Getting Comfortable

Goal #1 is not to lose money.  Goal #2 is to generate an adequate return on capital.  However, too often people seeking investments focus on Goal #2 and don't provide sufficient information to evaluate the risks of Goal #1.  Anyone raising money needs to see things from the investor's perspective.  An investor that is serious about a deal will want to know essentially everything and anything relevant to the transaction or business, preferably in an easily digestible format.

Often a potential partner will mention a report or document and say, “I don’t know if you would even be interested in that information.”  Of course I would!  If it’s relevant, I want it.  Even if it's barely relevant, I still want it.  This person has usually been in the industry for 10-30 years, and I have 10-30 days to get on his or her level... I need information.

Many investors say they need to "get comfortable” with a deal before moving forward.  It’s an odd phrase, but completely accurate.  Every detail needs to be understood to determine the risks of a deal going sour.  I need to "get comfortable” with the people I’m partnering with, the strength of the underlying business, the value of the assets, the transaction structure, and the factors that could cause things to go sideways.  I want to know how the business operates, how employees do their jobs, what customers want, what type of demand there is for the product, what the competition is like, what the challenges are, what type of character or track record my potential partners have… you get the point.

A while back I was speaking with the CEO of a company in which I was considering investing.  We were in touch for several months and I considered myself thoroughly educated on his industry and business.  I read industry materials, evaluated tangential businesses, spoke to other investors in the space and the CEO at length, and asked hundreds of questions about the business.  Even though I learned something new every conversation, I still felt I had a pretty solid handle on the deal.  Then, out of nowhere, in some obscure data I requested I found information indicating the company was essentially outsourcing a major function.  This had never been mentioned and I was shocked.  When I confronted the CEO he explained he did indeed outsource this part of the business and promptly explained why.  His reasoning was perfectly logical and I didn’t see any drawback to outsourcing.  Nevertheless, I was quite spooked.  I had spent months learning about his company and industry, but somehow this piece of information slipped through the cracks.  The CEO didn’t seem to think it was a big deal, and exhausted himself explaining why outsourcing made sense.  He didn't understand my concern wasn’t why they outsourced, it was he never told me the outsourcing existed.

Enemy #1 of investors is uncertainty.  You hear it all the time in the stock market- the press reporting prices dropping because of some event creating uncertainty.  If you take away anything from this post I hope it is this: you have the power to eliminate uncertainty for investors.  Provide them with information about everything and anything that impacts your business in any way, shape, or form (you'll have to put in the work to provide it in a format that isn't overwhelming).  Investors can then take that comprehensive education and evaluate whether or not they can "get comfortable” with Goal #1. 

Welcome to Catalus Corner

Welcome!  My name is Marek Olszewski and I’m the Managing Partner of Catalus Capital.  Given the rising popularity of blogs, I was surprised to find there are almost none written by practitioners of private investing.  It seems the industry is rather closed off to outsiders, so I feel a blog by a fund manager will be valuable.  My first post will be an introduction, but in the future I will discuss specific deals I’ve worked on, share my views on the marketplace and current popular topics, and of course get Catalus some exposure (investors are rarely purely altruistic).

Catalus is a fund that invests in middle market companies, and has wide flexibility to consider a diverse set of opportunities.  We would generally be placed in the Private Equity bucket, but more specifically are a mezzanine firm.  We make minority investments in companies or projects, typically in the form of preferred equity, subordinated/senior debt, or mezzanine loans.  Catalus does not buy entire companies, we don’t take control, and we don’t buy common equity unless it’s a part of a larger deal.  We feel this role is the best way to execute our strengths, as we’re not business operators and don’t want to specialize in any one industry.  Catalus wants every transaction to result in a genuine partnership.  We help evaluate major decisions and projects, and want to reinvest in our partners after the initial deal.

Our target investment size is between $3 million and $20 million.  This is an abnormally wide range, and over time you’ll find this isn’t our only atypical trait.  Our first level of screening simply looks for cash flow of over $2 million in EBITDA, or assets that can serve as sufficient security for our investment.  If a company has neither then we immediately, but politely, pass.  The deals we consider fall into 3 categories:

1.  Business Growth: A company has been in existence for a number of years, has been growing, and has been profitable.  There is an experienced management team in place that is passionate and dedicated.  They have identified an opportunity to expand, and require additional capital in order to execute.  Examples can be an acquisition, purchasing more inventory, opening new locations, hiring, or buying a couple million dollars of tuna (true story, we passed).

2.  Private Equity Financing: We will help finance a PE firm’s acquisition.  They will typically put up 30-50% of the money as equity, and we will help finance the rest.

3.  Asset Backed Lending:  If someone has a hard asset that has a quantifiable value, we will consider lending against it.  This can be anything from oil wells to real estate to an old military bunker (passed on that too).

If you have a deal for me to look at, please email me at marek@cataluscapital.com.

With regard to my background, before Catalus I was a Managing Director in Nasdaq’s Corporate Strategy/M&A group.  We looked at acquiring companies around the world including financial technology firms, internet companies, workflow solution businesses, investor relations products, clearing funds, and exchanges.  The very last deal I worked on was the NYSE bid.  I also worked with the heads of Nasdaq’s five business units to grow and to determine their strategy.  This corporate business experience helps me share a unique set of skills with our partners that most investment funds don’t have.

Before Nasdaq I was at Fieldstone Private Capital, an energy and infrastructure focused investment bank.  I worked with large energy companies, developers of greenfield projects, and investment firms on transactions involving wind farms, ethanol plants, power plants, and oil/gas fields.

I attended the University of Pennsylvania, where I majored in Economics and got a minor in Urban Real Estate from the Wharton school.  I’ve also passed the Level 2 CFA exam (haven’t quite had time to do Level 3 yet).

In high school and college I turned a hobby of selling and installing car parts into a small business brokering and dealing cars around the world.  Around the same time I served as an advisor to an exotic car club start-up, Velocity Club.  I had a supporting role in starting the business and completed my responsibilities the day of the launch party (it was a good one).  The Velocity Club was how I originally met Michael Freeburg, my partner in Catalus.  He runs and owns Greenwich Wealth Management, a firm with over $1 billion in client assets.  Mike and I have worked on countless projects over the years and I am lucky to have met him.  Without Mike, Catalus wouldn’t exist today.

Although I’m new to the blogging world, I’m excited about it.  Tell me some topics you want to read about and hopefully we can learn from each other.  Talk to you soon.