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.

See our email distribution here.

Catalus Capital's Marek Olszewski speaks to The Deal

Catalus Capital's Managing Partner, Marek Olszewski, recently appeared on The Deal to discuss the fund's opportunistic real estate investment strategy. Catalus seeks to partner with market leaders in specific segments and geographies where market inefficiencies exist.

Please click here to see the interview.

What am I Reading (listening to) Now?

*Update 12/4/14
Zero to One by Peter Thiel
Corner Description: The co-founder of Paypal and early investor in Facebook describes his views on how to build a successful business.


*Update 10/23/14
How Google Works by Eric Schmidt & Jonathan Rosenberg
Corner description: Insights on Google and running a business from two of the company's leaders.


*Original Post 9/16/14
I read a lot, so I figured it might be interesting to keep updates on the latest...
Inside the House of Money, Top Hedge Fund Traders on Profiting in Global Markets by Steven Drobny
Corner description: interviews of successful global macro traders on their strategies and experiences.

On The Left Interview - Swimming Naked

Early this summer I had the great honor of being interviewed by Randy Schwimmer for his inaugural issue of The Lead Left. If you're in the middle market, you're probably intimately familiar with Randy from his former senior role at Carlyle's lending arm, and his famous On The Left newsletter.

I'd like to thank Randy for the opportunity to be a part of his new venture. The interview is below:


TLL: Marek, your firm is probably not familiar to many of us. Tell us about what you guys do.
MO: We are an investment fund that focuses on special situations. That definition is pretty broad. We look for transactions with unique characteristics, particularly those that are typically unsuitable for traditional investors.

TLL: What kind does that involve?
MO: We like situations that are distressed, have a certain level of complexity, an unusual geography, or a unique business model. We also like opportunities that require specialized due diligence or research.

TLL: Where do your investments reside in the capital structure?
MO: Starting somewhere in the senior debt, but after that we go up and down the capital structure. For example, we just closed a deal where we simply acquired 100% of the asset as an all-equity transaction.

TLL: Give us an example.
MO: We recently acquired a property called Sirenusa, a high-end condominium complex located in St. John in the US Virgin Islands. A bank down there had foreclosed on it. That and the unusual location was what attracted us. Because capital is hard to come by in the Caribbean, there’s limited competition for deals.

TLL: I assume there’s also a decent supply of distressed situations.
MO: Exactly. So an all-cash buyer – as we are – is attractive to sellers. No contingencies and a quick close. The bank had been holding on for five years, but with the property empty it was still bleeding money. We offered a quick solution and, most important, a business plan to get back to profitability quickly.

TLL: What other locations offer similar opportunities?
MO: We’re looking at businesses and assets in and outside the US. I would describe the targets as “tertiary geographies.” Today, as an example, I had a call with some Greek investment bankers…

TLL: There are some of those left?
MO: (laughs) Yes! We’ve also considered Spain and Italy, though each country has its own complexities and risks. As recent borrowing rates show, those areas are recovering but still need liquidity. We are also careful to find partners with expertise in those niches. We are not global experts.

TLL: Where do you find deals?
MO: From a wide variety of sources: investment banks, middle market boutiques, brokers, personal connections. Also LinkedIn and Axial. Everyone wants to create proprietary deal flow. We’ll reach out to local operators. For example, we’re looking at solar energy businesses in Puerto Rico. So we find out who’s there now, get a few names and call them to understand the local business environment.

TLL: Where does your capital come from?
MO: My partner is Michael Freeburg. He runs and owns Greenwich Wealth Management, a $1.5 billion Registered Investment Advisor. Catalus’s investors are some of his biggest clients.

TLL: And typical investment size?
MO: $10-40 million is a good range for us, although we’ve considered as much as $100 million.

TLL: What’s your hit ratio on the deals you review?
MO: We say No to about 75% of the deals we give a superficial review. Ultimately only about 1% of those that make it through the initial filter make it to closing.

TLL: Who are the larger players doing what you do?
MO: Fortress and Cerberus have sub-strategies similar to ours. The difference is their size and that they have people on the ground. We like to partner with folks on the ground.

TLL: Are you industry agnostic?
MO: Yes, with some exceptions. We avoid specialized sectors like oil and gas exploration, mining, bio-tech, pharma, and insurance.

TLL: Let’s talk about this frothy lending market. Does it hurt your business?
MO: It certainly means a difficult time finding opportunities. Each quarter of last year things got a little more difficult. Rates and spreads are coming down, leverage going up, credit standards deteriorating, and covenants disappearing. That hurts us, especially our credit strategy. The power on deal terms has shifted from capital providers to sponsors.

TLL: So you’re just waiting for the next recession.
MO: That would certainly help our business. As Warren Buffett has said, you never know who’s swimming naked until the tide goes out. Lots of aggressive stuff is being done by our peers that might end badly in a downturn.

Which is why, in the next few years or so, if a recession does come and the tide goes out, we hope to fill the resulting liquidity gap.

We're Hiring!

Catalus is growing and we are seeking to add to our investment team. We would love to hear from you if you meet the profile below.

Job Description: The fund is seeking a full-time Associate or Analyst to help support investment evaluation, deal sourcing, and other related tasks. The position reports directly to the head of the firm. Responsibilities include analyzing, summarizing, and presenting investment opportunities as well as assisting in deal sourcing, due diligence, and activities related to managing the firm. Preference will be given to those with experience in private equity, investment banking, bond/loan research, distressed investing, other investment research, or mezzanine/structured lending. An ability to work diligently in an unstructured/entrepreneurial environment is required. The position will allow for significant responsibility in the deal evaluation and investment process. This is an opportunity to get in at the ground level of a growing fund with significant expansion potential.

Responsibilities/Requirements:

• Prior experience evaluating leveraged buyout, growth capital and/or debt financing transactions is a plus. 
• Ability to quickly and effectively evaluate, summarize and present investment opportunities, often with little direction or oversight. 
• Strong analytical skills to evaluate businesses, market opportunities, industries, etc. 
• Strong communication skills and keen attention to detail. Applicant will be required to draft investment memorandum, present ideas to the fund’s investment team and interact directly with senior management of potential investments as well as investment bankers and advisors. 
• Strong modeling / deal structuring skills. Applicant will be required to evaluate multiple potential investment structures and assess the impact on potential investments. 
• Ability to work in a flexible and entrepreneurial environment. 

Pay: Competitive based on experience