Wellington Financial portfolio co. FolioDynamix being acquired for $200M

We got some great news earlier today for our limited partners. New York-based FolioDynamix is being acquired by NASDAQ-listed Actua (ACTA:Q) for ~US$200 million. It was only the Spring of 2012 when we joined VCs ABS Capital and Edison Partners in the Folio Dynamics Inc. syndicate. What Folio Chairman and CEO Joe Mrak and his team have built clearly drew attention in a relatively short timeframe. And Actua, which calls itself the multi-vertical cloud company, had to have it.

FolioDynamix supplies a cloud-based technology platform to manage the full wealth management lifecycle for wealth service providers and investment advisors. It works across all account types including unified managed accounts and unified managed household programs. The company’s technology is complemented with institutional-quality research, content and consulting expertise delivered by its subsidiary, FDx Advisors, a registered investment advisor. FDx provides clients with due diligence and discretionary investment solutions regarding managers / models used to support separately managed account unified managed accounts, mutual fund wrap and exchange traded fund programs.

In operation since 2007, Folio’s clients include banks, money management firms, brokers and so forth. Examples include Cambridge Investment Research, LPL, Raymond James and Wedbush.

The management team has been very efficient with its investment capital over the years. Which is code for: this is a big win for the Folio team and their VC partners. ABS and Edison came did their round in late 2010, are were very much committed to the deal when the opportunity arose for a venture debt tranche. The role and benefits of venture debt was clear: provide capital at an important time without the meaningful dilution to the management team that would result from a VC follow-on. For the VCs, they got to keep their powder dry and improve their own multiple of capital on an exit.

From its vantagepoint, Actua gets “a current net revenue run rate of over $30 million (approximately $50 million on a gross revenue basis), with positive earnings and cash flow. [Folio] grew over 40% in 2013, and growth is expected to continue at that rate in 2014.”

Congrats to Joe, CFO Mark Herman, CTO Mark Davis, the Folio family and the teams at ABS (Cal Wheaton) and Edison Ventures (Chris Sugden).

MRM

 
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Wellington Financial opens new office in San Jose, California

Earlier today we announced the opening of another Wellington Financial office in California, as well as the addition of Rob Helm and Sean Lynden as our newest colleagues and Partners.

During their many years with Gold Hill Capital, a well known venture debt fund that started in 2000, Sean and Rob demonstrated the value of partnership to their portfolio companies and VC relationships. They also generated excellent risk-adjusted returns for their limited partners on both Gold Hill Capital I and II, which is something that matters to anyone in our business.

Rob is a Cal Polytechnic grad with 14 years of experience financing high-growth technology businesses. Rob was a Partner with Gold Hill, with responsibilities for transaction sourcing and adjudication. Before he joined Gold Hill in 2003, Rob spent three years with Silicon Valley Bank.

Sean has over 20 years of experience providing debt financing to growth companies, primarily in the California region. As a founding partner of Gold Hill Capital, Sean was involved in every facet of the business, including capital raising, transaction sourcing, credit reviews and portfolio management over a 14 year period. Previous to Gold Hill Capital, Sean spent 12 years with Silicon Valley Bank (SIVB:Q), with senior executive responsibilities. He’s a Stanford University graduate.

In 2009, we opened our first U.S. office and planted our flag in Santa Monica with the hiring of Eric Speer, formerly of Vencore Capital. In 2013, we added a second U.S.-based colleague and an office on Battery Street in San Francisco. Now that about 40% of our entire portfolio is based in California, and considering the impressive number of companies that continue to attract VC interest in that part of the world, it only makes sense to add San Jose and bolster our team further.

Welcome to Rob and Sean, and I promise that we’ll never ask you to stop cheering for the Sharks in favour of the Maple Leafs.

MRM

 
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Conflicting signals in public, private debt markets

Depending on your news source, this is either a rosy or horrible time to raise new debt for your mid-large sized company.

The publicly-traded high yield debt market has taken a pasting this summer, with US$20 billion of fund outflows since June. It can’t be a good time to be a borrower with a new debt issue coming to market (from Reuters Breakingviews in London, H/T G&M):

Like an old-fashioned bank run, no one knows for sure what started the run on high-yield funds in July, 2014.

Deutsche Bank has a plausible account. It thinks so-called short-duration funds started to suffer outflows in May, perhaps because they had been particularly richly priced by yield-crazed investors. Then investors started to worry that the U.S. economy would soon be strong enough to support higher policy interest rates, which would make junk less attractive. Janet Yellen turned a jog into a run in July when the Federal Reserve chair said high-yield valuations “appear stretched.”

As the high-yield funds were selling, they ran into a shortage of buyers. Many investors were too worried about Ukraine to want many risky assets. The effect was dramatic. About $20-billion (U.S.) has been withdrawn from high-yield funds since June, Barclays believes, the longest consecutive period of outflows on record. High-yield spreads jumped 55 basis points in a month – with no sign that defaults were rising.

Now, I’d argue that a high yield offering in the range of 5 or 6 percent isn’t really much of a “high yield” per se. It is certainly higher than what government bonds of the same tenor would pay, but that’s not traditionally been a sufficiently attractive selling feature for investors; the rate had to be high on an absolute basis, not just a relative one. For investors who saw implied HY rates quickly back up 55bps though, the mark-to-market loss on the face value of their portfolio HY bonds was real. Even if a new HY issue would still be priced at an attractive rate from an issuers standpoint based upon historical norms.

There are still plenty of high yield issues in the 8% range these days, but, again, this paper is sporting a coupon which is ~300 bps lower than traditional interest rate levels for such issuers — despite the same notional expected rate of default.

It doesn’t make sense to me either.

The problem for issuers isn’t the quick 55bps jump in rates, it’s the fact that US$20 billion of investor capital was redeemed from funds over the past few weeks. The absence of liquidity within institutional and retail funds dedicated to high yield bonds usually serves to brutally shut the door to many new offerings.

In the private debt market, however, AltAssets is reporting that “Leveraged loans in US technology sector hit all-time highs” recently. Frankly, from what our firm has been seeing in 2014, this doesn’t come as a surprise (see prior post “Bloomberg: Regulators stand by while U.S. bank lenders get footloose” May 14-14).

It may strike you as odd that illiquid $20 million – $100 million loans for U.S. private technology companies have never been easier to find, all while the public high yield bond market is in a funk. There are a few reasons why this is happening, and they aren’t very complicated:

- some U.S. specialty banks are making it easier than ever for unprofitable tech firms to get meaningful loans booked, with the tacit support of the FDIC and Federal Reserve (so far)

- some hedge funds have returned to the sector, after fleeing in 2008

- as much as the IPO market has been open to tech names for most
of the past two years, new investment funds have been created to allow higher quality private firms to “Stay Private Longer”. These aren’t the pre-IPO equity vehicles that invested in Facebook or Twitter, which were designed to give some liquidity for shareholders prior to an IPO. This is actually capital destined for the company’s coffers to spend in an effort to grow revenue.

- the fact that these private company loans are illiquid often gives lenders the ability to carry them at more static valuation levels for accounting purposes, unlike publicly-quoted bonds whose notional values bounce around from day-to-day

As much as this might explain-away the current divergence in the two debt markets, it is impossible to predict who will blink first. Institutional lenders, who see two more years of lowish interest rates in the US and Europe, or private debt players (including banks), who might want to be cautious about booking deals today that will only serve to have their own LP investors, regulators and/or shareholders look back in 18 months and say:

“You did what?”

It almost takes me back to 2006-07 (see prior post “US mortgage liquidity crisis at hand” Mar 14-07). Which was soon followed by former Citibank CEO’s famous quote:

In July 2007, Prince told the Financial Times that global liquidity was enormous and only a significant disruptive event could create difficulty in the leveraged buyout market. “As long as the music is playing, you’ve got to get up and dance,” he said. “We’re still dancing.

Market players will never forget how that turned out, right? Right?

MRM

 
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When it comes to marketing at least, Kevin O’Leary knows what he’s doing

News report: Kevin O’Leary leaves CBC, joins CTV

I know that you are probably expecting me to be critical of CTV’s decision to take Kevin O’Leary back, five years after he quit BNN to join Amanda Lang and the CBC. Quite frankly, I just can’t bring myself to do it. It wouldn’t be right, to be honest, as CTV is just displaying the natural tendency that we all have to let a talented marketer convince us to do something that might be against our better judgment. What Mr. O’Leary has taught Canada over the past decade isn’t about business or investing, but how to market yourself to the world in the face of tough odds, and that deserves acknowledgement and applause.

Hat tip. Clap.

Just imagine the challenge that Mr. O’Leary had to keep the “Decade of Daddy” rolling along to his financial satisfaction. The CBC recently lost the TV rights to NHL hockey and is undergoing massive budget cuts as a result. This left little in the kitty to pay KO for his contribution to Ms. Lang’s CBC show; he’s no longer doing these TV gigs solely to sell mutual funds or mortgages, since we know that at least two of Mr. O’Leary’s TV-generated start-ups are not working out as planned (see prior posts “RRSP season unkind to Kevin O’Leary’s fundraising hopes” June 5-13 and “Kevin O’Leary closes failed mortgage startup” Apr 14-14). The lack of budget at CBC put Mr. O’Leary’s agent in a tough spot. His client “gots to get paid.” There aren’t that many doors to knock on in Canada, and he was left to go back to the parent company of BNN (a specialty channel I love), which launched Mr. O’Leary on the unsuspecting Canadian public circa 2005, to see if they’d forgive and forget.

That’s where the salesmanship comes in.

According to CTV’s parent, Bell Media, Mr. O’Leary is a “financial expert.” Now, according to a lot of other media outlets (see The New York Times, Canadian Business Magazine or the ROB Magazine), and not just we backwater bloggers (see prior representative post “Highlights of our Kevin O’Leary Blog Posts” Sept. 27-12), this is, shall we say, debatable.

In its press release, CTV touted Mr. O’Leary’s last real corporate role as evidence of his “strong business acumen”:

Previously, O’Leary founded and was president of SoftKey (later called The Learning Company), a global educational software company, and negotiated its $4 billion acquisition by Mattel.

If you’ve ever seen Mr. O’Leary talk about his time with TLC on television, you likely heard him bark something like “when I sold my company for $4 billion dollars” in the direction of an entrepreneur on Dragon’s Den who thought he knew better than KO himself. We know from the NYT that Mr. O’Leary earned all of about $7 million after tax from that TLC-Mattel transaction, half of which came in the form of severance. Whatever. $7 million is a still lot of money, CTV might say, even if it isn’t $4 billion (see prior post “What is the origin of O’Leary’s “billionaire” moniker?” Jan. 24-10).

The TLC-Mattel story is an odd place to go if CTV is using Mr. O’Leary’s negotiation of the Mattel deal as proof of his “business acumen”. Why, you ask? Because a massive shareholder lawsuit flowed from the same O’Leary negotiation that CTV cites. Mattel shareholders wrote off the entire $4 billion purchase price barely a year after their company acquired TLC, and Mr. O’Leary, among others, was sued in the United States District Court of California for “stock fraud”, amoung other market non-nos:

…making “false statements”, “stock fraud”, “artificial inflation in Mattel’s stock price”, trading “while in possession of and using material non-public information”, “improper revenue recognition”, and financial statement “manipulation”….

Before the case went to trial, Mr. O’Leary, Mattel and his fellow defendants paid US$122 million in 2003 to settle the fraud accusations. Although he never talks about it publicly, and it isn’t mentioned in any of the O’Leary Funds disclosure documents on SEDAR, the producers at CBC’s Redemption Inc. felt the settlement had to be disclosed on that shows’ website as part of Mr. O’Leary’s bio circa 2012.

That was two years ago, which is a lifetime in the television age. And it’s not just Canadian television producers who are susceptible to the art of salesmanship.

If you ever watch CNBC, you’ll have noticed that Mr. O’Leary has become a quasi-regular market commentator of late; when he does double-enders, O’Leary Funds logos float behind his head. No chance is missed to market his fund company, despite its performance (see representative prior post “Shed a tear for O’Leary’s Yield Advantaged Convertible Debenture IPO investors” Mar 24-13). CNBC sees KO on Shark Tank, hears about the $4 billion sale to Mattel, and assumes he’s a business guru.

Which leads to further marketing opportunities. On July 22nd, the CNBC show anchor asked KO what he was doing with “your funds” based upon Mr. O’Leary’s belief that interest rates would be rising sooner than expected. Mr. O’Leary responded:

“I have shortened the duration in my funds” “to 36 months”.

According to the current disclosure documents for O’Leary Funds on SEDAR, such as those dated June 18, 2014, Stanton Asset Management Inc. is the Portfolio Advisor to the O’Leary Funds and “manages the investment portfolio of each of the Funds.” To my knowledge, Mr. O’Leary has no accreditation to actively manage investment capital in any Province in Canada.

As such, there is no way that he is in a position to shorten the duration of the funds being managed by Stanton. Mr. O’Leary is not employed by Stanton, and is never referred to as member of the team performing the Portfolio Advisor role for O’Leary Funds. Quite the contrary, as one recent Prospectus discloses:

“The Portfolio Advisor has also engaged O’Leary to provide consulting services to the Portfolio Advisor in respect of the Portfolio. The Portfolio Advisor, together with O’Leary, will implement the investment strategy of the Portfolio Trust. O’Leary will identify markets and investment opportunities but will not recommend the purchase or sale of specific securities by the Portfolio Trust. The Portfolio Advisor is ultimately responsible for the investment decisions of the Portfolio Trust and will review opportunities identified by O’Leary and make the investment decisions on behalf of the Portfolio Trust.”

You got that?

According to the requirements of Canadian Securities Regulators, Mr. O’Leary can give advice about duration strategy, but Stanton’s team is responsible for the investment decisions of the various funds. That’s not how Mr. O’Leary depicted it on CNBC last month, when he advised retail investors across Canada and the USA that “I have shortened the duration” of “my” bond investments, but those are just petty regulatory details.

For a talented marketer, you just keep on pitching. As Mr. O’Leary has proven, if you keep at it long and hard enough, someone will buy, no matter what.

Every entrepreneur should take heart.

MRM
(this post, like all blogs, is an Opinion Piece)

 
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9% Commercial Loan growth looks good for banks, economy

Published on August 5, 2014 by in Economy

It is so easy to fret about the Canadian economy.

Lacklustre job growth, Ontario’s oppressive government debt, regular plant closings…. And yet, when one looks at the balance sheets of Canadian banks, businesses are actually taking advantage of unusually low interest rates and putting their bank lines to work. Over a twelve month period, net commercial lending to domestic businesses by Canadian chartered banks grew by just over 8.5%, hitting $230 billion.

That’s a collective commercial loan book that’s more than 20% higher than when I starting tracking these Bank of Canada stats in December 2008 (The category is “Business loans to Canadian residents for business purposes”):

December 2008: $191.563 billion
January 2009: $185.679 billion
February: $183.759 billion
March: $184.089 billion
April: $181.811 billion
May: $178.691 billion
June: $176.365 billion
July: $174.664 billion
August: $173.818 billion
September: $171.152 billion
October: $171.091 billion
November: $168.425 billion
December: $169.430 billion

January 2010: $167.892 billion
February: $168.104 billion
March: $169.495 billion
April: $169.163 billion
May: $166.378 billion
June: $165.369 billion
July: $166.988 billion
August: $164.774 billion
September: $163.976 billion
October: $168.401 billion
November: $168.892 billion
December: $169.170 billion

January 2011: $170.42 billion
February: $171.800 billion
March: $174.028 billion
April: $175.198 billion
May: $173.974 billion
June: $176.527 billion
July: $177.574 billion
August: $177.654 billion
September: $176.856 billion
October: $178.214 billion
November: $176.705 billion
December: $180.526 billion

January 2012: $180.5 billion
February: $182.7 billion
March: $185.3 billion
April: $188.0 billion
May: $186.6 billion
June: $187.9 billion
July: $190.9 billion
August: $192.6 billion
September: $195.0 billion
October: $197.2 billion
November: $198.1 billion
December: $201.5 billion

January 2013: $200.8 billion
February: $204.8 billion
March: $209.1 billion
April: $210.0 billion
May: $209.2 billion
June: $212.5 billion
July: $216.6 billion
August: $215.3 billion
September: $217.8 billion
October: $218.7 billion
November: $219.5 billion
December: $220.6 billion

January 2014: $219.2 billion
February: $218.4 billion
March: $223.3 billion
April: $229.4 billion
May: $231.7 billion
June: $230.9 billion

Just think of what this could mean for bank earnings if the Prime rate was to go back to something more normal: like 5% or 6%. And, unlike in the USA (see prior post “Bloomberg: Regulators stand by while U.S. bank lenders get footloose” May 4-14), there’s no hint of weak covenant packages being used to win this business, either.

MRM

 
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