I always tell borrowers, “Get as much bank financing as you can. It is the cheapest capital available. If they don’t give you enough or if they don’t give you anything, Catalus will try to work with you to fill the gap.”
The difference today in the lending markets of large versus smaller companies is striking. Blue chip companies like Johnson & Johnson, IBM, Google, and Microsoft are issuing debt at some of the lowest yields in corporate history (I’m talking 1-2%). The high yield index, tracking a basket of junk bonds, is also at historical lows after being at an all-time high during the apex of the financial crisis. Institutional investors who can only invest in investment grade debt or public markets are desperate for yield. On the other hand, companies not large enough to tap into public markets live the story described in New York Times article.
Investing in a smaller private business warrants a higher return because it is more complex and risky. Larger institutions are scrutinized daily by thousands of analysts, investors, the media, and other interested parties. They use the highest quality auditors, law firms, and advisors. Information about the history of the company, the management team, and the financial performance is readily available. None of this holds true for the private markets.
When Catalus partners with a private company it’s a very personal experience. We seek companies and people we believe in and get fully educated on the business, the industry, and the management team. Our investments are viewed as long-term partnerships and our financing package typically includes a minority ownership stake and a board seat. In this role we are active by making introductions to potential joint venture partners, working to improve efficiency/operations, conducting financial analysis, and assisting in the evaluation of acquisitions and expansion plans. Our goal is to add enough value that when our partner companies want additional capital they come to us first.
