Buckle Up. Everything Has Peaked

For the last few weeks at Catalus, the big topic of discussion has been about how bad markets across the board are looking, and about how its only going to get worse. A lot worse.

Everywhere you look, problems are brewing, with the biggest warning signals flashing from the credit markets. Everything ranging from Treasuries, to leveraged loans, to high yield are down significantly (the latter being at a 5 year low). Credit downgrades are at the highest pace since 2009 and by some measures high yield bonds are at 2009 levels. You can paint a prettier picture by stripping out energy, but the losses are still significant, and the leftover companies are the ones that benefit from decreasing energy expenses.

Corporate profits have peaked with margins and earnings down despite the decreasing energy costs. In the last few years profits have been driven by stock buybacks, cheap debt, M&A, and cost cutting. The first three will be choked off with contracting credit markets and rising interest rates, and there's only so much corporate fat you can eliminate before you cut to the bone. Meanwhile US wages are marching upwards and the dollar is relentlessly rising, which makes our exports progressively less competitive.

US housing looks OK, but not great. The prices in gateway cities have risen to stratospheric levels. They outperformed in the last market downturn, but the reverse will be true this time around. Some markets are substantially over supplied, like Miami, Manhattan luxury condos, and some parts of LA. We won't see a crash, but there will be a more typical real estate correction, with the hottest markets getting hit the hardest.

Outside the US, the picture looks even worse. Emerging Markets are struggling, with some of the major ones like Brazil and Russia in deep recessions. China is just muddling along despite the government's forceful efforts to grow, and Europe has stagnated since the last crash.

Meanwhile in the face of all this the Fed will likely raise rates.

What does a responsible steward of capital do? At Catalus we've been waiting for this type of environment for years. In the meantime we've seen many market participants make some incredibly risky bets that will surely unravel if our prognostication is accurate. There will be opportunities in 2016 to pick up cheap assets; we're eagerly waiting.

*Update 1/7/16: On January 6th, 2016 George Soros referred to the current environment resembling that leading up to the crisis of 2008.  Let's hope that things don't get as dire as he predicts Soros Bloomberg Article.

The Next Big Thing

Once every few years we at Catalus stumble upon a trend or industry that we believe will generate attractive investment opportunities for many years to come and in some cases meaningfully alter the world that we live in. Sometimes these trends are controversial or contrarian, while others are completely unrecognized by the public. In this case, there's an almost cult-like following, and yet still we feel that there is an under-appreciation of the magnitude of this new industry’s eventual impact.

For decades, small-scale real estate developers and speculators have struggled with the inefficiency and difficulty of raising capital for deals sized $100k to $10 million. This size bracket is too small for institutional investors and dominated by unpredictable high net worth individuals who aren't in the business of investing, but rather do it in their spare time.

On the other side of the equation are the tens of millions of high net worth individuals in the US and globally that have accumulated savings, but don't have the knowledge or contacts to expand their investment portfolios beyond the traditional options. These individuals see real estate acquisitions, renovations, and developments happening all around them during their everyday lives, but rarely have access to invest, and don’t have the expertise to analyze the opportunities that they are presented with.

Crowdfunding will change all of that. If you’re not familiar with the industry, a good explanation is HERE.

Crowdfunding will enable technology to revolutionize how capital is raised, first in the $100k-$10 million size range, and then in progressively larger transactions as market-leading platforms are accepted in the deal community. Technology will also streamline the due diligence and closing processes, creating more efficiency and opportunity. As a result, real estate operators will have reliable access to capital through crowdfunding platforms and individuals will be able to participate in transactions with risk/reward ratios typically unattainable through traditional methods (the kicker is that some of these deals are really good… and some are pretty horrible). 

We've spent the last year studying the industry, meeting with the management of the most sophisticated platforms, and investing in deals. We're likely some of the best informed individuals on crowdfunding, and we continue to be impressed with its potential. I've personally been investing in these deals since early 2014 with excellent results, and we have now built a multi-million dollar portfolio at Catalus.

More to come.

Catalus Capital Partners with Genesis RE Holdings to Acquire Distressed Property

Catalus Capital and Genesis RE Holdings have partnered to acquire distressed residential property in Southern Florida. The deal was structured as a $10 million revolving first lien loan from Catalus and an equity investment from Genesis. The capital will be used to acquire foreclosed homes at auction.

Catalus continues to seek additional special opportunity investments that would benefit from a flexible approach.

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