A Hands On Approach To Private Credit, With Meriwether Group Capital

Meriwether Group Capital was a presenting partner at Alts Expo May 2023, a one-day virtual event hosted by WealthChannel. In this webinar, Jamie Shulman presents the Hero Fund.

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Click here to visit the Meriwether Group Capital website.

Webinar Presenters

Webinar Highlights

  • Jamie’s background in finance, and the reasons for founding the Hero Fund.
  • The typical profile of companies and loans made by the Hero Fund.
  • The basic questions asked during the diligence process.
  • Profile of the current loan portfolio held by the Hero Fund.
  • The common sources of repayment, including refinancing and successful exits.
  • Annual yield of the fund, and other terms for investors.
  • Live Q&A with webinar attendees.

Connect With Meriwether Group Capital

Webinar Transcript

Jimmy: We have our first investment sponsor now presenting, and that’ll be Jamie Shulman. I’m gonna bring him up on stage. And Jamie, you’re joining us today from Meriwether Group Capital. You’re gonna be presenting the Hero Fund, it looks like. So, Jamie, good to see you. How are you doing?

Jamie: Great, Jimmy, thanks for having me on.

Jimmy: Absolutely.

Jamie: All right. Thanks, Jimmy. It’s great to be here. And thanks, Shawn. That was a great opening message. I think it segues exactly into what I wanted to share with you all. And so, first of all, good morning. My name is Jamie Shulman. I’m the co-founder and fund manager of Meriwether Group Capital. We are a private credit fund focused on small business lending. So just a brief background on myself. So, I had been in commercial banking up until founding Meriwether Group Capital for 27 years, all of it lending to small to medium-sized businesses. And something kind of I perceived and saw along the way was what I felt was an underserved niche, small businesses needing access to capital that just sat kind of on the edges of what banks like to do. And it didn’t make them bad borrowers. It just meant that someone needed to spend a little bit more time and attention with these kinds of companies, and they needed to get paid for the risk as well. So what I’m talking about is generally called mezzanine commercial finance or sometimes called venture debt. What else I recognized is that there are other mezzanine lenders out there, but most of which start at much larger loan sizes than I wanted to focus on. So, we formed a business doing just this. And today, I’m gonna give you an overview of who we are, who our borrowers are, and what our fund is.

So, first of all, we launched our fund just about a year ago in early 2022. We’ve now had four successful quarters under our belt. Our original idea when we launched the company was based on kind of five key points. First of all, for investors, we wanted to create a passive income fund offering above-market returns in exchange for what we believe to be a modest degree of credit risk. Next, we wanted the ability to kind of think outside of the highly regulated boundaries of commercial banks and to really take advantage of what we see to be solid credit opportunities that just maybe have a story to be told. Next, we wanted to lean into my experience in commercial banking, both as a loan origination officer, a team lead, a credit officer, and special asset management background. With our other partners, we wanted to leverage our combined management group, which has really strong relationships in commercial banking, investment banking, and leverage that to really find the best of opportunities that we could. What we’re experiencing today is that for every one loan that we do, we’re getting today about 20 looks at new good qualified opportunities, which is great for us. And then lastly, we wanna contribute to our local economy. And what we’re doing is supporting small business. The loans we generate often are put to job creation and spurring economic growth. And so we’re making loans that are obviously good for us and our investors, but ones that we can feel good about as well.

So, one of the things that really sets us apart is the partnership we have with our other general partners. So just as a quick background, I’m one of the three partners. I really lead all of the loan origination efforts, portfolio management, investor relations, but I have two great partners who helped me along the way, one of which is Meriwether Group, which is an investment bank. They’re primarily an M&A advisory office that do a lot of sell-side transactions. We have a lot of common ownership of the types of clients we work with. And while we do operate independently, we refer a lot of business back and forth and we have a lot of insights into growing successful businesses. Oftentimes, we can serve as a bridge loan as a business of seeking potentially an equity transaction down the road. And then next would be First Northwest Bancorp, which is the parent company of First Fed Bank, a Seattle-based $2 billion asset-size bank. They’ve been around for 100 years. And they too are a great partner to us and offer up resources to help us along the way. So I’m able to lean into the resources of my two great partners. And I would share with you that all three of us as general partners are also all limited partners in the fund itself, today representing about half of assets under management.

So who is our borrower? So, today we work with existing profitable EBITDA-positive businesses. They have a track record of success. They’ve kind of proven themselves to the public. We generally don’t work with startups or pre-profit or pre-revenue companies. So these are companies that already have a proven track record of positive cash flow. Typically, they’ve either maxed out their current bank or maybe their bank is maxed out down. Typically, our use of funds is for permanent working capital or acquisitions. The majority of the businesses we work with fall kind of loosely under manufacturer, wholesale, distribution types of businesses. Frankly, we love companies that make stuff because we can understand how they operate.

Our vetting process really starts with two very basic questions, which are, “How do you make money?” and “How are you gonna pay us back?” And if we can understand the answers to those questions, there’s probably a path to a yes. And because of that, we tend to stay away from overly complicated businesses that we can’t easily understand. So today, our borrower criteria is on the right-hand side here. And to date, we’ve made 12 loans. Again, we have a target of doing about one a month. We’ve had two successful exits since then. The average loan on our books today is $1.5 million. In terms of a minimum expected yield between upfront rate and fee, we do expect to get at least 14% from our borrowers. And the reality is we’re doing well north of that today. In exchange for really that type of yield, we operate in a very user-friendly format. So our borrowers really enjoy kind of the access they have to myself and the customization of all of our credit products.

Our average loan on the books today is 18 months. And we often really serve as a bridge type of financing structure. So, oftentimes, while we do underwrite to recurring cash flow, in reality, our source of repayment is usually one of three events, refinance of the balance sheet with a more traditional senior lender or bank, an equity transaction, or potentially even sale company. And so we usually try to set the term of our loan based on the likelihood of one of those events happening.

Today, our portfolio is in very good shape. We have no credit quality issues. Everyone’s paying on time, reporting on time. And I feel really good about the businesses we work with. We intentionally keep the portfolio very, very small. So this is not a portfolio of thousands of student loans or credit card loans, or, you know, these kinds of things. We know every single one of our borrowers really well. We get financial reporting on all of our borrowers every month. So we stay very close to them. And everyone has a vested interest in us being paid off first.

So, a little bit more about our loan investment and underwriting strategy. So, first of all, all of our loans today are secured. We get the option of doing unsecured loans, but we don’t have any on the books today. We recognize that often we are junior to a senior lender. And we typically are a very friendly partner to commercial banks. We do take a UCC filing in all business assets. So we are, we believe, well collateralized. In addition to that, we generally have personal guarantees from the majority owners, and we’ll often seek outside collateral in addition to that, which could be liens on real estate, or purchase orders, or other forms of capital that we can use to kind of shore up our total collateral position.

From an underwriting perspective, we really take what I call a holistic approach to underwriting. So we do a traditional financial review. We have some key metrics that we look at. But then we really combine that with kind of part of our secret sauce, which includes on-site visits with the management team, the ownership group, and spending time and really understanding who they are as a business, the risks that they see, and how we mitigate those risks going forward. As I mentioned, we keep the portfolio very small so that we know all of our borrowers. And like I said before, today we review about 20 loan opportunities per month with the objective of doing one.

One last thing I wanted to mention about our partnership with Meriwether Group, I really believe that this is part of our secret sauce. And again, we do operate independently from them but we really lean into each other’s resources because we share a lot of the same types of clients. These are growing businesses, often seeking equity transactions at some point down the road. And what we found is that we can be a very good partner to these businesses and really serve as a bridge to help them achieve a higher EBITDA, and ultimately a higher multiple when they’re looking to sell equity or potentially even an outright sale. Below here are just a few examples of the clients that are in our portfolio today.

So let’s talk about the fund itself. So we have very strong loan demand. And we’re proud of that but we’d like to help more borrowers. And so we are seeking additional investments from limited partners. Our fund today has $11.5 million of assets under management. And we’re actively looking to grow that to 20 to 30 million over the next two years. Our fund is open-ended or evergreen, so we don’t ever have a closed date. Today, within the fund, we have 33 limited partners. Our fund strategy is really twofold. Number one, it’s preservation of capital. And then number two, it’s a recurring income stream via quarterly distributions. So this is not a growth fund. We’re never gonna have 20% to 30% kind of upside or downside opportunities. This is meant to be boring, predictable, stable, recurring, are the words that I would use. We have a target return annually of 10% to our investors. We’re really proud to say that we have exceeded that return every quarter since inception of the fund. We have a minimum investment of $100,000. And we have the ability for investors to add to it over time. We do have a redemption period or a whole period of 24 months. And the reason for that is the average duration of our loans are 18 months. However, we do pay distribution every quarter, which can be received in cash or could be added back to your capital account. In terms of investor criteria, we do work with individuals, families, and other business entities. We can use retirement funds as well. And generally, all of our investors meet an accredited investor test.

So how did we perform? This is something that we put out every quarter. And this happens to be our fourth quarter results. And it also speaks to how we get compensated. So as the general partners, we charge the fund 1.75% of assets under management annually, which we collect quarterly, and then we collect 15% of the net income. The 85% goes to our limited partners. For last year, we had an annualized return of 10.21%, which we’re proud of. We’re over 10.1 in the first quarter of this year. And while I can never make a guarantee, we are having a very good quarter in Q2 and expect this to be our best quarter ever. I already shared some information about me. So, I’ll use this as a stopping point. I think that there’s probably a few questions out there. And Jimmy, I’ll turn it back over to you.

Jimmy: Yeah. Well, thank you, Jamie. There are a few questions that we do have from our audience here. So let’s dive in. I’m just gonna check the time here. I think, yeah, we got about five or 10 minutes or so. We got plenty of time. You wrapped it up nicely there, Jamie. Plenty of time for questions. So keep those questions coming, use the Q&A tool in your Zoom toolbar. We’re gonna try to save time after everyone’s presentation today to get to some live Q&A. Let’s see, a question here from my good buddy Patrick in Michigan. He asks, “Hey, Jamie, as you mentioned, your fund is evergreen. Is your unit price in the fund always the same or does it change based on periodic revaluation of the portfolio?”

Jamie: Yeah, no. So your price stays the same. You know, something I would add to that, too, because I think there’s a question sometimes around, “Well, am I investing in just one loan of money or just future loans?” So, because of loan demand, we are basically fully deployed at all times. And so, any investments made into the fund, first of all, are spread pro rata across the portfolio of loans. So our investors don’t pick and choose individual loans. So there’s a greater degree of credit risk diversification. Also, because we’re fully deployed at all times, any investments that are made in the fund immediately go to work against not only the existing portfolio but then any future loans that we are making.

Jimmy: Good. Yesterday the Fed increased interest rates by another quarter point. How have the rate increases impacted the performance of your fund?

Jamie: Yeah, that’s a great question. So, generally, our rates have gone up over the last year. You know, I would say, in all honesty, that that’s a little bit more of a function of supply and demand, which we have very strong demand, than what’s going on in a kind of macro environment. Now, having said that, what we’re experiencing is larger banks are getting a little bit more conservative, with regional smaller banks which concerns over their loan-to-deposit ratio. And so all that does is create more opportunity for private lenders like ourselves. So because loan demand is so strong, you know, that really helps us drive kind of where our pricing is in the market.

Jimmy: Good. Next question here asks, “Are you industry-specific? Are there large allocations to any particular industry?”

Jamie: Yeah. So we tried to really stay industry agnostic. And it starts with the industry we like are ones that are profitable, which is a generalization, and ones that we can easily understand, again, a generalization. And so we tried to really spread it around with businesses we can easily understand, get comfortable with, and have understood exit strategy with.

Jimmy: All right, this next one says, I think you mentioned this, “But do you and your partners have any skin in the game? Do you have any of your own?

Jamie: We do. Significant. So roughly half of the assets under management are held by myself and my other two partners.

Jimmy: Good. How large do you plan to grow the Hero Fund in terms of assets under management? Is there a ceiling?

Jamie: Yeah. So, it’s open-ended. There is no ceiling. I’ll share with you kind of our goals, though, which are to get to 20 million in this next year, and then 30 the year after that. You know, there’s a real reason for that. Number one, given the average size of our loans, that’s about the size of portfolio that we can manage with the existing people, resources we have right now. So we’re super cautious about expense management. And we feel like, you know, that’s a good size for us with the team that we have. Secondly, then we believe that that’s about the dollar amount that provides kind of our target credit risk diversification for our limited partners. So we do like to spread it around multiple loans. You know, beyond that, we don’t have aspirations for this to be a billion-dollar fund or something like that. You know, again, part of our secret sauce is that we know all of our borrowers really well, and we believe we can maximize returns and stay within a modest degree of credit risk in a much smaller portfolio size.

Jimmy: Good. Few more questions. They keep coming in. We got a few more minutes too, so this is great.

Jamie: I anticipated that.

Jimmy: Yeah, exactly. That was good of you. John asks, “If I choose to reinvest quarterly distributions, are the distributions subject to a new 24-month hold?”

Jamie: No. Great question. So distributions are basically liquid, can be taken at any time.

Jimmy: Good. Scott asks, “Do you need to be an accredited investor?”

Jamir: Yeah. So, in 49 states, you do need to meet an accredited investor test. In the state of Washington, you need to meet a qualified purchaser test.

Jimmy: Got it. And when you registered for Alts Expo today, you should have had to tick a box that certified that you were an accredited investor to be here, just FYI. Probably a few people on here who may have snuck through the cracks. But we did intend for this event to be for accredited investors only because the vast majority of the investment opportunities that will be presented today will be open to accredited investors only due to SEC rules around investments into private placement funds. Couple more questions here. Are there any industries that you’re staying away from right now, given current economic conditions, anything you think may be in trouble if we hit a recession?

Jamie: Yeah, that’s a great question. I mean, what I’ve experienced in my banking career is that good loans can be made in the very worst of times, bad loans can also be made in the very best of times. So, you know, we’re less concerned maybe about that. Having said that, we do stay away from businesses we don’t easily understand. And to the extent, you know, people here are involved with bioscience or cryptocurrency or things like that, you know, I have no problem with that but I don’t understand those businesses and so I stay away from those. And then we do stay away from things with any kind of reputational risk, where, frankly, we wouldn’t wanna be on the front page of the newspaper. So, you know, I’ll let you kind of use your imagination and figure out what those industries are.

Jimmy: Yeah, headline risk is a real risk for some people. Let’s see, Patrick Shigeru again asked me, “Jamie, are you good with ERISA plan funds?”

Jamie: So I’m not sure what an ERISA plan is. Now I would share that we do work with retirement funds. So to the extent that I did there, we can do that. We have investors who have leveraged IRAs, and especially around self-directed IRAs is where we have the most success.

Jimmy: Another question here from Joshua. Joshua asks, “What are your reserve requirements?”

Jamie: Yeah, so we don’t keep an allowance for loan loss reserve like a traditional bank does. I mean, we do expect to have 100% of our loans repaid. If we did take a loss, you know, our LPs would share pro rata in that loss. So we don’t set aside that money because we wanna make sure to maximize current income each and every quarterback to our investors.

Jimmy: Fantastic. Patrick did just chime in. He said, “Yeah, I meant IRAs and 401(k)s.”

Jamie: Great.

Jimmy: “Thanks, Jamie, there.” I don’t see any more questions. We got through them all. It’s a first. Jamie, tell us more about how anyone can reach out and get in touch with you.

Jamie: Sure.

Jimmy: And are they able to make an investment right on your website or is this just to begin a conversation with them?

Jamie: Great question. So, first of all, my contact information is up here. I believe I provided and will make available this investor deck as well as our Q1 results to all…

Jimmy: Let me interrupt you right there. My colleague Michael Johnston here at Wealth Channel has posted links for this copy of the deck that you just saw plus that recent shareholder letter in the chat. So if you open up your Zoom chat, there’s two links right there. Those are legit links from my team. Click on those if you want to learn more about what you saw today. Go ahead, Jamie.

Jamie: Perfect. So you’ve got that information. My contact information is up here as well. We don’t do direct investments through the website. It starts with a conversation to understand kind of your goals and how that might fit in with us. So feel free to reach out. We can schedule a separate time and, you know, I appreciate the interest and opportunity.

Jimmy: Fantastic. Well, Jamie Shulman everybody. Thank you so much for participating with us today on Alts Expo, May 2023. We hope to see you again at a future event, Jamie. Thanks so much.

Jamie: Thanks, Jimmy.

Jimmy Atkinson
Jimmy Atkinson

Jimmy is co-founder and co-CEO at WealthChannel.