Thread by @SkolCapital

There’s a “movement” for my thoughts on structuring (how I learned, mentors, etc) ...

Ok, really it’s @tsludwig that asked.

Time for a thread!

https://twitter.com/SkolCapital/status/1306688027150790656

First, the following chart from is fascinating. It begs the question: How do you achieve superior risk/adjusted returns? In my opinion, it boils down to:

1) Finding the right deals
2) Saying “no” (being selective)
3) Structuring correctly

Second, find a good lawyer. My attorney is also my best friend. He performed my daughter’s marriage. You don’t need to go that far, but:

If you’re picking an attorney based solely on cost, you are making a mistake. Ditto if you expect them to make a few edits and hit print.

I was first exposed to the mezz world when I was running a $1 B corporate bond portfolio when they put me in charge of alternatives as well.

I’m a complete idiot: It took me 8 years (and significant heartache in less than fulfilling jobs) to realize I could go downstream.

So, structuring isn’t complicated, but in finance we like to make it sound complicated. You have:

A) Hard costs (cash)
B) Terms of “A” (frequency, term, etc)
C) Soft issues (risk control)

Think about what’s important to you, and be flexible on what’s not.

A) I’m upfront about the cash cost of doing business with me in the first conversation. Set expectations, and be willing to walk away. Know your strengths, and be willing to charge appropriately for them.

If you’re not the right fit, refer them to a “competitor” that is.

For example, I like current pay (no PIK), monthly interest payments. But I don’t usually need to amortize the loan.

My rates are mid-high teens. If you can find cheaper money you should take it. If I think I can charge you 20% then the deal’s too risky for me.

Learn from the market, but don’t blindly follow the market. Deal flow is always lumpy. It may be ok for pricing to be different than the market BUT you better know why it’s different. If you’re ok with the results then that’s great.

B) Structure of cash: Keep thinking (and learning). Listen to your clients. Be flexible and creative to come up with structures that work for both of you.

My current pay rates are typically higher than others, but I don’t typically take equity (warrants).

There are structural reasons for this in the mezz industry, but the reality is giving up equity kickers has become a competitive advantage for me.

Know your strength.

C: Incentives matter. If you want to reduce risk then put softer issues in place that help your clients do what you want the to do.

That may be information flow, board access, financial penalties, covenants, etc.

However, don’t put things on place just to do it.

I’m going to be nice going in, but I’m also clear going in: IF you default you aren’t going to enjoy it and there’s a good chance that I’m taking your business if the situation persists.

Final note: How did I learn? Slowly, over time.

From who? Everyone. Watch, listen, and think.

Talk to as many as you can, keep good ideas, and discard the bad.

Always happy to answer questions!