Wellington to introduce no cov, no am, low interest loan product

Published on April 1, 2015 by in General

As a former boss of mine once said about Free Trade, “Only donkeys never change their minds.”

For years, the Wellington team has thought that the best way to succeed in our business over the long term is to find good companies and provide them with appropriately-priced, flexible capital. By flexible, I mean useful. I mean, “no am.” Rather than the traditional amortizing loan product that pervaded the tech debt industry for two decades prior to our firm’s founding in 2000. The credit check on the “no am” structure was a financial covenant, which was meant to ensure that one could have a meaningful conversation with your portfolio company should they go wildly offside the business plan that you funded against.

Some U.S. venture debt funds avoided utilizing a financial covenant, preferring to allow the amortization of the loan to manage their exposure to any individual loan. Regulated banks, however, didn’t have that luxury, even in the tech space. As any CFO will tell you, A/R margins, borrowing base certificates, and amortizing term loans (with a short principal holiday at most) were the norm throughout all of the last decade. Commercial bank credit officers understood that a loan without a covenant was merely a form of secured equity (as is a VC pref share) but at debt pricing.

They knew that the concept would put the bank’s capital at unnecessary risk, and even if they could get comfortable with a specific company, they were be confident that the bank inspectors from FDIC, OCC, OSFI or the Federal Reserve would slap them for it…so why bother?

Over the past 24 months, we’ve noticed that several tech-focused commercial banks have decided to dispense with covenants altogether, including MACs, just as the larger commercial banks have let leverage levels grow to all-time highs (see prior post “Bloomberg: Regulators stand by while U.S. bank lenders get footloose” May 14-14). All while dropping loan rates to 4-5% all-in for sub $25 million revenue firms that are losing money. Those rates are below what high-yield bonds cost a company with $250 million of EBITDA.

With that in mind, it seems to me that our commercial response should be to start doing “no am”, “no cov”, no MAC, no collateral deals at rates that are as low as they’ve been since WWII.

If bank regulators don’t have a problem with it, despite the fact that banks are levered 20-1 and are ultimately guaranteed by the taxpayer, why should our pension fund limited partners feel they’re at risk?

I mean, what could go wrong?

MRM
(disclosure: yes, this is an April Fool’s joke; the last part anyway)

 
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Constellation Software acquires Wellington Financial portfolio co. InterAct911

Remember that sub-$20 TSX IPO that is now trading for more than $400? They’re at it again.

Constellation Software Inc. (TSX:CSU) announced last night that it had completed, through its wholly-owned subsidiary N. Harris Computer Corporation, the acquisition of InterAct911 Corporation. InterAct became one of our portfolio companies in May 2011, and is a provider of “Computer Aided Dispatch, Records Management, Mobile Enforcement and Offender Management systems in the United States and select regions worldwide.”

According to CSI’s press release, “InterAct’s geographic footprint and customer profile complements and enhances Harris’ current Global Law Enforcement business unit. Harris plans to continue to develop, sell, implement and support InterAct’s Software as a Service (SaaS) Computer Aided Dispatch, Records Management and Offender Management platforms, enabling Harris to participate in a growing segment of the Law Enforcement market. InterAct is an excellent addition to our Law Enforcement portfolio. The company has invested significantly in the development of its SaaS platforms over the last several years. We look forward to expanding the client base for these innovative and highly functional products. I am very pleased to welcome the InterAct customers to the Harris family and look forward to long-lasting relationships with each one.”

On behalf of our team, thanks go to John McNulty, President and CEO of InterAct, who has been a dream to work with throughout our time together.

MRM

 
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How much does a pension plan’s “personality” contribute to its return profile?

News report: “HOOPP’s returns defy market trends

This headline caught my eye, and not just because it reflected more good news for the local contingent of high profile Canadian pension plans. HOOPP is one of those larger-sized plans that always seems to march to its own drummer. The current investment strategy was designed years ago by then CIO Jim Keohane and former PE head Andy Moysiuk, among others, and the team has appropriately stuck to their guns throughout the post-2000 era. HOOPP was one of the first local pension plans to get actively involved in the business of being a GP, for example (think Argosy Bridge Fund in 2004). Something that is now commonplace at OMERS and AIMCO with their venture, PE and infrastructure teams. Whether or not this trailblazing approach drove HOOPP’s outsized returns in 2014 is difficult to analyze, and it may well have been more about bonds than anything particularly fancy like a direct investment strategy (from the Globe):

One move the pension plan made was to increase its exposure to long-term government bonds, with the view that the bonds would appreciate if long-term interest rates declined. This was a major benefit in 2014, as HOOPP posted a surplus of nearly $14-billion.

The FTSE TMX long bond index appreciated 17.5% last year, despite the fact that a 30 year bond will earn you interest of just 2.23% per annum right now. For years, Bay Street chatter has suggested that HOOPP’s fixed income portfolio was “triple-levered.” If that’s in fact true, it would definitely explain why HOOPP’s performance beat some of its contemporaries by 700 bps. So goes the bond market, so goes the return.

As “personalities” go, HOOPP is just one of several large Canadian plans that appear, at least to outsiders, to reflect the man at the top (sadly, there aren’t any women in my sample). As CEO of OMERS, Michael Nobrega steered the organization to be more of a high quality deal shop than a passive market player; investments in Bruce Power, OMERS Ventures, Porter Airlines and the huge capital allocated of Oxford Properties reflect his early imprint. The current CEO, Michael Latimer, is putting his own stamp on the place as he sets up the $72 billion plan to ensure its resilience over the long term — in all market conditions.

The analytical mind of Caisse de Depot CEO Michael Sabia has certainly been a key factor at that plan’s stabilization and turnaround, just as the crazy professor bent of former AIMCO CEO Leo de Bever served to delight/horrify crowds when he’d go off script about the merits of venture capital or PE at an industry conference. The mirror image of de Bever’s free-forming, of course, is the “zip-locked mouth” approach at CPP Investment Board regarding the disclosure of anything but great news at Canada’s largest capital pool — a policy that could only have been crafted at the top of that house (see representative prior post “12 questions CPP Investment Board won’t be answering on BNN today” Jan. 17-13).

As the years pass, I’ve becoming increasing amazed at how these huge organizations, with billions of dollars of pension assets under management, can often seem to take on the personality of the Top Dog; in the same way a sports team can often reflect the traits of its owner. I’m not saying that’s a bad thing. Far from it. You’d expect it to be a common occurrence with a hedge fund, PE shop (such as Newton Glassman or Anthony Munk) or with a wonderfully big personality like Tim Draper in the VC world.

But in the staid pension fund world? Who knew?

And, if I’m right, does this contribute to the plan’s overall return for its beneficiaries? Maybe, maybe not. There’s probably a PhD thesis in there somewhere, either way.

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

 
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When you have the chance in life, get the best

Published on March 8, 2015 by in General

It attracted a great deal of local attention, but you might have missed that the Windsor-Detroit Bridge Authority announced on Friday that four respected Canadian financial executives have agreed to serve as members of the WDBA Capital Markets Advisory Panel.

There was no such “panel” when the Federal government first created the new WDBA Crown Corporation, but given the recent criticism of Public Private Partnerships (P3) by the Ontario Auditor General, our Board wanted to ensure that no stone is unturned as we undertake this multi-billion dollar project on behalf of the people of Canada.

Over the past seven months, there have been plenty of concrete steps to initiate the procurement of the public-private partnership to design, build, finance, operate and maintain the new bridge. One “big bucket” of work involves a review of financing and strategic opportunities available in the current P3 marketplace. Our new Capital Markets Advisory Panel has been established by the WDBA’s Board of Directors to provide independent counsel to the Board regarding the financing strategy associated with the New International Trade Crossing (NITC) project between Ontario and Michigan.

The four individuals are doing us all a favour, and on behalf of my Board colleagues and every Ontario exporter, a sincere thank you goes to Donald A. Wright (Chair), Dominic D’Alessandro, Sheryl Kennedy and Richard J. Kostoff.

If you’ve spent any time in and around the capital markets, you’ll recognize the breadth of experience that this Panel brings to the project. Mr. Wright is the former Chairman and CEO of TD Securities Inc. and Deputy Chair of TD Bank Financial; decades of experience on financings large and small. He has significant public service experience including as Chair of VIA Rail Canada, Governor of the Royal Ontario Museum and as a Director of Sick Children’s Hospital Foundation. All will agree that Don’s mind is as sharp as anyone on a Bay Street trading desk.

Mr. D’Alessandro was President and Chief Executive Officer of Manulife Financial Corporation from 1994 to 2009. He currently serves on the board of directors of CGI Group Inc. and Suncor, and recently retired from the CIBC Board. Given the huge demand for fixed income product that might be associated with the NITC down the road, as well as the liability-matching represented by a long term project such as this, we were so lucky that Dominic agreed to assist.

Ms. Kennedy is CEO of Promontory Financial Group Canada ULC. She served as Deputy Governor of the Bank of Canada from 1994 to 2008 and chaired the Markets Committee at the Bank for International Settlements from 2003 to 2006. She currently sits on the boards of the Canadian Public Accountability Board, the General Synod Pension Plan of the Anglican Church of Canada and HIPPY Canada. Sheryl’s current international business activities will help ensure that we have a global view on the financing side, and her long history in Ottawa is priceless.

Mr. Kostoff is the founder and Chair of Temple Rock Holdings Inc. He currently sits on the board of the Ontario Finance Authority, is a member of the Independent Review Committee for Fidelity Investments Canada, HealthCare 365, Novari Health and the advisory boards of CommunityLend, FemMed and Straen Inc. He has advised a number of government and corporate entities including GMP Inc., GE Capital Canada, Infrastructure Ontario, OP Trust and the Hospital for Sick Children. Richard has been part of many P3 financings already, and has the helpful battle scars to prove it.

Our Minister, Lisa Raitt, loved the concept of the panel, and has been completely supportive of anything we can do to maximize the benefits of the Public-Private Partnership on behalf of both the taxpayer and all future NITC users.

With $120 billion of two-way trade each year, few government projects are as important as this one. That said, every entrepreneur should follow this rule when building their own Board of Directors or informal Advisory team: “When you have the chance in life, get the best.”

A sincere thanks, on behalf of every Canadian, to Don, Dominic, Sheryl and Richard.

MRM
(disclosure – this blog, as always, reflects a personal opinion and in no way represents the views of the WDBA, its Board/Staff or the federal government)

 
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If you’re an Analyst / Associate, we’re hiring

The last time we were formally in the market for an Analyst / Associate was 2009.

That day arrived again a few days ago, as one of our talented colleagues (Daniel Bernholtz) headed off to do his MBA at the Ivey School of Business. I wrote a blog in 2009 outlining our needs, which ultimately led to his hiring. With that success, I naturally thought we’d try again. Here’s what I wrote five years ago (see prior post “If you’re an Analyst, we’re hiring” Dec. 7-09):

Job description: if you have to ask, you aren’t right for the role.

Education: Some type of math, engineering, business or similar undergrad degree.

Skills: you know, Analyst or Associate skills.

Personality: team player, an individual who takes pride in their work, enjoys meeting new people.

Previous work experience: at least 12 months in a Analyst role where Excel and analyzing businesses was the daily fare.

Career goals: we’re open-minded.

Before he head off to Western, and perhaps a stop at the Ceeps or Joe Kool’s, I asked Daniel to tackle what he thinks the job description would be. Here’s his view after the better part of four stimulating and enjoyable years with us:

You will be responsible for evaluating venture debt opportunities across North America. This will include preparing investment memorandums on behalf of the deal teams, outlining the merits of proposed transactions, along with creating detailed financial models that will help in the overall underwriting analysis.

Additional support will be provided throughout the deal process, including preparing term sheets, performing due diligence, and portfolio management activities related to closed transactions.

Ad hoc projects may include presentations and reporting prepared for prospective clients, investors and other third parties.

Through this role, you will have the opportunity to evaluate transactions across a range of technologies, market segments and geographic areas, while focused on North America. Interactions with bankers, agents, venture capitalists and C-suite executives will be routine. The role requires a focused mind, ability to multi-task and prioritize to perform under tight timelines.

If you are such a person, and we only have budget to hire one, email your resume to resumes@wellingtonfund.com. Thanks in advance to everyone for their interest. We had lots of interest last time, and I expect nothing different in 2015 (see prior post “If you’re an Analyst, we’re hiring part 3” Dec. 16-09). I hope everyone understands that we will only have the chance to contact people who are on the interview track, and we are grateful for the interest in our firm.

MRM
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