cashman: We like both. I'll tell you that this year it's even higher, probably anywhere from 50 to 70 percent of the deals we do each year are with existing portfolio companies.

[00:29:34] The import of that is that. We view every deal as not just that transaction, but as an opportunity for continuing to grow and deploy assets with that company. And so it's really important for us. We're core middle market investors. Our average EBITDA bar right now is Call it in the mid 70 millions, but we do lots of deals with companies that are 15, 20, 25 million of EBITDA.

[00:30:04] And what we like about those businesses is I mentioned the company that we owned way back in 1998, and we're still a lender to the business. If we pick the right businesses and the right sponsors, we can continue to deploy capital for multiple different owners. And that's particularly relevant as the private equity industry has evolved to one where the exit for a lot of businesses is not to a strategic buyer, it's to another private equity firm.

[00:30:35] And there's almost. Like this sort of feeder system, if you will, where mid market sponsors will buy things and they might even think about their exit as being to a larger private equity firm. So, for us, being able to be that lender early on is important and it helps to really drive our strategy. We like the high volume shops, obviously.

[00:30:59] They give us a lot of flow, but we certainly haven't walked away from that.

[00:31:05] Sean Mooney: I'd be curious, and particularly for people who are newer to the industry, can you talk a little bit about how a direct lender makes money and how your kind of risk versus return profile is different than the equity? And that might inform why you're able to say yes to some and no to others.

[00:31:27] There's a different mindset. You have to come in as a lender given that dynamic.

[00:31:30] Greg Cashman: We make money pretty simply. We make money by not losing money. We don't have any upside on the debt set aside a small equity co invest, which might be less than 1 or 2 percent of our loan size. So we don't have any upside.

[00:31:46] We only have downside. We raise equity capital, we raise debt capital and make investments with us. And our whole strategy is triggered around keeping our defaults low and keeping our losses low. So unlike the equity, we can't make up for a loss with a big gain somewhere else in the portfolio. Having said that, I think lenders and private equity are generally aligned because most private equity firms don't have a stated strategy of, oh, well, we're going to do 10 deals and we're going to lose money on three, but on three other ones, we're going to make 5x.

[00:32:23] Some do, there are definitely firms that have that kind of high beta strategy, but Generally, they don't want that from a track record standpoint. So our interests are generally aligned with private equity firms, but not always. There are definitely times where we look at a situation. The most classic one that comes up for us is customer concentration all the time.

[00:32:45] You have a growing business, but it has one big customer that's 30 or 40 percent of revenue. And the sponsor looks at that and says, well, we're going to diversify and we're going to diversify. Add other customers, and that's how we're going to create value. And we have to look at the downside of what happens if you lose that one customer.

[00:33:06] So that's a situation where maybe the alignment of interests aren't the same. So that's why we like to focus on PE firms that have, I frequently do the baseball analogy and say, private equity firms that hit singles and doubles instead of always swinging for the fences. That's what's important to us.

[00:33:26] Sean Mooney: Yes, Lloyd knows. I love a good metaphor. I've spoken before about my billy ball, a metaphor of private equity versus venture capital. So we won't take everyone down that rabbit hole again, but you just lightened up my heart, Craig, by, by referencing that and just made me feel good about the world. It's painful to talk about baseball

[00:33:44] Greg Cashman: based on this

[00:33:45] Lloyd Metz: past week.

[00:33:50] I was hoping it wouldn't go there, but you New Yorkers, you don't have to be a Yankees fan to appreciate how special that Dodgers team is.

[00:34:01] Sean Mooney: So I'd like to go back to one of the things that Lloyd talked about being on the good list. And part of that is like, how should a sponsor in a perfect world. bring you a deal to get it quickly underwritten and effectively underwritten with more confidence.

[00:34:20] Like what if you could say in a perfect world I wish I had this because then that will flow right through the way that we do things. And we can get back to you with a much better and more solid recommendation so that that sponsor can really go after it with more confidence as well.

[00:34:36] Greg Cashman: It's surprisingly simple.

[00:34:38] I mean, the reality is, is that given the way the whole sell side ecosystem is developed, the investment banks that are selling a company generally develop a pretty deep and complete data room. But that's the starting point. I think we all know. That there's potentially some spin on the materials that you find, or they're not always as comprehensive as you would like.

[00:35:05] So, in terms of our diligence, we're always looking for a detailed quality of earnings report. So, as a reformed accountant, we all know that financial statements don't always tell the full story in terms of how reliable or repeatable those results are. So, uh, quality of earnings report, we like to see a market study.

[00:35:28] Some firms, as I recall, Sean, your firm did their own market work, and we had comfort with that based on your expertise in the end markets you focused on. We like to see customer calls, a lot of detailed historical financial information, understanding really where a business is making its money and how repeatable that is.

[00:35:50] Something that sometimes gets a little overlooked and is harder to hone in on is just the quality of a company's information systems and management systems. What reports are management getting? How do they use them? How does information flow around a company? That's a harder one. You know, their processes, but then beyond all that, which is sort of table stakes is just again, coming back to a conversation we had earlier.

[00:36:20] It's what's their investment thesis. Why do they like it? What do they think could go wrong? What's their exit? We sometimes are as informed if not better informed on some of those topics because we might be seeing a deal from multiple different sponsors and that gives us a perhaps a broader view or we've invested in a certain sector before and we've learned a lot from that.

[00:36:45] So we close probably 150 financings a year. I don't think there's any private equity firm that closes that many deals in a year. So it does give us a pretty broad set of information to incorporate and think about risk. It's transparency. It's not jamming us at the last minute and saying, here's. All of our third party work, let us know if you're interested by Monday.

[00:37:11] We've all seen that the way the market works now is the timeline for most of these deals is dramatically compressed and we like to have access to management so we can hear directly from management's point of view in terms of how they think about the business so that we can filter that through our own internal filter, if you will.

[00:37:32] Like how important in that end is

[00:37:33] Sean Mooney: like getting a seat at the management meeting?

[00:37:36] Greg Cashman: I'd say that there are less than 10%. Of deals a year where we haven't been able to sit down with management. Now it's frequently virtual, but sit down with management and really pick their brain about how the business works and ask them questions.

[00:37:54] Sean Mooney: Is there kind of almost like a checklist of this is a gala deal in terms of almost like informing what types of deals should come through, like your scorecard? Like we want to see you, like you mentioned customer concentration is one moment. Are there other things you say, like, these are a gala deal, like where we know this is going to be our kind of deal.

[00:38:11] Greg Cashman: Over 20 years, if you talk to anyone that works at Golub, one of the things you'll hear is that we are pretty hidebound when it comes to process. We've developed our underwriting templates because we got to leverage ourselves, right? We've got over 200 investment professionals now, so we've developed and refined over 20 plus years.

[00:38:34] All of our pre screen and our screening materials, they have lots of checklists. A lot of it is common sense. In terms of our fit, we stay away from businesses that are commodity like have volatile margins. We don't do any oil and gas. We did one oil and gas deal once where we closed it two times leverage and we're like, this one's safe.

[00:38:59] And like a year later we were 12 times leverage. So that was our one experiment and it definitely taught us a lesson. We stay away from fads. Again, that gets back to like a way in which. We might not have an alignment as a lender with a private equity firm where you might see some sort of consumer product.

[00:39:20] That's really gotten a lot of quick acceptance and grown really rapidly. But we might look at it and say, gee, you know, is that really sustainable? Won't other competitors come in and compete? So anything that has any sort of faddish element to it. We just want boring recession, resistant, resilient, non cyclical.

[00:39:42] Recurring revenue businesses with no customer concentration.

[00:39:48] Sean Mooney: So you think about like some of the things that Doug's firm is doing, where they're going to maybe start smaller and then build up through consolidation strategies. How do you kind of underwrite that? And how do you think about like, we're going to start here, but then have capital to go the whole run.

[00:40:04] Greg Cashman: One of the things that's a big difference versus when we all got into the business is the proliferation of, What are called these delayed draw term loan facilities, DDTLs in another life, they were called acquisition lines. They're a pretty common feature of most financings these days where there's any sort of acquisition plan.

[00:40:26] And so those are available subject to typically a leverage test and no events of default and other conditions. I look at those and I think that they're best reserved for those situations where The acquisitions are going to be very consistent and within a very narrow industry niche. You're not worrying about, oh, this is a consumer product business, and now they're going to open a car wash or something like that.

[00:40:56] It's going to be consistently used. So, as I said, we like small businesses that have the opportunity for growth. Small businesses sometimes are more fragile. They have more person risk. There's a little more execution risk. That's one area where we're very careful in terms of understanding. All right, you're going to buy something small and build it up.

[00:41:19] What's the background of the team? We've had situations where you've had businesses that have pursued a consolidation strategy. And unfortunately, the management team that was really good when they were 10 million of EBITDA really just doesn't have the skill set to run a 50 million EBITDA business and they've run into problems.

[00:41:38] So we're very careful in that

[00:41:40] Doug McCormick: space. As the equity guy on that one, I would agree with you in many cases. I think we think about those consolidation strategies as often appropriate to over equitize upfront. If you end up executing well, you're going to get to the right leverage point anyway, and you can do it at a point where it's cheaper and more underwritable and you don't end up with more equity in the deal.

[00:42:01] You just end up with a little bit longer duration. And those early days are critical.

[00:42:06] Greg Cashman: If you were to bring us a deal and we couldn't get comfortable based on size or whatever, we would say you don't want to that kind of financial pressure on a business to have a loan that you can't support. There are definitely, I mean, it just gets to the broader topic of you want to capitalize a business in such a way that you have room for making mistakes along the way.

[00:42:31] Doug McCormick: Yeah. And that's the hard one, right? The market's gotten so competitive. It's like you're either pricing risk or you're pricing way upside in my mindset. You got to look at a lot of things to find your angle.

[00:42:43] Sean Mooney: Maybe with that in mind, Greg, now to set the stage here on this question, Lloyd, Doug, and I have never done a bad deal, but there's other firms that have.

[00:42:55] And so when you're in one of those situations where it's not going is smoothly. We'll say it's underperforming versus full potential. So you have a company that's underperforming. How should a PE firm and borrowers really think about working with their lenders when things aren't going right?

[00:43:17] Greg Cashman: It really comes down to trust and transparency.

[00:43:21] There is sometimes an inclination on the part of the owners of the business to maybe hide bad news because we'll fix it and they'll never know. Okay. That sort of thing, but for us, in our experience, we have a lot more confidence and trust in the sponsor to fix a problem if they're being open and transparent with us.

[00:43:47] So, the earlier we know about problems, the more we trust the sponsor that we know the full picture. As opposed to wondering what we don't know, I tell everyone it's like, if there's a problem, let us know and we'll work with you on it. The more we understand, that's our argument to when we do deep diligence, sometimes sponsors like, gosh, you're asking a lot of questions.

[00:44:12] It's because we want to know as much as we can about the business so that we can be prepared if there's a problem and to know. Whether we think it's in our own mind, it's something fixable that we can work with or not. So providing access to management. A lot of times it's a hard balance, right? If the management team is going through something that's not going well, the last thing you want to do is distract them with a lot of meetings with lenders.

[00:44:40] And I get that we all get that, but there's a good balance there in terms of sharing of time. I think most lenders. know that they're in a relationship business. We don't do any one deal with a sponsor thinking this is the only deal we're going to do with the sponsor. We want to do multiple deals. And so we're going to be commercial and reasonable and try to find a solution.

[00:45:03] So, but it does come down to trust.

[00:45:06] Lloyd Metz: You guys see hundreds and hundreds of companies in your portfolio. You do a hundred, 150 a year. It sounds like in terms of financings and you track more companies than most, any one of your sponsors. Does themselves, right? Does that give the Golub teams inside a perspective that might help that sponsor who is, let's just say it's my deal and.

[00:45:34] Golub is the lender to the company. Can that Golub professional share insights? It's like, Hey Lloyd, we've seen this picture before. This is what you're doing wrong. Or you might want to consider this, or you might want to hire this person, or you might want to, right? Because you've seen a lot more than maybe I've seen.

[00:45:50] I may have done 20 deals, but y'all have got 400, right? Does that give you some insight and information that you can share with your sponsor clients?

[00:45:59] Greg Cashman: Sometimes, because these days, Our access to information and management teams is a little more limited than say it was 20 years ago.

[00:46:11] We do track metrics across all of our different industry segments, so we can sort of look at those metrics, and we certainly will share that with the sponsor and say, your customer acquisition costs are way out of whack.

[00:46:27] What's going on? Is it you need to replace your head of sales? Is it a sales issue? You have much higher employee turnover. What's going on there? Maybe you need to look at your benefits programs or training or whatever. We definitely try to share what we can, obviously, within the bounds of confidentiality.

[00:46:46] Yeah, we like to think that. We're smart business people in addition to just being lenders. So we absolutely try to add value where we can. That's true on the upfront investment decision too. I mean, there are certain segments. If you lend to one company and it kind of gets out. Sometimes you wind up generating three or four transactions from that because people know that you've gotten comfortable and underwritten the space and then it makes you kind of an expert.

[00:47:15] And so we also try to bring that value to bear on the investment decision too.

[00:47:22] Sean Mooney: That's really helpful in terms of maybe bringing this conversation from kind of where it came from And kind of how it's developed. I'd love to get your perspective on what is the state of the capital markets in the private equity world right now?

[00:47:41] And where do you see it kind of going into next year, 2025?

[00:47:46] Greg Cashman: It's been a wild ride. We went from COVID, which obviously was a real trial by fire for investors and lenders alike. And We came out and then 2021 was just an absolute blowout in terms of M and a, it was the biggest year ever. Then we hit 2022 with everything that went on and that sort of shut down the syndicated markets and really fueled a pretty significant growth or acceleration, if you will, in the private credit markets.

[00:48:22] So right now, what I tell you is the syndicated markets for all these hundred million of EBITDA businesses and up, it's wide open. I mean, there's lots of available capital and not enough deals, to be honest, to meet the appetite for the investors that play in syndicated loans. There's plenty of private capital available.

[00:48:44] There's been a lot of interest in the space and a lot of capital that has flowed into the private credit space. So there's not a lack of availability of capital right now, and the rates which shot up in 2022 and 2023 have moderated due to sort of lack of new m and a and due to some of the capital coming in.

[00:49:08] So base rates are still on the high end, as you guys know, but. We appear to be in a rate cutting cycle now. So depending on what happens, I think the issue is not availability of debt capital at this point. It's sponsors who bought businesses. Back in 2021, or maybe even prior to coded deciding that valuations have gotten back to a point where they want to sell.

[00:49:36] We saw a pickup this year kind of slowed down a little bit, but we definitely see things starting to trend that way. And I think next year 2025 could be a lot like 2021. let's go.

[00:49:49] Sean Mooney: Don't we all hope this is what I like hearing here. This is good. Thank you, Greg. That's exactly what we're seeing when we look at our data at BluWave here is the economy is pretty good.

[00:50:01] The unemployment going up is actually better for the economy. It's still in that healthy range. You get through some of the geopolitical stuff, the elections going through in 24. You take that emotional burden off of everyone's shoulders. You have an industry that has to transact. It just has to. There's too much at stake for it not to.

[00:50:20] And then if you get into, The new normal, everything suggests that it should be a good year next year, save the non zero risk of World War III. I think we're good to go.

[00:50:31] Greg Cashman: Yeah, no, I think, I agree with all that.

[00:50:34] Sean Mooney: I think with that we've got some really good, positive, and I wouldn't say hopeful news. I think it will happen if we can kind of keep things on track as they are progressing right now.

[00:50:46] And Golub is ready to support.

[00:50:48] Greg Cashman: Yeah. If you guys have the deals, we have the money.

[00:50:53] Sean Mooney: All right.

[00:50:54] Lloyd Metz: Thanks a lot, Greg.

[00:50:55] Doug McCormick: Thanks, Greg. Appreciate your time.

[00:50:57] Greg Cashman: Great to talk to you. I really appreciate it.

[00:51:01] Doug McCormick: A special thanks to HCI Equity Partners, a lower middle market, private equity firm focused on driving transformational growth through consolidation strategies by partnering with family and founder owned manufacturing.

[00:51:13] Services and distribution companies. Learn more at hciequity. com ICV partners, an innovative lower middle market, private equity firm, supporting management teams of leading companies at the lower end of the middle market. Learn more about ICV at icvpartners. com. And finally, BluWave, the business builders network connecting the most proactive business builders in the world with the best of the best service providers for critical, variable, on point, and on time due diligence and value creation needs.

[00:51:48] Learn more about BluWave at BluWave. net. For further information on HCI, ICV, and BluWave, and relevant topics discussed here in the episode, visit Please see the episode notes or links.

[00:52:01] Sean Mooney: The views and opinions expressed in this program are those of the individuals presenting and do not necessarily reflect the views or positions of any other persons or entities, including those referenced herein.

Join Doug McCormick from Oridian Capital Partners, Lloyd Metz from ICV Partners, and Sean Mooney from BluWave as they explore timely private equity topics and offer their seasoned perspectives on crucial areas of focus within the industry. Gain valuable insights from these industry experts in this engaging podcast tailored for PE professionals.