The Booming Private Credit Market, With Jamie Shulman

As the private credit market continues to grow, emerging managers are finding success in unique niches across the credit landscape.

Jamie Shulman, founder and fund manager at Meriwether Group Capital, joins the show to discuss where the best value can be found in 2023’s private credit market.

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Episode Highlights

An overview of Meriwether Group Capital, and the unique niche that the company serves in the private credit market.
An update on the fund’s performance, one year after its launch.
Insights on the private credit market, and why its supply-demand dynamic is a structural trend that encourages pricing power for lenders.
Jamie’s outlook for private credit in the next twelve months and beyond.
How viewers and listeners can learn more about Meriwether Group Capital and its fund by registering for the upcoming Alts Expo event.

Today’s Guest: Jamie Shulman, Meriwether Group Capital

About The Alternative Investment Podcast

The Alternative Investment Podcast is a leading voice in the alternatives industry, covering private equity, venture capital, and real estate. Host Andy Hagans interviews asset managers, family offices, and industry thought leaders, as they discuss the most effective strategies to grow generational wealth.

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Show Transcript

Andy: Welcome to the show. I’m Andy Hagans, and today we’re talking about the private credit market. Very hot topic here in 2023, for family offices, for high-net-worth investors. Joining me is Jamie Shulman, founder and fund manager at Meriwether Group Capital. Jamie, welcome back to the show.

Jamie: Andy, great to be here. Thanks for having me on again.

Andy: Yeah, in our prior episode, if our listeners, you know, open up your iTunes app or Spotify, check our back catalog, we discussed Meriweather Group Capital, and, you know, the fund. But Jamie, since that episode, which was, like, six months ago, our audience has grown substantially. We rebranded, we have a new YouTube channel that’s grown quite a bit. So I think a lot of our listeners and viewers aren’t yet familiar with your fund. So, could you give us a brief introduction to the fund, and your unique niche?

Jamie: Sure. Happy to. So, just a quick background on myself. I had been in commercial banking, mostly in the Pacific Northwest, for my entire career, so, 25-plus years. Mostly in the commercial lending space, working with small to medium-sized businesses. I just kind of observed over those years, really, what I thought to be an underserved niche of businesses needing access to capital. It was kind of on the periphery of what banks like to do. And, so, I decided to find a couple like-minded people who shared a similar view, and we decided to put together a private lending business focused just on that. So, we work with businesses that are typically existing entities, that are typically profitable, and EBITDA positive, and they’re just looking to generally grow, or maybe take on an acquisition, and we help with that kind of financing.

Banks typically avoid these kinds of things because the underlying business might be growing too fast for them, or they’re just bound by their own regulations and restrictions, and we’ll kind of talk about maybe the industry overall in, here in a little bit. So, a typical business, for us, needs permanent working capital, growth capital, or acquisition debt. And we typically come in and fill, really, a bridge-type need. So, we’re not here to be the forever lender. We’re here to typically help businesses for a couple years as they’re growing. And then typically, we’re repaid by either a refinance of the balance sheet by a more senior lender, or maybe an equity raise or even sale company. And so, we have kind of a specific niche that we fill. Unlike other, or more traditional mezzanine lenders, or kind of venture debt lenders, we stay definitely on the small side.

So, our target lending size is under $5 million. Our average loan on the books today is about a million and a half. And so, within that space, and kind of, these are, again, commercial loans, not commercial real estate loans, there’s just not a lot of us doing this kind of space, it’s a little hard to do it really efficiently, and so, we’ve carved out a nice little niche for us. And, you know, small businesses are ones I’ve worked with for a couple decades now. I really love that space, working with founders, and, you know, that’s kind of our mission and our target.

Andy: And so, Jamie, what’s so interesting to me, and I think you’re the first private credit guy I’ve had on the show, I think, you know. But it was on my radar, and then after that, it was like, seemed like it was everywhere. So, I think you’re a little ahead of the curve, or your timing is obviously very good. But an interesting thing that you said is, you know, that some of the loans that you’re doing through your fund, they just don’t fit into a bank’s mandate, or their structure, their system, their rules, internal rules. But at the same time, it sounds to me like, if I can use a baseball analogy, you’re just waiting for fat pitches. Like, you don’t need to go chasing…you don’t need to, like, chase deals or anything like that. You can almost cherry-pick deals that have a very good risk/reward ratio for you guys.

Jamie: Yeah, absolutely. I mean, we’re working with businesses that are making money. These are definitely not, or typically not startups, or kind of, pre-profit, pre-revenue companies. It’s already a proven concept. The public has said yes to these kinds of companies, they’re generating positive cash flow, and they’re just looking to grow a little bit faster. And when I say grow, they’re looking to maybe expand a client relationship, or get into a new geography, take on a new product, something like that. And, you know, having worked in a highly-regulated industry my entire career, I get it. I mean, banks like to see businesses that have kind of incremental growth year over year, not significant growth year over year. And that bank, makes banks nervous, but that doesn’t mean that it’s a bad borrower. It just means that someone needs to spend a little bit more time and attention with these kinds of companies. And of course they need to get paid for the risk too, and banks generally are set up with a very finite set of kind of rules and regulations and boundaries, both from a credit and pricing perspective, so it’s really hard to go kind of outside the box, and that’s exactly what we’re set up to do.

Andy: Understood. Let me ask you, within private credit, I mean, it all… You know, when you compare it to, like, bonds or fixed income, it’s all sort of, like, “high-risk,” right? Or high yield, or however you want… But it’s not really high-risk. You know, it doesn’t need to be, at least, right? Like, if you look at the default rate, or, you know, some of these other metrics, with many, you know, it’s not all one thing is my point, right? Like, high-yield bonds aren’t all one thing. You know, there’s a huge spectrum of risk even within high-yield bonds. So, even if I compared private credit to high-yield bonds, there’s a huge spectrum there. Where would you say your fund is in that spectrum? Is it more towards the conservative end, or is it in the middle?

Jamie: Yeah. We are definitely a more conservative lender, in that, you know, first of all, we’re not doing kind of, you know, pure venture debt, or venture equity, which is, you know, in these kinds of entities, you’re making an equity, not a debt investment. And you’re making kind of a bet. You know, I hear, “On average, we want one in every 20 deals to work out.” Well, in our world, we want 20 out of 20 deals to work out. So, we don’t take kind of undue credit risk. And we dig in pretty deep, you know, doing a financial review, and then spending time with the founder, their management team, and really getting to know them, and ensuring that we’re gonna get paid back. We don’t go into these thinking we’re only gonna be right, you know, half the time or three quarters of the time. You know, we need to be right, you know, basically 99.5% of the time to make this work out well for us.

And so, you know, we do take the underwriting very seriously, and really think hard about how is the underlying business going to perform in light of, you know, a recession or a pandemic or, you know, these kinds of issues and things that could occur. And so we stay a little bit more conservative. At the same time, we do, as a private lender, can apply a degree of kind of “common-sense lending” the banks sometimes have a hard time doing because of their restrictions. And so, when you kind of layer that on top, and then you can really price to risk, it makes it attractive for, you know, ourselves and our investors, and it still makes good sense for our borrowers.

Andy: Yeah, I mean, as an investor, this is just my personal opinion. Okay, I’m not speaking for Jamie here, but to me, the thing with private credit, and especially right now, like, at this moment, this past year, to me, it feels like it’s a low to mid-risk product that’s paying you as if it were a high-risk product. And that’s a big, broad statement, you know, but that’s…

Jamie: Yeah. So, you can speak for me in that regard, because you are exactly right. You know, we do, just anecdotally, I wish I could, maybe better metrics on this, but as I think about a year ago at this time versus today, kind of what are we seeing, is maybe one way to answer that from a data point perspective. So, we have a goal of doing basically one loan a month. We’re not a high-volume shop. We’re really picky and choosy. We want to know our borrowers really well. We’re not doing…you know, this isn’t a portfolio of student loans or credit cards or, you know, thousands of loans. We know every single one of our borrowers. So, we’re really careful about who we choose to do business with. And so, for every one loan that we end up doing, a year ago at this time, we were probably looking at maybe 10 per month.

Today, that number is more than double. And, you know, there’s, I think there’s a few reasons for that as we kind of talk about how I view maybe the broader industry, and kind of credit globally, but we’re seeing a really high volume of demand right now, and that helps us, again, be really picky and choosy about what we do. We get priced, you know, we’re priced well. And so I think that mitigates a lot of risk that can go into, you know, lending business. It does…you know, we are in the risk management business, for sure.

Andy: Yep. So I’m thinking risk/reward, if I now have, you know, the fund was already successful, and was already, you know, you were already raising money, and investors were happy at the previous risk/reward, you know, from a year ago or six months ago. But now, when you have double the number of leads coming in from the, you know, from the business side, it’s almost like you can go lower on the risk side of risk/reward, because you can cherry pick or be stricter with underwriting or however you want to phrase that. But then also you have pricing power, because that’s a sign to me that this is…there’s a very big mismatch between supply and demand for private credit loans, so then it gives you pricing power, so there’s more on the reward side too.

And so that’s, it feels to me a little bit like that’s what’s happened in the private credit market, where it almost doesn’t follow, like, the efficient frontier theory or whatever. But, I mean, maybe we’ll kind of get into that, because, to your point, the loans. You know, this is what I appreciate about you and your firm. You know what you wanna do, you know the businesses that you wanna help, that you’ve worked with for years and that you’re passionate about. And so you’re not just, you know, running your fund trying to maximize, like, every dollar and cent profit. It’s more like you’re willing to serve this market, this size of business, and there’s a whole huge number of institutions that are just like, “we can’t play there,” or “we don’t wanna play there because we don’t think there’s enough profit to really make it worth our while.”

Jamie: Yeah. So, again, I totally agree with you. I mean, I spent, like I said, greater than 25 years lending to small to medium-size businesses, and I’m a big believer in kind of the small business world, however you choose to define that. And I’ve sat side-by-side, as a lender in the past, with entrepreneurs. I mean, we’re working with the owners. We’re not talking to kind of the third-in-line of the finance team. We’re talking to the owner, the CFO, the key founders. And, you know, it’s a humbling experience. I mean, to go off on your own and decide to break away from maybe a bigger business and start your own, you know, that takes a lot of guts. And so I just feel very passionately of the importance of small business. And so, you know, we said, well, why don’t we put our money where our mouth is and do just that? And so, you know, I think maybe there’s a connection between what we’re doing and what our founders are setting out to do that, you know, gives us a lot of opportunity to see lots of deals, lots of good deals, and, so it’s fun. And, you know, I definitely enjoy it. That hasn’t come across yet.

Andy: Yeah, yeah. Well, I think that, you know, now, kind of going personal, in my track record as an entrepreneur, one of the things I’ve learned about myself over time in building businesses is it’s not, maybe this is obvious, but it’s not just about money. It’s that, you know, it’s not just, there’s an opportunity in the market, and that’s, like, this objective thing. But then there’s this other subjective thing, you know, called Andy, and it’s like I have to hack my own psychology and create a motivational feedback loop, where if I enjoy showing up to work, I show up two hours earlier, I work harder. And it’s like, from the outside looking in, you’d say, well, you’re making it look easy or whatever. And it’s like, no, I actually enjoy doing this, and I’ve kind of hacked my internal motivation feedback loop. And Jamie, it seems like that’s kind of what you’ve done here, is a beautiful thing. You knew going in, you had a track record of dealing with these businesses, but you’re like, “I know exactly what customer I wanna serve.”

Jamie: Yeah. So, it’s funny you say that, because I have two great business partners. I’m gonna give a specific shout-out to one of them right now, because it really resonates with what you just said. So, David Howitt is the CEO and owner of Meriweather Group, which is one of our two other general partners. We operate independently, but have kind of leaned into their name because of what they do, which is really investment banking. And David has preached to me, and I’ve drunk the Kool-Aid of what he calls “the power of and.” Which really speaks to the fact that we can do what we do, and it be successful in kind of two ways. Meaning, we can make loans that are, you know, they’re expensive, what we do, but, for our borrowers. And, we can do a way that really benefits them, and we really benefit our investors, and we benefit ourselves. So, you know, this isn’t a zero-sum game type of business, where someone has to lose for us to win. What we’re doing really is, you know, providing value to our founders, and it’s a good return for our investors. It’s worthwhile to us, and so it’s, you know, that’s what I think is part of the secret sauce of how this is working for us.

Andy: I love that. Yeah. And, I guess, to draw an analogy…you gotta stay with me, Jamie. Sometimes my metaphors and analogies, you know, get out there. But, you know, thinking about capitalism, and thinking about, you know, a company like Walmart… I have nothing against Walmart, but it’s like, they come into a town or whatever, and it’s like there’s already an economy there, there’s already storefronts there. And they’re really replacing that sometimes, and driving mom-and-pop stores out of business. And they’re, you know, but they’re adding efficiency and yada, yada… I don’t wanna get into that, “is that good or bad?” But that’s more like the red ocean, you know, the red ocean.

Whereas, you’re showing up on a football field where it’s like no one else even showed up on it, no one else is even willing to make these loans, so it’s just the mere fact that you’re raising your hand, and you’re saying, we want to, you know, service this…and when I say no one, I’m exaggerating, right? But there are few institutions willing to make those kind of loans. And so you’re right, it might be a higher interest rate, but when the alternative is no loan, and then no acquisition, that’s a very clear value creation, which I think speaks to what your point is. It’s like win, win, win. Like, there doesn’t need to be a loser. The loss would be, you don’t exist, your fund doesn’t exist, the loan doesn’t happen, the acquisition doesn’t happen, right?

Jamie: Yeah. Again, I agree with what you’re saying, and, you know, I’m not against, kind of, the low-cost provider, which, you know, serves a certain purpose. And I used to think…you know, I spent a lot of years in community banking. And I often thought, okay, you know, if big banks did their jobs really well, I wouldn’t have a job. Community banks wouldn’t need to exist. But, you know, they fumble sometimes. And being the low-cost provider is not always the best option. You know, there’s value in kind of consultative assistance. And so that’s why community banks exist. And that, you know, that applies outside of banking too. I mean, you give the Walmart example. There’s nothing wrong with Walmart. They’re the low-cost provider. They serve a very specific purpose. But there’s companies who sell the products that you can find in Walmart in a maybe a more unique way. And they exist because if Walmart, you know, did everything perfectly, they wouldn’t need to exist. And that, you know, apply that to any other kind of industry. And in our world, the exact same thing applies.

Andy: A hundred percent. So, broadly, you know, before we, I know we’re gonna move on to the business update and lessons learned, and all that. But just for our listeners, you know, we have high-net-worth investors, family offices in our listenership. Not all of them are invested in private credit, which I’m starting to almost probably sound like a broken record when I…because I keep saying over and over, like, “Hey guys, I think the best risk/reward profile right now is private credit,” you know. And a lot of people agree with, like, people smarter than me think that too. But what, you know, as a spectrum, I kind of mentioned, I don’t know if I’m using the right terminology, but there’s the more conservative private credit, there’s more moderate, and then there’s the more high-risk. But what’s the range of yield or the range of, like, reasonable income, for let’s say, like, mainstream private credit funds or products?

Jamie: Sure. Yeah. So, I mean, so, first of all, I’ll kind of share what are we not and then what are we, and then I’ll specifically answer your question. So, we are not a growth fund, so we’re never gonna have 20%, 30%, you know, returns, things like that, or downside risk to that degree as well. Our goals are preservation of capital, and then a return of a recurring payment to our investors via a distribution every quarter. Those are our underlying goals and how we agree to perform. So, we have a target return to our investors of 10% annually. I’ll be proud to share that we have exceeded that target every quarter since inception. We’ve also paid a distribution every quarter since inception too. So this is really good for those who are looking for kind of yield upside.

So it’s kind of a bond proxy, is almost what I would call what we do. I have seen other private credit, kind of, really, income-style funds, of which that we are, that market anywhere from maybe, like, 7% to 12%. Again, kind of depends on the risk spectrum. There’s probably ones who are lower, there’s probably ones that are higher, but, you know, that’s kind of the average. So, I would say that our target is kind of, maybe incrementally above average. But given kind of the risk profile that we wanna go after, we feel that that’s a really attractive return compared to other, kind of, like investments out there. And, you know, what we do is really, we’re an alternative investment, and we totally get it. We should never be 100% of anyone’s portfolio, but, you know, within the kind of the income side of someone’s portfolio, we can be really complementary, and help give maybe a blended return once you mix us with, you know, treasuries or munis or something like that, that it’s a little bit more keeping pace with inflation, which is, you know, kind of part of the whole idea behind this too.

Andy: Yeah. Bingo. So, once you get into the 15%, 18% yields, that’s getting into, that’s, you know, you can still find those in private credit, but that’s getting more to, like, the truly high risk, like…

Jamie: Yeah. I mean, I’ll never speak to kind of someone else’s credit portfolio, but it just seems intuitively to me that that’s a degree of risk that would be at least beyond what I would be personally comfortable with. And, but, you know, for people who are willing to kind of, you know, go along with that, there’s more yield upside, and that’s just kind of beyond the spectrum of what we wanna really be.

Andy: Yeah, it’s a different philosophy. I mean, to me, once I’m hearing about an 18% yield, I’m thinking, well, defaults are occurring, and you must be pricing defaults into your model, and have to have a certain volume. Whereas what you told me is, you know, you’re looking for the 1000% or 99.9% success rate. So, very different mindset. So, thank you so much for, you know, kind of giving us that review of the landscape. One other question on private credit is, you mentioned munis, you mentioned treasuries. For a high-net-worth investor, for a family office, is there any way to make private credit, you know, that portion of the portfolio, tax-friendly? Is it just a matter of, like, hey, this is a product that, ideally, you can put it, place it inside a tax-advantaged account? Is there anything that can make it more tax-friendly at the fund level?

Jamie: Yeah. So, I would never suggest to be a CPA. So, you know…

Andy: Yeah, insert disclaimer here.

Jamie: Big disclaimer there. So you’re kind of on your own. You know, we do…our fund really, you know, distributions are generally treated as current income, so there’s not really, we’re not a tax-free instrument in and of itself. Having said that, especially for our individual investors, we have a number of investors who are leveraging their retirement instruments and putting money in this fund. And so, to the degree that those are, you know, tax-deferred or tax-free, then, you know, there’s the opportunity there.

Andy: Yeah. And it’s interesting, you know, speaking with family offices, high-net-worth, very high-net-worth investors, to me, that’s, it’s almost the funnest part of managing a portfolio. To me, it’s like a game, it’s like arranging chess pieces on the chess board. It’s like, okay, you have this amount of space, 401(k), IRA, Keogh, SEP IRA, whatever. These types of products should be domiciled there, and then these other things are naturally tax-friendly, you know. But that’s a whole…maybe I should have been an accountant in a second life or something. I actually find that stuff interesting. Some people get bored by it. My thing is, whether you love it or hate it, get some professional advice, because it usually pays to.

Jamie: Yes. I would never suggest that I know everything about tax codes, so talk to your CPA, and leverage them for kind of the best way to do that.

Andy: Yeah. But a 10% yield, I mean, that’s a healthy yield, right? So it’s absolutely worth doing. So, Jamie, you’ve now been running this fund, you’re one year in. I mean, to me, this is kind of fun. It was fun having you on the show six months ago. It’s fun having you on again, because I’m kind of watching in real time. You know, you’re building this business, you’re a fellow entrepreneur. What lessons have you learned one year in, you know, as a fund manager? Anything you can share that you’ve learned along the way so far?

Jamie: Yeah. Lots of lessons. So maybe, while I answer that, I’ll give you kinda a few data points of kind of how are we doing, and then, takeaways, you know, one year in. So, we kind of officially opened our doors April 1st of last year, 2022. Since that time I kind of look at things on the two sides of our business, the loan side and then the fund side. So, on the loan side, we’ve made 11 loans as of…we’re actually closing one tomorrow, so I’m kind of squeezing that in. So, you know, through basically a year, we’ve done 11 loans. Our average loan’s, about $1,000,004. The average duration of our loans are 18 months. So we serve, really, kind of that bridge type need.

We have…it’s funny timing of this conversation. We have our first successful exit literally today. It happened this morning. We got a final payoff from one of our borrowers. And so that was actually a great story that happened, really, ahead of schedule, so I would call that a very successful exit. And as much as we like making loans, we love getting paid off, because then we can redeploy that, you know, to somewhere else pretty quickly. So, we’ve had a first exit. We’re actually are expecting our second one this coming week. And so, you know, that’s going well. Like I said, we’re probably reviewing right now about 20 loans a month, with a goal of doing 1. So we’re kind of averaging, adding about one a month over time. And so, on the loan side, the portfolio’s performing really well. We have no credit quality issues, everyone’s paying on time, reporting on time, and we’re in touch with our borrowers, you know, pretty much on a monthly basis.

On the fund side, again, we started a year ago at zero. Today we have about $11.5 million of assets under management in the fund, which it’s pretty much close to 100% deployed at all times, given that loan demand is so high. You know, the exit we had today, the money’s already gone back out into another loan. So we don’t really that very quickly. We have, I think, 33 limited partners in the fund today, including the three of us as general partners. We all have our own money in the fund as well. Average investor I think has about $350,000 in the fund.

Mostly individuals and families. We have a couple business entities. We have a bank that’s an investor, we have an RIA that has a kind of a fund-of-fund strategies that’s an investor as well. It’s mostly taxable accounts, although, as I mentioned, we have a few who’ve leveraged, mostly, like, self-directed IRAs or other retirement vehicles, and using us within that. Again, we have a 10% target return. We’re really proud to have exceeded that every quarter since inception. And based on our pricing discipline, we expect to be able to continue to do that. So that’s kind of the quick state of the union.

You know, in terms of lessons learned, there’s a lot. You know, I had spent, like I mentioned, 27 years prior to last April in what I would call “the known world,” meaning I was a W-2 employee for one bank or another. There’s only a few I worked for over time. And, you know, there’s nothing wrong with working for a bigger business, or another business. But it’s not your own, you know, and you’re working with someone else’s mission and vision, and trying to fulfill that. And, you know, I’m really proud that I made, I believe a positive impact there, but I was always working for someone else. And so, when I jumped into what I would call, “the unknown world,” you know, it was a big leap of faith, for sure. And I was surprised about how humbling it has felt, and really kind of the privilege it’s felt to work with founders and investors.

And, you know, I take that stuff really seriously, and I’m very, very protective of our borrowers and of our limited partners in our fund. And I recognize that, hey, the money we’re putting out, especially for our borrowers, you know, this is making a huge impact. It’s creating jobs, it’s helping them grow. And this isn’t, you know, a few bucks to a billion-dollar company. I mean, these are companies that are, you know, revenue ranges are probably averaging $15 to $20 million a year or less. And the loans we’re making make a huge impact. And so that is not lost on me, and I sit side-by-side with these founders, and I get it. I get what it’s like to go from really a bootstrapped company to one that are maybe getting credit, you know, for the first or second time, and all the stress that goes along with that. And so, you know, that has been very impactful to me.

And then on the LP side, you know, these are hard-earned dollars that people are entrusting me with, and that is definitely not lost on me. And so, keeping their money safe, providing a good return, you know, I don’t, you know, just kind of blow that off. That’s critically important. And, you know, I’m very committed to ensuring that we continue to do that. You know, I’d say there’s other lessons, but that would be kind of the biggest.

Andy: Understood. Yeah, it’s interesting. At the end of the day, you’re working with people, right? I mean, it’s, you get into finance or, you know, real estate, finance, business, spreadsheets, you know, and then you, you know, you start your own business, you know, and running this, it really is all about people and relationships. And back to our earlier point, you know, that’s really what kind of motivates you, right? More so than the spreadsheets, at the end of the day.

Jamie: Yeah. I mean, these are not, again, both sides of the business, both our borrowers and investors, these are not faceless entities. I mean, real people. We don’t really, you know, on the LP side, have what I would call significant institutional dollars with us. And so, you know, there’s real faces behind the money that’s coming to us, and so that’s, you know, we would call that a privilege, and we take it very seriously.

Andy: Well, on that note, Jamie, I wanna talk about macro a little bit, or more, you know, how the macro situation is affecting your corner, you know, of the marketplace. So, obviously, you know, we had the whole SVB thing was in the news, regional banking concerns. Were regional banks, were they, like, I don’t wanna say competitors, but were they, you know, making…does the credit picture with regional banks, does that trickle over to you at all? Or does that even affect, you know, your…

Jamie: You know, it trickles over to us from a, not a competitive perspective, but a collaborative one. So, you know, I’d say that 75% of our borrowers today, we are a subordinate lender behind another bank. And in many cases, the underlying bank is a community, a regional bank, and less so a larger bank. And so, you know, we get a lot of referral business from other commercial banks because we’re very friendly to them. We help them retain relationships where maybe they’ve maxed out what they can do. We see an opportunity, in a low-risk way, to do a little bit more debt, kind of, “one more turn of EBITDA,” in many cases. And so we’re very friendly to all banks, really. We’re not taking away loans from them. We’re helping them maintain a good relationship.

Andy: Yeah. And maybe even stabilizing a client of theirs, in a way, or…

Jamie: Absolutely. And it’s completely our goal, our borrower’s goal, and the senior lender’s goal, is for us to be taken out as soon as possible, by, typically, a senior lender refinancing us out. So it’s a win. You know, again, this is the kinda “the power of and,” it is a win for everyone. So, you know, what I’ve seen… You know, I’ve been doing lending a long time. I’ve seen, I don’t know, four or five recessions in my career, I would guess, and I’ve seen this really kind of interesting confluence of events happening. You know, I was giving that a little thought before this, and I’m kind of… So, what I’m seeing is, first of all, economic uncertainty. And that is maybe media-hyped, to some degree, or is completely real. You know, we’re either in a recession, about to go through one, or maybe one’s already, you know, ending. Who knows? I mean…

Andy: Seems like it’s both, Jamie. Yeah, I don’t know. All the news, it just seems like it’s both to me.

Jamie: But, you know, whether we’re in one or not, you know, I think one of the unintended impacts of that, or outcomes, is that, among other things, large banks get more conservative. So that’s kind of the impact number one. And I have seen larger financial institutions make more knee-jerk reactions around, okay, we’re gonna stop lending to certain industries, or we’re gonna limit what we’re going to do. And under most circumstances, that’s not a problem, because muni banks or regional banks are there to help kind of pick up the gap. Okay. But now, what’s going on? With Silicon Valley Bank, run on deposits, you know, community banks and regional banks are completely dependent on having sufficient deposits to lend out dollars. Well, what happens if deposits are going down? So, you know, I can’t speak across the entire universe of regional community banks, but my kind of intuition says deposits are harder to come by these days, are kind of flooding to safer choices. But those same dollars are not being made available to be lent out from larger banks. And so if community banks and regional banks have less dollars to work with, even though they might want to be making loans, that’s harder too, because they literally don’t have enough dollars to lend out.

Andy: And that’s all, like, a legal requirement, right? I mean, they…

Jamie: Absolutely. I mean, banks are regulated in kind of managing the ratio of loans they have relative to deposits they have, and those things.

Andy: And if anything, if a loan comes due or gets fully repaid, they may not even be recycling that capital, because they…if the deposits are going in the wrong direction. Okay.

Jamie: You totally get it. So, you know, that’s going on too. So now, I’ll layer on kind of one more phenomenon that I’ve just observed, which is, during, especially the kind of this recent three years or so of COVID, is, you know, we’ve seen kind of this, you know, I don’t know if I call it mass resignations, but a lot of people leaving, you know, their employer. And the formation of new business has been high too. So, we have more people who have formed businesses maybe over the last few years. And now that they may be starting to turn a profit, they’re EBITDA-positive, they’re seeking more capital to grow. So not only is there less lending available by kind of the general banking world, but there’s more demand now too, because of what’s going on.

Andy: Jamie, this is what I mean by mixed. I’m like, is it a recession or not? Well, I’m like, yeah, it is a recession for these banks, but it doesn’t sound like it’s a recession from the startup world, right? Because now, the first wave, you know, the first wave of survivors and thrivers of this generation of businesses are saying our revenues are up, we wanna grow. It’s…anyway, I don’t mean to interrupt, but I just think that’s so interesting. It’s not all bad news. It’s good news, in a way, that there’s demand for you, right?

Jamie: Yeah. And, you know, I’m not an overly idealistic or, you know, it’s all roses out there. I mean, there are challenges in the economy for sure, and we frankly could be going into an economic apocalypse. I don’t know. But what I see here today is that, you know, there’s still formation of business. Consumer spending is still there. At least the businesses we work with is, you know, my evidence of kind of what’s going on in the world, are performing. And so when you kind of mix all this together, there’s no surprise that loan demand for private credit is, you know, very high. For us, it’s kind of double what it was in terms of demand a year ago, when we first started. Where that is a year from now, who knows? But it just seems like there is meaningful opportunity in the private credit world. And, you know, it’s no surprise that there’s entities like us who are doing this kind of business.

Andy: So, one thing I’m wondering about, you know, with the Fed and interest rates, you know, they may be pausing, or, you know, close to the ceiling of how they’re gonna hike or what… That seems to be slowing down, at least for now. And, you know, in fixed income and the bond market, that has all, you know, that sort of percolates in the bond market, and it affects everything, right? But what I’m wondering, in private credit, if I’m in your seat, and it’s a good thing I’m not, right? Because I don’t really…I wouldn’t know how to underwrite. But if I were in your seat, you know, and I were in one of my cranky moods, if somebody mentioned the Fed to me or the Fed funds rate, whatever, “I’d say I don’t care. That has nothing to do with us. We have supply and demand, and this is the price of private credit right now. Take it or leave it. And if you don’t want this deal, there’s 19 other good businesses behind you that do want it. So get outta my office.” That’s what I would…so does it even affect you, what the Fed does?

Jamie: Yeah. So, first of all, Andy, you totally get our business. If I was in a hiring mood or mode, I would go to you first, and we’d have an interview, and you understand how we do this. So, but yeah, I mean, you understand that very well. I mean, what I have observed over the last year, with loans we’re making today versus a year ago, is on average, we’re probably 300 to 400 basis points higher on yield.

Andy: Wow. Wow.

Jamie: And that is a little bit a function of the interest rate environment, and maybe there’s some lessons learned in there too, but it’s more so supply and demand. And, you know, we just don’t have to…

Andy: That’s not good. You don’t hear what the Fed does and say, “Well, I’m raising my rate by 60 basis point,” whatever. It’s more just, you know what the market’s gonna bear, because you’re seeing applications come in and…

Jamie: We are. And, you know, we just don’t sharpen our pencils a lot, because, to your point, if a borrower says, “Nah, that’s too high for me.” Like, fine. You know, we’ll just move on to the next one. And as long as that still exists, we’re gonna continue to operate this way. And, you know, my suspicion is, if demand slowed, you know, the pricing we are able to get today still is well within what we’re forecasting and targeting to our investors. And, you know, while I never take anything for granted, I feel that we’ve kind of comfortably positioned ourselves to ensure a good return, you know, regardless of where interest rates are going over time.

Andy: So, you have, essentially, if I’m reading the tea leaves or if I’m hearing you right, you’re saying you don’t even need this perfect storm to deliver the 10% goal to your investors, is your belief. And right now it’s…

Jamie: I just think the world of private credit has a permanent place in the commercial lending space. And I don’t… I mean, maybe I’m wrong, and, you know, I’ll look back and be completely embarrassed by this comment, but it just seems to me that the general kind of commercial banking world has set itself up such that private lenders have a meaningful place to exist.

Andy: Well, I totally agree. No, you’re right. So, you’re saying, look, the supply and demand dynamic here is a macro trend that is, well, heck, it’s decades, probably, in the making. The fact that, you know, lending standards are tightening at banks right now, and the Fed funds rate, all that stuff, that’s just gasoline on the fire. But even if the gasoline goes away, this is still a fire. Sorry if I’m using a fire analogy, Jamie. That’s probably not the right analogy.

Jamie: It’s okay. Here’s the other maybe anecdote I would share, that kind of supports that idea, which is, we have more than a couple borrowers who, in my opinion, are more bankable than they think they are. Meaning they probably could have gone to their lender, or maybe shopped it around to other lenders, and/or sought maybe SBA lending, and gotten what they needed without going to me. But they’ve chosen to go with a private lender, in part because of the user-friendly nature of our business. Meaning we charge more, but, you know, do you wanna, you know, I’m the lender, I’m the chief credit officer, I’m the one you’re talking to, or do you want kind of a faceless, large, entity, where the turnover lender might be high, and you don’t know who you’re talking to, and you have to retell your story to a new, you know, lender every year? And what is that worth?

Andy: Interesting. Interesting.

Jamie: And so, you know, we have people who I think could get money less expensively elsewhere. And in fact, I have no problem telling them, “Hey, I think you can get this cheaper elsewhere.” And they have still said, “But you’re just easier to work with.” And I’m not tooting my own horn. I am tooting the horn of private credit when I say that.

Andy: Because when you’re, you know, if I could hazard a guess, allow me to a hazard guess, when you’re doing underwriting, when you’re doing due diligence, you are…you know, I’m sure you have record-keeping and all that sort of thing, and checks and balances, but you’re just really trying to get to the answer, trying to get to the truth, trying to get to the heart of the matter. Whereas at a larger institution, it’s gonna be so institutionalized that there’s always a huge percentage of, “We have to dot this I and cross this T, and fill out the TPS report,” right?

Jamie: Yep. Absolutely. So there’s, you know, in my opinion, there are two kinds of credit cultures in, whether it’s banking or private credit, whatever you choose. There’s a guilty until proven innocent culture, and there’s an innocent until proven guilty culture. And guess which one is a lot more fun to work with, and makes a lot more sense? And that, we’re, you know, an innocent until proven guilty. And as long as we understand how the business makes money, how they’re gonna pay us back, our mindset is, “Okay, how can we get this to a yes?” Versus starting with, it’s just easier to say no. And then maybe we’ll, if the lender begs and pleads, maybe we’ll get to a yes. And that’s kind of, you know, that’s our mindset.

Andy: I love that. You know, and the big difference, you know, skin in the game, both from your side of the table, from the founders’ side of the table, it is, as an entrepreneur, and I work with other entrepreneurs a lot, that is a refreshing part of working with small businesses, you know, is that, you know, sometimes at larger institutions, that there’s not that much of a direct effect between how you perform at your job and the direction of the company. So, yeah, I kind of get it. And that is interesting that some entrepreneurs, you know, choose to work, not just with your fund, but, to your point, you know, with, that’s a trend in the whole industry. So, you know, let’s talk about outlook for 2023, or even into next year. Do you see yields staying the same? Do you see them becoming even juicier? You know? I mean…

Jamie: Yeah. Well, you know, my outlook, and no surprise based on what we’ve just talked about, is fairly optimistic. I think, regardless of what’s going on in the world, you know, there’s businesses who find a way to make money. And, you know, those are the ones we wanna focus on, we wanna continue to focus working with businesses who have a proven concept, where the broader public has said yes to them, and their founders we like working with. And so, my outlook is that there’s sufficient of these for us to kind of keep doing what we’re doing.

From a yield perspective, you know, I think there is a cost of capital ceiling upon which borrowers just are not gonna borrow. And I think, you know, we’re not that far from that number. I think there’s maybe some yield upside with what we’re doing. But, you know, from a borrower’s perspective, they’re usually considering us, debt, and they’re oftentimes also considering, well, should I just sell equity, which is dilutive, but is a non-credit way of raising money too. And so, the cost of debt capital, I think could get to the point where, okay, maybe it just makes more sense to sell equity.

Andy: Although, in that scenario, Jamie, I have to say, probably valuations are a lot less attractive, you know, on the safe… So, the cost of equity, in my…speaking as someone who’s raised equity before and has done private equity deals before, in my experience, those two things probably move together. Like, if the cost of debt is way higher, probably means the valuation, equity valuation of my business is way down. So, but I hear you. Honestly, I think that, it’s honestly a very good message, refreshing message, because it tells me that the yields you’re talking about, the opportunity with your fund, and in private credit in general, it’s not a tactical thing that relates to, like, high inflation or high interest rates right now. It’s more a structural, long-term play.

Jamie: Agreed. Agreed.

Andy: Lovely. And now I have to give a little plug for our upcoming event. Jamie, you and your offering will be presented at Alts Expo, which is upcoming on May 4th. So, this event is for high-net-worth investors, family offices, financial advisors, RIAs can come and learn about different income-producing strategies, different types of alternative investments, and also learn about all sorts of specific funds that are available right now to new investors. So, more information on that event is available at wealthchannel.com. It’s free for high-net-worth investors and advisors, so I encourage everyone to check that out. And Jamie, I’m looking forward to having you participate in the event.

I have to say, back to the beginning of this interview, you know, one of the very first segments, you mentioned capital preservation and income, you know, two kind of core pieces of your strategy and your fund. We’re doing panels on those two topics at this show. And those, it’s like, I’ve never heard capital preservation as a phrase more than I have heard it in the past 12 months. So I think, Jamie, I have to tell you, I think your philosophy is resonating in the marketplace right now.

Jamie: Okay, good, good. We’re not so crazy after all. That’s good to hear.

Andy: No, definitely not. And that being said, where can our listeners, where can our audience of high-net-worth investors and family offices go to learn more about Meriweather Group Capital in the meantime?

Jamie: Sure. So, I believe you will probably post this and include all of our information. You can email me at [email protected], which will be on the website that you post this, as well as our website. I’m looking forward to participating on the Alts Expo in May. And, you know, I’ll just, my shameless plug on top of that is, you know, no surprise, loan demand’s very high. Our fund, which is evergreen, or open-ended, we’re always looking to add new investors, because then we can just do more lending, which is our goal. And so we’re certainly open to talking to individuals who are seeking this kind of a strategy.

Andy: Absolutely. And as Jamie said, I’ll be sure to add links to Meriwether Group Capital in our show notes. Jamie, thanks again for joining the show today.

Jamie: Hey, Andy, always a pleasure.