Matt Willes of Skol Capital - How does the World of Mezz Lenders Work? (Plus a great perspective on life)! - The Michael Girdley Show Episode 27

Hey, Michael here. You will now hear some episodes of the Michael Girdley Show that we had branded differently, called Unusual Profits or some such like that. Same show, same person, just me interviewing people and producing content that could be helpful on your journey and mine as well. So with no further ado, here's the episode. Hey, Michael here. Sponsor for today's show is actually a product that I'm a part of called DM Bridge. And what DMBridge is, uh, is a service that we built, uh, to solve the problem that Twitter's direct messaging functionality is a total mess. So we built DMBridge to help you fix that. Um, a lot of the other solutions, uh, do things like requiring you to install a whole nother inbox. We didn't want another inbox, so we created DMBridge. And what it does is it takes all of your Twitter DMs and has them appear inside of your email inbox. So you can reply to them just like it's a regular email. You see them just like it's a regular email. You can search them later like it's one of your regular emails, all just by using DMBridge. So, uh, we're currently live with the product. Uh, would love for you to sign up and become a customer, uh, and check it out. So you can find that at dmbridge.app, uh, and go on there, put in your name, uh, and be either part of the beta or join us as part of the live use of the product. And again, check it out, dmbridge.app. Welcome to Unusual Profits. I'm your host, Michael Girdley. Very excited to record today's episode with one of my Twitter BFFs, Matt Wills. And we are going to dig into the beautiful, wonderful world of mezz lending, which as a business nerd, I'm fascinated by. And I'm also starting to get exposed to it in my day to day. And we're going to go start from the zero level foot and then work our way down as deep as we can. And I think it'll be fascinating. So Matt, thanks for being here today.

Michael, thank you so much. It's great to be here.

Uh, by the way, I had a nightmare last night that I mispronounced your name, and I was like, oh, oh, like, so it's— being a podcast host is like the weirdest, like, nightmare set. I guess people, you know, it's the equivalent of when you were a little kid, you kept having that dream of going to school naked. That's the, that's the thing for—

so it's actually Willis. We actually pronounce it Willis, but my ancestors were poor and didn't know how to spell, and You know, but look, I've, I've answered to a whole lot worse in my life. So no, no challenges.

Well, I guess my nightmare just came true. So anyway, Matt Willis, thank you for being here.

No problem.

So I'd love to give you an opportunity to take, take about a minute and tell us about, you know, how you got to where you are today and what you do.

Yeah, thank you. So my background is in investing. I started out life after business school managing a corporate bond portfolio for a small insurance company here in Salt Lake City called Beneficial Life. And by the time I was done at Beneficial, I had, I had their corporate bond portfolio, I had their equity portfolio, and I had a portfolio of alternative investments, which was a smattering of other things, real estate, as well as some funds. One of those funds was a mez lending fund. And so we— I went off after beneficial and did some other things. And then if you fast forward to about 10 years ago, I got a call one day at my office from my dad. And my dad was a senior executive with some big businesses for a long time, made some money in his career. And called me up and said, "Look, I'm not getting any younger. I can't do it anymore. What can I pay you to manage our investments?" And I kind of chuckled and said, "Well, I'm not going to charge my own parents to give them some investment advice." And Dad said, "Well, you can't retire to the beach yet. What are you going to do?" And I said, "Well, I have an idea." And so I started about 10 years ago managing a small family office for my parents. And then about 9 years ago, I took my money and some of that family office money and spun out of the family office a mezz lending business. And, uh, the idea was to take, uh, at the time what was a fairly sophisticated, uh, approach to mezz lending, uh, and bring it down market. Mezz lending is— the way to think about mezz is essentially as a, uh, a private high-yield kind of product. And so the approach was to say, hey, this type of capital is typically available to big businesses for the right situations and to go downstream. We would go downstream and try to make it available to, to small and medium-sized businesses. And so that's what I do today.

That's great. So, so if I can put some numbers around kind of Well, first of all, you know, so mezz lending is this— if you have bank debt and then you have equity, so people own portions of the business, the mezz kind of sits in the middle of that and it, it, it fills in a gap between the two. Is that kind of how we should think about what—

Yeah, look, middle of the capital stack, subordinated to a commercial bank if a commercial bank is involved. But it can also be in a senior position if a company does not have bankable collateral, right? You know, somebody thinks they're, you know, they're bankable. The bank kind of hems and haws and says, hey, we don't really love your collateral. You know, a mezz lender or private lender can, can step in in those situations.

Got it. And so, so then in terms of kind of the numbers of where you play, you brought some of the things that you saw kind of in the middle market and brought it down into almost a small small business and I think so what is those what, what kind of like loan amounts would you see kind of at each one of those kind of steps as you work your way down to smaller?

Yeah. So for us, a typical check size or how much we're looking to invest is 1 to 5, 2 to 6, 2 to $7 million per deal. And the way to think about that as it relates to company size is typically companies can go out and get 1 turn, uh, 1 times their EBITDA, uh, you know, half time their EBITDA. 1 turn of EBITDA, uh, is, is about right. So think about, you know, I'm looking for companies that have $2 to $10 million, $2 to $15 million of EBITDA. Uh, that generally relates to companies that are you know, $10 million to $100 million of revenue, you know, depending on profit margins and growth and those kind of things.

Got it. And then so how do the loans, the mezz loans get structured? So, you know, there's debt has just straight interest on it, you know, with, with that they have first lien on, on things if you just have straight debt. And then there's the mezz notes or the mezz debt that I've seen structured as you know, a preferred equity type instrument, and that allows you to get past kind of this 18% usury laws that we have in some cases and price in that risk. Is there a mezz that's just straight interest? Like, it's like, like I see the hard money lenders guys do sometimes, which is like, okay, what's a 15% straight interest loan like with, you know, and that's how it's going to work. How, how, how, how are the different flavors of kind of mezz shake out and how should, how should you think about those options?

There's 21 flavors of mezzanine debt. You can structure it however you want, Michael. Let's talk about the industry and then maybe where I'm a little different. The industry will typically structure things as a note with some sort of equity characteristics aside from that note, right? Warrants, options to purchase equity in the company, Uh, and so a lot of the industry is out there, in my opinion, gathering up lottery tickets so that they can, uh, you know, pay out their investors or their LPs, uh, on the backs of the high interest rate, and then, uh, can gather up, uh, equity claim checks, uh, to really drive performance for their fund. Uh, and so with those, typically, sometimes it's structured as a preferred equity deal, but usually it's structured as a note with options or warrants attached to that note. I think usually that's the case because the lender wants to be able to go file a claim against the assets of the company. And in order to file a UCC saying that you have security interest in the assets of the company, it's easier to do that against a note than against a preferred equity structure. I take a little bit of a different tact where I'm not looking to generate equity positions from the loan deals that I do. And so I charge an interest rate. My interest rate tends to be a little bit higher than other people. So if the industry is out lending at 10 or 12%, I'll lend at 15 or 16%. And then there's, for me, there's two additional costs associated with doing business with me. Typically an origination fee, that's 2 to 3% associated with getting into the deal. And then I'll have the company reimburse me for out-of-pocket legal expenses to do the deal. And then like I said, I don't take equity or warrants or other things in the deals that I do, but a lot of the industry does.

Yeah. So why have you decided to take kind of this alternative path? You just see that as a competitive advantage. Does it match more to your personality as a lender? Is it, is it something that— well, I guess I haven't asked if y'all are operating just solely off of your balance sheet or if you're using other people's money. Like, how did you end up kind of deciding, okay, well, I'm going to be different kind of in this, in this vein versus the games other people are playing?

Yeah, for 2 or 3 reasons. The first is we are investing our own money, uh, and so we don't need to, uh, we can get comfortable risk-adjusted returns for our purposes just by charging interest and management fees, uh, and not subjecting ourselves to the equity. The second is, I'm honest that I mean it when I say it, but I'm not smart enough to, uh, try to think about me being in a both debt and equity position in a capital stack at the exact same time. Uh, there's a lot of people out there that are probably smart enough to do that. It's just not a game, uh, that I really play. Uh, the last reason though is, is maybe the most important, which is for me, by not taking equity or warrants up front I'm able to save kind of the equity conversation in order to structure a deal so that I am even more protected, uh, from a lending perspective, uh, than I would otherwise be. And we can talk more about that, uh, if you'd like to, but, you know, the short answer is, uh, I kind of fell into that more protected place because it wasn't a natural fit for me to take equity or warrants anyway. I guess the last point on taking equity or options or warrants in a deal is that I don't have a whole lot of interest in being 3% or 5% or even 7% or 10% of a company. It's pretty easy for a lot of small business owners to ignore me If I'm 3% or 5% of the business and I— you need an awful lot of things to go right for that to be a meaningful position. If I'm going to be a small piece of an overall business, I'd rather just think about it as an equity deal and go invest as an equity deal and not muddy the waters with the debt as well.

Yeah, that makes sense. So yeah, I guess this is a great time to dig into the next thing. My dad used to have a great quote. He'd say, "It's easy to lend money. Getting paid back is the hard part." So, so what are the, what are the structures to protect you? Right. So you're sandwiched between, say, if in some of these cases a bank loan and then there's the equity holders behind you. And so you're kind of this, you know, this mayonnaise and ham in the middle. Like how— what are the structures to protect you and what are the different options there, you know, to make sure you're going to get paid back and compensated for the risk you're taking on?

Well, I'd get along well with your dad. I always joke that if I wrote a book one day, the title of the book would be, hey, the best case scenario is getting my money back, you know, at the end of the day. And, you know, hopefully you collect a little interest along the way. But look, risk management is all in the structure of the deal. And you have to make sure that you do due diligence. You have to make sure that you examine the company and you're comfortable with the risk that you're taking going in. Perhaps the most important question that I ask potential borrowers is, "Hey, how do I get my money back at the end of the day?" Right? And if a potential client does not have a great answer to that question, I'm probably not terribly interested in the deal at the end of the day. But one of the more interesting things that I've done to try to incent a borrower to want to pay me back is to say to the borrower, and this is what I was alluding to earlier on the equity question, "Hey, I don't want equity. I don't want warrants. I don't want to own your business. What I want at the end of the day is I want my money back." And, and because of that, I'm going to put a feature in the documents of my— that says that if you default, and only if you default, my note all of a sudden becomes convertible, uh, and it becomes convertible into equity of your business, uh, one that is not at a fair valuation. It's going to become convertible into some really, really large percentage of your business. And it's going to be equity that you want to really figure out how not to bring onto your capital stack. It's going to be preferred equity. It's going to carry kind of punitive shareholder rights and preferred dividends and those kinds of things. And you really want to avoid doing that. And what that does is that heavily incents the borrower to want to do what I want them to do, which is to give me my money back at the end of the day. And it's not a— I mean, look, people, we give people standard cure periods. So I'm not trying to trick people into those kind of default options. I'm not trying to take over business, what I'm trying to do is to provide an incentive so that the borrower does what I want them to do. And it's proven to be very effective over the years on a number of different deals at helping them to figure out, okay, I don't really want to sell 50% of my business for you know, $3 million or $4 million. I think it's worth significantly more than that. So I'm going to start early in the— if I can't afford to pay Matt back after, you know, 2 or 3 or 4 years, I'm going to start the process early and I'm going to go out and I'm going to raise money at a better valuation so that I don't have to give up that equity to Matt.

Yeah, it makes sense. So, so to put that in context, it sounds like a warrant has the mezz lender, you know, able to convert that into equity or buy equity at a discounted price on the upside case, you're actually optimizing for, okay, how do you get protected such that somebody's really disinterested in the downside case, right? And that allows you to price your risk in at a lower level, right?

I think that's right. Look, I'm managing the risk, but the other way to think about it is in any kind of lending relationship, if things go really south, what's gonna happen is the lender is gonna start some sort of a legal process, and that could be a foreclosure process that's initiated by a lender, that could be a bankruptcy process that's initiated by the borrower, but what they're essentially doing is starting a formal process to come to some kind of a term. And what that term looks like at the end of— what that agreement looks like at the end of the day is probably some, hey, the lender is going to take most of the assets, maybe management and the previous ownership stays involved so that they can manage, you know, and get the business back on better feet. But it's correct to say that what I'm essentially doing is pre-negotiating that foreclosure process. Right. And I'm essentially saying, hey, foreclosure is messy, foreclosure is expensive. We don't really want to go through that legal process at the end of the day. Let's agree that we want to avoid that at all costs. And here's a framework to allow us to avoid that.

Yeah, I dig it. Well, so I guess tying on to that, one of the things I wanted to ask you about today, you know, my, my buddy had like an $80 million a year company that he started. And it was not a very bankable business. There were no, no real assets and had grown so quickly they didn't have a lot of track record of, of earnings. So they couldn't really do, you know, an earnings or cash flow based borrowing. So he went to some guys out of New York from the wrong side of New York. And, you know, it turned out those guys were in the loan-to-own business, you know. So I'm thinking about this from the perspective of, okay, I'm a potential borrower. Like, who are— is that— have you heard that same phrase, this loan-to-own thing? And like, how do you— who are those people in the universe of mezz lenders?

I don't want to say anything negative about any of my competitors or anything, Michael. You know, it's, you know, but the— look, I would encourage anybody listening to this that if you're going to enter into a lending relationship, understand how you're going to pay off that loan at the end of the day. Mezzanine finance or private lending or call it whatever you want to call it is, is usually— I won't say always, but usually very tough. And, you know, you think commercial bankers talk about wanting to be in a relationship and those kind of things. Most people in my business they're in it to watch out for themselves, right? And they want to make money. And a lot of people view it as a backdoor way into the equity of your business at the end of the day. And so if you don't understand how you're going to repay that loan, you know, whenever it's over, you're going to have a tough time.

Yeah, it makes total sense. I, and I felt really sad for, for my buddy because he had a, you know, there were basically triggers in the note that he had that automatically, like if they missed just a couple of payments, the board, he lost board control. Right. And then equity would like switch over to these folks. And next thing you know, like, I mean, I think he's still suing these guys. Like, it was just really bad.

Look, it's common, right? I mean, I, I got a call once from from a local company here in Utah that they were dealing with a similar kind of group on the East Coast, down in Florida, and they were basically trying to make life miserable so that they could take over the business at the end of the day. And, you know, when you find yourself in that situation, you can either fight it legally which is a long, expensive, kind of brutal process, and you don't have that many levers, right? Or you can try to find a white knight who's willing to provide the capital to replace them in the capital stack. And the sad truth is you usually end up with that kind of a lender for a reason, which means you don't have a whole lot of options for that type of capital. And, you know, so that can be difficult, you know, at the end of the day. Maybe I should just put a plug in there at that point for— and yes, read your documents. You know, the documents can be long and dense and not a whole lot of fun to read, but read your documents and hire outside counsel. But yes, read the documents, understand what it is that you're signing.

Totally makes sense. So, um, so just in terms of the universe of, of how you think about what you're doing, you know, you had a great tweet where you drew a very hand-drawn version of kind of the, the universe of kind of meslending returns, right? Um, so I don't know if I have a good question about this. I was hoping to just get some color, like, like about how— well, I mean, it's beautiful. I could pull it up on the screen, but, um, kind of how you're thinking about your, your part of the universe, potential investments, because I think it's also one of the really interesting things you're doing is you're not just a straight mezz lender, right? You're also managing, you know, in-house money that you guys are deploying in multiple different strategies and with different managers. So just, just kind of your thoughts on, on where you fit into kind of that whole universe of potential, potential areas of deployment.

Well, look, we got into this because we're like everybody else trying to find good investments. And so, the dirty secret of mezz lending is that I can get superior risk-adjusted returns in mezz lending than I can get anywhere else. And Michael, you've been around and you touch a lot of spheres in a lot of different places. You talk to any private equity group or venture capital group in the market and they're going to talk to potential investors and say, "We can't promise you specific returns." Prior results are not a guarantee of future success, all those types of things. But we target 25%, 30%, 35% kind of returns. The reality is top decile private equity or VC kind of returns are, let's just say, significantly less than that. Uh, if you're talking about the hedge fund world, uh, it's the exact same thing. And maybe what's common across all of those different kinds of asset types is you and I can't get in the top-decile kind of funds anyway. We don't have access to them. We may get lucky by picking a young emerging manager and experience terrific results, but that's risky, right? And that's difficult to do. And so, in the MES world, I can pound out mid to high-teen kind of IRRs, uh, that are where I'm taking significantly less risk, uh, than I have to in other places, uh, to do that. Now we can talk about what's happened here recently, right? But, but returns are coming down. And so where I used to be able to generate mid to high teen kind of IRRs, now people are talking about, hey, will you lend to us at 12? Will you lend to us at at 10. And for me, I have to really go back to my experience at Beneficial Life. So when I talked at the beginning about managing a billion-dollar corporate bond portfolio, a billion dollars sounds like real money. In a corporate bond world or in an insurance kind of environment, a billion dollars is nothing, right? And one of the lessons from Beneficial was you have to use your size to your advantage. Not only do you not have to swing at every pitch, you can't swing at every pitch. Because if I go out and I start lending to people taking substandard returns, even if that's where the market is, then at the end of the day, I've used up all my capital and I'm out of money for when a really fat pitch comes along. And so What I see, in my opinion, is a mistake today that a lot of people are making is to go sit there and say, "Hey, I couldn't get 8% on an investment 6 months ago, but now that investment's trading at 8% or 10%. That's really attractive. I'm going to go make that investment." Well, what risk are you taking to go get that 8% or 10%? Right? And so for us, you know, back to your question, MES fits into this kind of overall investment landscape where we think, you know, the overall kind of risk-adjusted returns are very attractive for us.

Yeah. And so for you personally and as the family office, why actively do this as opposed to what I've seen in some of your other strategies, which is working with specialized managers, right? Do you Do you feel like you're running a risk of kind of being, uh, well, what I'm trying to say in a way that wasn't offensive, but, uh, but you know what I'm saying? Just being like a dilettante at it when, you know, that's typically a recipe for, you know, for challenges. It's like me going into a healthcare deal. Like, I just don't know anything about it. So how do you think about that in terms of why, why this is something you guys have decided to be in this business in particular?

Well, the short answer is I, I, I know this world from, uh, after my beneficial life and corporate bond experience. Uh, I was a commercial banker— is— I was in the commercial banking world, uh, for a couple of years at Science— with Science Bank here in Salt Lake. Uh, and so lending and, uh, you know, the kind of the credit markets is, is something that I'm comfortable in. Uh, But you absolutely have to know your sphere of competency, as they say, right? Sphere of competence. And at the end of the day, I mean, one of the industries that I will not lend against is real estate, right? Because what makes one piece of ground better or worse than another piece of ground, I have absolutely no idea. And hats off to the people that do, but for me, That's just not a world that I know. And I guess the other answer to your question is when you start talking about businesses, we feel like the risk at the end of the day here is business risk. It's not really— interest rates are high enough for us. It's not really interest rate risk. It's not really duration risk that we're talking. It's business risk and it's operating risk. And we feel like we have a good enough understanding of operating businesses that we can intelligently make decisions and allocate some capital to the strategy.

Yeah, totally makes sense. So, so I think that's a great picture of kind of how the landscape and how the industry works and how what, what you do works. So kind of double-clicking a little bit, how, you know, how, how is that top of funnel created for a typical mezzalender and/or for, for you? Right. Like, how are you, how are you seeing deals And, you know, in spending time preparing for today, there's like a lot of mezz lenders, you know, the Ceribus of the world and stuff like that. They work specifically with private equity sponsors and they know, okay, when this hedge fund or this private equity fund comes in, like we've worked with them before and we're going to be spreading our risk across their whole portfolio. You know, how is the top of funnel typically built for, for a mezz or a specialty lender in that way?

Wherever you can get deal flow, as you know, deal flow is, is wonderful, but it's never enough. Right. And so, Specifically on the sponsor versus non-sponsor question, we have the advantage in the size that we're playing with that we can work with small independent sponsors mostly in that size. But a lot of our business and the loans that we do are just with owner-operated companies. And so we're agnostic between the two. We have sponsors or independent sponsors that we that we deal with, and we're always looking at deals, you know, with those. But it's also word of mouth, right? You know, it's companies hear about us or they're talking with their, what I would call the professional set, right? Accountants, lawyers, insurance salesmen. Hey, how's business? Well, you know, I'm thinking about doing this and they have a need and, oh, well, I heard about this guy and there's a few of us around, but not many, right? And so I'm pretty confident that we see maybe not every deal that's kind of in our wheelhouse, but a pretty high percentage of the deals that are in our wheelhouse. I'm pretty comfortable that we're seeing them.

Yeah, super cool. And then are you geographically limited at all or are you mostly, or is it just your network's strong in the Mountain West or how do you think about where you're going to deploy capital?

So for us, we're pretty much Denver West, uh, and that is, is probably both a top-down and a bottom-up. From the, from the bottom-up, uh, perspective, I've spent a lot of time, you know, I started this business in the Mountain West and, and, uh, it's where my net contacts were and my network, and so I could just get out and and generate deal flow that way. My wife refers to it as the lunch circuit, right? And then deal flow's not as good, okay, time to go take some people to lunch and see what's around. But then I made a conscious decision. The first one that I did was Phoenix-Scottsdale down in Arizona. I said, "That's a market that I'm interested in. I want to go." Well, you show up in the market, you take some people to lunch, you attend a conference or two, you meet some more people and ask them who else you should take to lunch. And pretty soon you've got deal flow in Phoenix, Scottsdale, and then Denver was next for me. And I went and did the same thing in Denver. And so from a bottom-up perspective, I could kind of grow geographically organically that way. From a top-down perspective, The East Coast is tough for me. I love the East Coast. We lived on the East Coast for a few years. I just don't want to get on a 4 or 5-hour plane ride if I don't have to get on a 4 or 5-hour plane ride to go due diligence of a deal. And so nothing against the business communities there. I just, you know, it's a time management piece for me.

Yeah, makes total sense. Well, they— The lunch circuit has always kind of fascinated me because it sounds terrible. Like, I just want— like, I don't like going to lunch. Like, I'll go to breakfast, but I don't like going to lunch. And like, I know I, I need to do it, but then I'm just like, I'll just tweet some more stuff. Like, maybe that'll help.

Well, there's, there's a reason I fall off and, and need to, need to refresh the efforts again, right?

It makes total sense.

Okay.

I think I've learned something here. I feel, I feel coached.

Go to lunch, Michael. Come on.

Okay. Thank you.

The—

so switching gears a little bit, you know, there's— most lenders have a workout group. So if things go wrong, the workout group starts to handle stuff. They have a servicing group. At your scale, are you all of those things?

Yes, it's all— it's all me. I'm in the first conversation I'll have with people, I tell them I'm the investment committee. I'm the, you know, I'm the deal guy. I'm the— I'm everything. And so, you know, for better or worse, you know, I'm—

it totally makes sense. And so you talk about this investment committee like it's a committee of one, which is very— it's— there's upsides and downsides to that, which is— which is good. Have you ever been been tempted to have more than a one-person IC, or are other people looking over your shoulders to make sure you're not missing anything, or how do you think about that?

Well, I have an advantage. I have a brother— excuse me— I have a brother that is involved somewhat with the business that we can bounce ideas off of and talk about things. And then, but I would say, and he's terrific, but I would say the biggest person that I bounce ideas off of is my dad. I learned to do business a certain way. I learned from my father. He had a very successful, long career in business. And, you know, I call him up and, and, you know, he's older now, but I call him up on a regular basis and say, what do you think? And, you know, it's, it's One, a great excuse to call dad, but two, I always learn something.

Yeah. Well, and I saw you blogged about kind of your relationship and your impact, the impact your dad had on your career and your life. Like, you know, what are the kind of material things in terms of the way you've designed this business environment for yourself that reflects some of the things you learned from him?

Well, I would say the biggest thing is you just have to do business with people that you're comfortable with. Right? And life is too short to, to do business with people that you're not comfortable with. And so if there's any question about integrity, honesty, uh, those kinds of things, uh, we're pretty hesitant to, to follow those opportunities. Uh, life is too short, uh, to do that. And so I would say absolute integrity and honesty is very high on the list for us, not just in lending, but across all of our relationships. I would say the second thing is you just have to be— He always repeated a phrase that I found out later after I started reading that he picked up from Peter Drucker, but the phrase was, "You have to see the world as it is, not as you want it to be." And that was an original Peter Drucker comment I attributed to my dad, or to Peter through my dad. But it's probably safe to assume that I am not Steve Jobs and I cannot change the world to meet the circumstances for how I think the world ought to be. I'm Matt Willis and I have to engage with the world as it is. Uh, and so to the extent possible, uh, I think you have to be level-headed about, uh, how does the world look today, uh, and what do you do that's the same or different, uh, than the way that the world was last year or 5 years ago or 10 years ago, and where do you think that it's going. And that can apply to industries or the economy in general or how you structure a deal or a specific business or, you know, that's pretty universal advice. Uh, but the world changes and you have to change and adapt with it.

Yeah. Super cool. Well, one, one, one person you, you just touched on, which I found, it fascinates me. Like when I first started like digging into like how to be a better business person, like I went to the beginning, right? I was like, okay, where's the Drucker? And I ended up reading like all of Peter Drucker stuff and it is some dense academic stuff, but like, It's one of the things like I wonder if you have an opinion on it. Like nobody talks about Drucker and like the ideas in there are like so, so good. And I mean, what, what has gone wrong with Drucker's legacy? Like, why aren't people reading that stuff? I mean, I don't even see him talked about anymore. So I don't know if— I don't know if you have an opinion on it.

Well, I think his stuff is too long form for people now, right? I mean, Drucker doesn't fit nicely into a Twitter world, right? And, and, you know, the way I would think about it is, uh, you know, you know, if you think about long form and short form, even Trucker's short form was probably still too long for today's world, right? You know, and so I think people that are, you know, more modern and more media savvy have, have crowded it out. And that's a shame because, because I think he's— look, I think the guy was a genius, but totally.

Well, actually, it's funny you say that because my people ask, like, we talk about Drucker and I'm like, okay, like, here's the book you should have. And it's actually not one of his books. It's somebody who went through and created Cliff Notes where there's 365 of his ideas, each written concisely in half of a page. And you can read one per day and start to think about it as opposed to the, like, this, you know, the 4-inch thick ridiculously large book stuff that he's very academic.

So, so, so you're just going to leave your listeners hanging or you're going to give them the name of that book, Michael?

Well, I actually have a Twitter thread coming up. No, it's, it's, it's called the Daily Drucker. So, yeah, it's, it is what it is. But yeah, no, I mean, I am working on a thread that's going to come out in the next few weeks where I feel like, you know, I spent a lot of time with MBAs. Now I don't have one, but like that educational part of what they got from their MBAs, there's about 20 books that assembled together gave me enough to be dangerous to where, like, when I talk to my MBA friends now, there's nothing really that they've been exposed to after I read those books that, like, I— that they've, they've seen that I haven't. Yeah, they've sought through more, like, case studies or whatever, but, like, in the end, like, I know what structured finance is and I know what, you know, this, this HR laws and stuff like that just because I read that core book. So I'm going to do a thread around that because it's the number one, like, question I get asked on Twitter.

I think it's a great idea.

So we'll see. Yet another thing I do that doesn't make me any money. Fantastic. So, so I wanted to dig in a little bit like what is your underwriting process? So a borrower shows up, they send you their financials, they send you their, their pro forma model, their budget and other stuff. So what are you intaking at that point? And then kind of how does your process go in terms of underwriting a deal?

So maybe I'll back up a half step. Typically what happens is somebody calls me up and they say, "Hey, I hear you do this. Here's my situation." And they tell me a little bit about their business. And in that first call, I explain my typical rates. I talk about, I want, you know, I'm looking to get 15% here, or, you know, whatever I think, you know, just on a high level is gonna make sense. And almost always the potential borrower says, "Oh, I would never pay that. I just am not interested in that. Thank you so much for your time. I really wanna keep this to 10%." Right? And I say, "Hey, if you can get that, you should take that because that is a really good deal for you. Congratulations." And then typically 3 or 4 months goes by and I don't hear anything. And then after 3 or 4 months, I get another call and they kind of say, "Hey, Matt, remember? Well, we're still looking for this. Really good things are happening, but it's a tough market out there. We haven't been able to find 10% money. We'd like to reengage with you." And I smile and I say, "Wonderful. Send me some financials and let's go." So people send me financials. After financials, they send me, you know, we have another call. That call is typically, hey, I've been through the financials, I have questions about this and that and the other thing. I don't understand this. Explain what's going on to me. And after that call, if I'm still interested, we'll set up a, uh, an in-person meeting. That's my opportunity to go, uh, due diligence on the company, meet the people, ask some more questions, gather a little bit more information, that kind of thing. Typically, uh, from that in-person meeting, I know whether or not I'm interested. They know whether or not they're interested. Uh, if both of us are interested, I can have a term sheet to them within 24 hours. Uh, you know, term sheet is kind of the point of negotiation. And, uh, then from, from signed term sheet, uh, to close, we do a dual path of documentation and due diligence. Uh, and that process typically takes 30 days, and then we close the deal and, and wire them money if, if everything checks out.

And then so in terms of kind of quantifying the risks and assumptions you're making in the deal, are you building like an internal financial model around it or are you just like based on the way you're structuring things as kind of a unique lender, you feel like you can build in your margin of safety enough without, without kind of going to that level of granularity?

I don't typically go into that level of granularity because the fundamental questions for me are typically higher level. That, right? And so if the company has projections, I look at their model and I, I, I ask myself, what do you think about the assumptions that they've made moving forward? Uh, and, and that's a much more important question to me than whatever assumptions I would make about their business moving forward, because at the end of the day, they know their business better than I do. And so, uh, you know, But if I think their assumptions are reasonable, then okay, that makes sense to me. If I think they're being overly aggressive, then that's a red flag, right? But the other thing is usually the risks that I'm thinking about are higher level than what's gonna show up in an Excel spreadsheet. You know, what's happening with their customer base, what's happening from the competition, what's happening in the economy, you know, all of those kinds of things.

Yeah, totally, totally makes sense. Well, it's also interesting how a lot of the function of financial models I've learned is just showing a proof of work to other people and much less what the model says, right? Like you take something to an investment committee and they want to see that, oh, did you guys not do enough work to produce a financial model? Are you kidding me? Like, or the lender wants to see that you've modeled this out or an investor. Wants to see like, oh, you guys have thought through this deal. And then the smart investors will go look and see what the assumptions are. But it's interesting, this power you have because you're an investment committee of one. You don't really— you don't really have to prove to yourself that you actually did the work and flew out to, you know, Texas or whatever to look at the deal. So it's an interesting kind of reflection of how the utility of models is not necessarily what people think they are.

I will say I own half of my business and my wife owns the other half, and she would tell you her half is the half that makes money and my half is the other half. So you know, there's always somebody that you have to answer to. Michael Girdley.

Yeah, well, that's— it's— if it's all right to ask you a personal question, which you gave me permission before, so I will. But you intentionally, you know, we've gone through kind of what you do on a day-to-day basis, but you intentionally list the very first thing on your LinkedIn as you're the executive assistant. I think it's executive assistant or chief, whatever, for your wife's business.

I am. My wife is an artist. She, she debated whether or not I could use the executive part of executive assistant. But we, we will have been married 25 years this summer. And she decided after 24 years of marriage, I could probably claim to be the executive assistant.

Be promoted. Well, it's so— it is a unique thing, a person that does what you do and, you know, you're impacting a lot of stuff and these are impactful deals. I mean, you're loaning out significant amounts of money. You're managing a significant pool of family capital. You know, what, what about you wires you to want to do that? And I mean that in the nicest, kindest way possible. And as somebody who also, like, I am terrible at self-promotion, like, it's something like I'm very South Texas in that way. I just can't do it. The people that are self-promoting, I'm like, what's wrong with you? But anyway, the extreme self-promoters. But like, so why do that? Why, you know, why kind of set that up? Or you— what message are you trying to send?

I do not care about status at all. There's not one bone in my body that cares about status. And, uh, you know, some people might look at decisions I've made in my personal life or my car, you know, whatever, and say, oh yeah, right, you know, of course he cares about status. Look, I drive a BMW because I like driving a BMW. I, I do not care what other people think or say about me, uh, in the slightest, uh, and it's a it's a luxury that I have given the position that I'm in. And I'm, I'm grateful for that every single day. But I just do not care about status or the trappings of status in any way.

Yeah. So it's a very, it's a very conscious decision. And by doing that, you're— I mean, it sounds like you're intentionally sending that message out as like, hey, this is one of my core values of who I am as a person. That was just a statement. I think I'm supposed to ask questions as the interviewer. I'm sorry.

Go ahead. No, no, no. I think that's right. But, you know, it's also high comedy, Michael, because, you know, rather than getting, you know, maybe it says more to what I think about LinkedIn than anything else. But, you know, you know, every ad that I get from LinkedIn now says, hey, XYZ Company is looking for a high potential executive assistant. You'd be perfect for this, you know, and all these things. It's like, oh, you don't understand. I'm sleeping with this woman. I'm not, you know, I'm not looking for another job here.

So that's so funny. Well, so, so in the vein of kind of sending that message intentionally, um, and also poking fun at LinkedIn because it deserves it, you know what, you and I got to know each other over Twitter. Like, I love your Twitter presence. You're like one of the most positive, like, constructive persons on there. Um, you know, what, what is— why Twitter? What is it about it that that helps you in your business or gives you joy in terms of being on there and posting?

Michael Girdley I don't know. That's an interesting question. I lurked on Twitter and had 12 followers or something for years and years and years and never did anything. And then I started to get serious about it. For some reason, to me, just the— call it fintech, Not FinTech. What's the word I'm looking for, Michael? Fin—

FinTwit. FinTwit.

You know, FinTwit, real estate Twitter. It's kind of this wonderful circle of Twitter, right? Most people are pretty supportive, very smart. You can weed out a few bad actors pretty easily. And I've found it totally totally engaging. I, I don't know that I've ever done a Mez deal on Twitter, but I'm in— I'm a limited partner in, uh, 4 or 5 or 6 other, uh, funds or investments that I have found exclusively through Twitter. So I found, you know, business relationships through Twitter, uh, and it's, it's just kind of this you know, supportive environment that I've found. And, you know, I don't, I don't get into political Twitter. I don't get into, um, you know, any of the gunk or the muck. I have friends that try to drag me into it every once in a while, and I just ignore it. You know, there's no point. Um, but it's, it's this wonderful supportive environment. I, I will say the other thing is I think Moses, uh, had a great point. We're doing what what a lot of us do that put deals together. When you're putting a deal together, it's this kind of really time-intensive process, right? You're super busy. You're trying to read documents and do due diligence and get all of this stuff done. But when you're not in the middle of trying to close a deal, you find yourself with a whole lot of spare time on your hands. There's, there's frankly not a lot to do. And, and Twitter is a great way to, to frankly kind of engage and to be exposed to new ideas and different things when you do have a little bit more spare time on your hands.

Yeah, I like it a lot. It's been— it's made me a better person, just like doing this podcast has made me a better person. Yes, I'm going to lunch. Yes, Matt, I will be a better person. Yes, I did do it.

Be a better person, Michael. Come on.

Try it. It's such— it's so hard. Um, uh, anywho. Yeah, I mean, I do think it's interesting you, you tapped on kind of this idea that I believe that when you see a healthy community, the surest sign of a healthy community is what happens to bad apples when they show up. Like, do they come in and dominate and become key players, or do they get ejected eventually? And I'm still— I think I'm still TBD on where, where FinTwit or SMBTwit or Retwit in terms of those Twitter communities is on that because, you know, we had a kind of a canceling of a person who I think was a bad actor. But like, I was one of the people who kind of knew that stuff, but I didn't step forward until, until it happened. So anyway, I don't know that we need to litigate that person. I don't plan on it, but it's just one of those things where I'm like, I'm still kind kind of, I don't know, I just don't know if it's, if, if we handled it right or if it was handled right or not. Um, but it's, it's one of the things where I was happy that it ended up in the right place.

Look, I, I don't disagree with that. The only thing that I would add to that is I have made a very conscious decision to try to be absolutely as positive on Twitter as I can possibly be. And, um, you know, I, look, I think there's value value in saying, hey, I've had a bad day and, you know, it sucks, right? You know, I think there's value in being human and being real, but I also think there's value in trying to put forward a positive, encouraging face to the world. And for one, I think, you know, people like you better when you try to do that. And two, I think that's the way you generally have to try to go through life. My wife will laugh when she hears this because she thinks I'm generally not a very optimistic person. I'm a lender at the end of the day, right? But to try to find optimism and put forward an optimistic view of the world is something that's needed today.

I think it's actually a pretty unique, unique concept, or it's a unique characteristic of yours, which is I see people who are more classic kind of allocator personalities. They are often wired to see all the stuff that can go wrong and they're very negative and they don't have an optimistic bone in their body. And it's inspiring to see like, okay, you're very much an allocator mindset that I would say kind of prototypical one, whereas I'm much more of an operator. Um, but it's cool to see you buck that trend, right? Because so many times I feel like I'm going on Twitter and I'm like, guys, like, lighten up. Like, the world is not, you know, the sky is not falling. Um, like, and, but they're like, no, no, look, this Ford plant shut down, it's so terrible. It's like, come on. So anyway, I think that that was just my long-winded way of complimenting you that I think it's an awesome combination.

Well, thank you. Look, there's a risk to it, right? The, the risk is for somebody like me is And I've gotten a lot of, you know, very positive DMs saying, "Hey, I really appreciate what you're doing. Thank you." You know, that kind of stuff. I've also gotten a fair number of negative DMs that say, "Oh, you're just a rich guy, and, you know, that's all you are." And that's the risk behind it, right? Is if I keep trying to suggest, "Hey, there's opportunity here. Let's go take advantage of it." you know, disasters have a way of not happening, world isn't going to come to an end, you know, all those kinds of things. The risk is you open yourself up to, oh, that's just because you have some money and you don't have to worry about this stuff. And well, maybe, maybe not.

I don't know. We are, we are privileged Caucasian men, white men in the United States of America. So every day I wake up and and recognize the privilege that, that I do have. My parents are still married and I graduated without any debt from college. Like, I have so much that I have to be thankful for. And to some extent, I feel like I owe the world optimism and being constructive because it's my job to make it. I've given those gifts. It's my job to make the world a better place as much as I can because of, because of that. So anyway, I'm totally with you.

Absolutely.

Totally with you. So I'd love to, in the last few minutes that we have, switch gears a little bit. You know, the mezz and private lending industry, like with the flood of capital coming in, I'd love to kind of talk about trends that you're seeing. You know, like I've— I'm seeing like private equity firms doing— bringing structured finance for, you know, practices in alongside their flagship funds. You know, you're seeing the Vistas of the world kind of do some of those things and even kind of the more traditional private equity firms. So and then you're seeing the lenders, you know, seeing more and more when you talk to folks who are classic mezz lenders, they're like, no, no, we want to do the whole thing. We want to do a unitranche debt structure for you. So kind of how are you seeing those things? How's the whole thing evolving and what are you seeing in terms of trends?

So I think what you're seeing is lots of capital across two primary dynamics. Everyone's raising new funds in the, or has raised new funds in the mezz private lending kind of world. So instead of investing, you know, $200, $250, $300 million, they're all investing $650, $750, $850 million. And so they've gravitated up into— in check size. So, you know, if you need to borrow $50 million or $100 million, you have all kinds of options in order to go borrow that money.

Hmm.

Okay. Well, what you might say is, okay, well, all those players have vacated the lower end of the spectrum. Matt, life is great. You have no competition anymore. And what's happening at the bottom end? Well, the same thing has happened on the bottom end. One, I have a lot more competition today from what I would call the rich uncle syndrome. And I say uncle to to mean unsophisticated. I don't want to hang that on females that are out there. So let's call it rich uncles, rich, unsophisticated uncles that frankly don't know what they're doing but have some money. And they're sitting there saying, you know, to the business owner, hey, you need to borrow $1 million. You're going to pay me 8%, 10%. Great. Yeah, that's— look, I'm only getting 4% over here. I'll do that deal all day long, right? And so you have a lot of competition there. And then you have a massive amount of technological change that has allowed different organizations to come downstream and to push lending into smaller and smaller check sizes, but put their own balance sheets to work through technology. I had a client that was in the middle of a rollout to Home Depot, and they got a call one day from Home Depot's banker, and the banker said, "Hey, we view your risk of your product in Home Depot as Home Depot risk, not your risk." "So we are willing to lend to you at Home Depot rates, borrowing rates, plus a spread." And the company said, "Well, what's the spread?" And the bank said, "Oh, I don't know, 12 or 13 basis points." And they said, "So we can go from borrowing from Matt at 15% to borrowing from—" And the bank said, "Yeah, about 5." The company said, "Okay, where can we do this?" And that's just one example of, well, the bank has used technology to be able to lend money to smaller and smaller borrowers at better and better rates, right? By the way, in a different industry, Amazon is doing the exact same thing. In a different context, Facebook is doing the exact same thing. With their balance sheet. And so you see technology making capital more and more accessible across the waterfront. And so competition is increasing everywhere.

Hmm. Would you, would you encourage young people to consider getting into private lending as a career? I mean, do you think— I'm curious. You seem to love it. I'm curious if you think other people would love it as much.

I do love it, but I'm a strange, strange guy, Michael. Look, it is a— look, I love it. If somebody wants to get exposure to it and go work for Apollo or Ares or one of the others and decide whether or not they want to make a career out of it, go for it. I mean, it's a it's a fascinating business, uh, where, uh, people can, um, you know, look, in finance, we are all extremely overpaid for what we actually do in society. And so, uh, if you, if you, if you get into it and you like it, then you want to make some money. Sure. Why not?

Yeah. Dig it. So, um, so you've given me advice that I need to go to more lunches. You're exactly right. Do you have any other coaching for me? You've watched me on Twitter for 2 years now. Anything else you would do besides less cursing? Anything else you would tell me?

No, look, I think, um, not for you because I think you are great and I really appreciate, uh, your Twitter presence. I really appreciate— I consider you a friend, uh, and I think you're terrific. If I could give any general advice It would be, be courageous, be kind. And there's not enough kindness in the world. There's not enough people that are willing to be vocal about the fact that they're good, kind-hearted people. And that takes courage. And in fairness, I need to tell you that that phrase, be courageous, be kind, comes from a little girl that wrote that in talk on the sidewalk down at the beach that I was at 6 months ago. But I thought it was an apt-fitting message for the world. And so I repeat it to your listeners: Be courageous, be kind.

That's awesome. That's awesome. I think that's a great place to finish up. And, you know, I told you I was really excited to do this interview today, and I want you to know you did not disappoint. So I'm sure our listeners will enjoy it as much as I did.

Thank you, Michael. I just really appreciate what you're doing. I appreciate the forum. And so thank you. Super cool.

Well, thanks again for being here. To our listeners— oh, I have one more question. Is there anything our listeners can do to support you or any of the causes that you are involved in? Any, any ask for folks that follow me and listen to the podcast?

No. You know, I look at— follow me on Twitter if you're not following me on Twitter, but Uh, you know, other than that, you know, just thank you.

Super cool.

All right.

Well, thanks everybody for being here today. Uh, just a reminder, please rate the show in your podcast app so Mirko, our producer, won't beat me up. And, uh, do appreciate, uh, everybody tuning in today and look forward to hearing feedback on this episode. Thanks again. Bye.