The firm just announced the formation of a new office in San Francisco, along with the addition of a technology vertical. How does this fit in with your overall strategy?
What we’ve done over the last couple of years is to get deeper into industry verticals where we think we can add significant value to our customer base.
Technology, we’ve added two very experienced investment professionals – one from Hercules Technology and one from HIG Whitehorse, both friendly colleagues in our business – and we’re going to aggressively build that business. We can’t do a technology vertical without being in San Francisco so we opened a new office there. That’s where a lot of those transactions emanate from.
We’ll soon be adding another vertical in the Media space. That will be a good business for us as well.
Are those siloed or do you pursue deals that work across multiple verticals?
In our firm, everybody works together. There is a tremendous amount of interaction, that’s what we pride ourselves on. We have a very flat organization, and everyone is encouraged and incented to work together. If you look at our people, the one thing that I am most proud of is that we have virtually 100 percent participation among our firm in the carry/promote of our new Senior Secured Direct Lending Fund. Everyone in our firm shares in it, so that makes for an atmosphere of cooperation and aligned interests with our LPs.
The firm’s website lists mezzanine as a strategy. How are you viewing the mezzanine market these days?
As an asset manager, I am not a huge fan of a mezzanine debt today. I think that it’s mispriced for the risk. My general view is that it’s a bad risk-reward investment for LPs today. It has become a very competitive area with the advent of business development companies and other funds in the market. To take unsecured, deep capital structure risk and not get paid a commensurate amount with the equity investors; that does not make great sense to me.
With more historically typical debt structures involving a senior lender and a mezzanine lender , there are two or three different lenders, there are three different sets of lawyers with three different sets of investment committees, covenants, defaults and other rules that a borrower must navigate. It’s a cluster when you’re trying to get a transaction done on a timely basis.
Our unitranche product has come to disintermediate mezzanine debt in our space because we can combine senior and a mezzanine debt into one piece of paper for our borrowers. We can allow our borrowers to then amortize that piece of paper, and often lower the overall cost of capital for them by amortizing the most expensive part of their capital structure first.
Dovetailing off that, has that flexibility become more appealing for customers with the recent onset of regulation?
Over my 28 year career, bank regulators have flexed and unflexed many times. It just so happens that in today’s environment, the banking regulations have gotten more stringent for mid-market and lower mid-market banks than they were in the last business cycle.
That regulatory environment has made our product much more compelling in that, we can go deeper into the capital structure for our customers than any regulated financial institution– we can provide more capital at higher leverage points with more flexibility on terms, rate, amortization, etc., than a bank. Because of that, our financing products tend to be more user friendly than a bank’s loan product for buyouts and other transactions because sponsors need and require flexibility.
We know that things may be tight early on and we plan for it with relaxed amortization in the early years of a deal. Banks don’t have that flexibility.
Theodore Koenig is president and chief executive of US-based specialist mid-market debt investor Monroe Capital, having joined the firm in 2004 at its inception. He is based in the firm’s Chicago headquarters.