I was recently intereviewed by AxialMarket for their 2012 Review and 2013 Outlook Report. You can read the interview below and get the report here.
Tell me a little about yourself and Catalus.
“Catalus is an industry agnostic lending fund that invests throughout the capital structure, including mezzanine, second lien, and subordinated debt. We also offer ‘special situation’ senior debt, which includes alternative opportunities -- unique geographies, business models, industries, or just atypical circumstances. We typically write checks of $5 to $25 million and invest in the US, Canada, the Caribbean, and Europe.”
How did 2012 go for Catalus?
“Depending on how you look at it 2012 was both a great year and a difficult one. From a returns perspective, we're happy with our performance. We are making solid risk adjusted returns for our investors and are very happy with our current portfolio of businesses.”
“From the new capital invested perspective, 2012 has been more difficult. While we did make a few investments, it was fewer in number and smaller in size than desired. Since we are a lender, this was a result of interest rates continuing to compress and the increased flow of capital into debt markets. Debt has been performing well -- it is a very competitive environment.”
“Interest rates have continued to come down throughout the year. While this is good for borrowers, it is bad for lenders. The lowering of rates has gone against the lending community.”
How will interest rates change in 2013?
“It’s hard to say what will happen to interest rates in 2013, but the consensus is that the rates will stay low throughout the year. I still have the hope that the economy will improve and rates will start to rise, helping to normalize credit conditions.”
How did it go for the entire industry?
“M&A was pretty weak in 2012. There were a few glimpses of some larger transactions, but there was no sustained, frequent M&A activity.”
“On the other hand, the high yield credit markets were robust. But this poses a challenge -- how can credit be robust if there are no acquisitions? The answer is dividend recaps, refinancings, and a little M&A. You have this interesting dynamic of a very robust, almost record breaking credit market with an underwhelming M&A environment.”
“Interestingly, the amount of equity going into LBOs is definitely on the rise. PE firms are using less debt and relying on senior debt or unitranche facilities and less mezz or subordinated debt. In order to get that type of capital structure, the firms are relying heavily on high-yield and loan markets.”
Valuations to rise?
“The most recent data seems to suggest that valuations will actually come down in 2013. That could be a result of the uncertainty in economy and regulatory environment -- if you buy a business, you have to price in that risk.”
“In much larger transactions multiples remain high, but as you get into lower-middle market, the multiples are pretty reasonable -- we see a fair amount of deals 5x-7x EBITDA.”
How are you thinking about 2013?
“I don’t see 2013 as a big turning point for activity. However, I do think January will be very busy. After a significant holiday -- like the one this year -- there tends to be a spike in new activity. I think people will return in January to find many new deals and will be quick to jump on them.”
“I am less concerned by the uncertainty than others. I believe that there will be some clarity in early 2013 -- the two parties cannot continue going back and forth for six months. Once some agreement is made, either positive or negative, activity will continue.”
What do you mean by positive and negative?
“A positive outcome, given the current situation of anemic growth, growing taxes, and high spending, would be the two parties meeting somewhere in the middle.”
“A negative outcome would be if the current stalemate continued and the immediate cuts came into play. The cuts would create a huge drag on the economy. Although, it could create some opportunities for people like us who are willing to look at distressed deals and be opportunistic.”
How will Europe fit into the equation?
“Europe is particularly interesting because there are fits and starts of panic. I think 2013 will see some repeat of the panic of 2012. It was like when Bear Stearns went down -- there was a quiet for six months and then Lehman went down.”
“While there hasn't been any real solution to the European problem, I believe Europe will make its way out of the current crisis. Their dedication to stick with the Euro has helped spur some markets and in 5 or 10 years, recovery will be evident. They may lose a country or two out of the Euro in the process, but it will likely recover.”
How will Europe impact the US?
“Since we are such significant trading partners, there is definitely an impact, but it all depends on how problematic the situation becomes. There are several countries in recession now. If that spreads to other countries or worsens, it could have a significant impact on the US.”
“We have some industries that have are particularly strong in the US -- like energy and technology. The growth in those areas can help offset some of the pain that we feel from Europe.”
Why tech?
“The US has demonstrated global technology leadership for some time now. There are so many innovative companies just beneath the surface that will likely become immense successes. While not all are success -- i.e. Groupon -- there is undeniable innovation. Technology in the United States is almost perennially a bright spot.”
Anything else I should ask you?
“In any environment, it is an investors job to find opportunity. Whether there is a recession, a bubble, rapid growth, or a stable economy, it is our responsibility to find places where we can invest safely and generate strong risk-adjusted returns for our investors.”
“Our sweet spot is our ability to find unique opportunities that are either overlooked or avoided by the broader market.”
