Rich Alterman  00:04

You're syncing up and tuning in to the lending link podcast, powered by GDS Link. With a modern day lender can dive deeper into the future of data decisioning and credit risk solutions. Welcome to the show everyone. I'm your host Rich Alterman, and today we're syncing up with Cambridge Wilkinsons, Thomas McDermott. Tom is a managing director with Cambridge Wilkinson, a New York City based investment banking firm that arranges debt and equity capital for their operating company clients with top family offices, insurance companies, pension funds, endowment funds, private credit funds, private equity groups, and other capital providers. Tom has been with Cambridge Wilkinson for seven years and is a global operating executive and advisor focused on financial services, including lending payments, consumer products and services, aerospace technology and the environment sustainability and governance industries. Tom joined Cambridge Wilkinson with over 30 years of diverse operating experience across a broad spectrum of industries including financial services technology, and consumer product companies. Tom is also the founder of Money Access Financial and advisory business to CEOs focus on innovative strategy execution and capital raising. Tom holds a Bachelor of Science from Boston College. In this episode, Tom and I will touch on many facets of the investment industry including some key terms, the role of an investment banker, key market trends and so much more. But before we dive into the interview, please head over to our LinkedIn and Twitter pages and GDS Link that's G D S L I N K and hit those like and follow buttons. If you haven't done so already, please subscribe to our podcasts on Apple podcast, Spotify or wherever you prefer to listen to your podcast. All right now let's get synced with GDS. Good afternoon, Tom. How are we doing? Doing good, Rich.

 

Tom McDermott  01:51

Absolutely. Good. I

 

Rich Alterman  01:53

hope you having a productive week so far. So where you're joining me from today.

 

Tom McDermott  01:56

So I'm calling you from my home office in Allendale, New Jersey that's located in Bergen County, about 25 miles due west of Manhattan. Right. Well,

 

Rich Alterman  02:05

we really appreciate your joining us this afternoon. So Tom, you've been with Cambridge now for about seven years. Maybe you can share a little bit more about your background before starting with Cambridge Wilkinson.

 

Tom McDermott  02:15

Yeah, thanks, Rich. So I've had a very fortunate career. Really, the first 30 years of my career has been that as an operator in various industries, the first 15 years of those 30 were spent in consumer packaged goods. So what does that mean Nabisco, Unilever bracket, and I had the good fortune to spend eight of those years in Europe and Latin America driving those businesses. And then I pivoted into technology and financial services. So I worked at the big companies that you may recognize First Data Corp, Western Union Capital One, as well as some earlier stage businesses. That was good for me because those were either venture capital backed or PE backed early stage businesses, and you got to know your way around raising capital as an operator. And then after that, I joined Cambridge Wilkinson, that's now seven years ago, I have a strong focus in financial services and fintech and specialty finance. I also manage the ESG practice, and have a lot of interest in the consumer products as well as technology.

 

Rich Alterman  03:18

Thanks for sharing Tom, quite a background. So before we dive into business, let's get a little personal you and I were chatting and in preparation for today's session, and you mentioned that you had done some work in South Africa. Um, as you know, I've spent some time there as well, quite a long trip to get down there. But you shared a pretty interesting situation that happened on a trip that maybe becomes etched in your mind is one that you'll never forget. So maybe you can share what happened with us.

 

Tom McDermott  03:43

Yeah, happy to do that Rich. Yeah, this is one of those trips that you will never forget for sure. So I was living in London, and we had to do a travel to Johannesburg in South Africa. And if you look at a map, it's basically 12 hours do south in a plane, not very complicated. And so halfway over in our journey, as we're about halfway over Africa, one of the passengers had a medical emergency. And they really didn't have a plan what to do over Africa. So they turned around and spent another three hours four hours heading back. We ended up in a small island in Spain, and we had complications there because Spain does not accept South Africans without a visa. So that was very difficult to get people on the tarmac. Long story short 18 hours after we had left from London, we returned to London. Wow. And as we exited the the aircraft, we were invited to the Virgin Club, which and if you've been to Heathrow, it's really tremendous infrastructure. And there we see Sir Richard Branson standing there in his stocking feet because of course he had his boots being shined at the shining place at hand, standing there with a glass of virgin, cola and cold all the To the pastor who's over and basically said, blame me, this is poor planning, we messed it up, we're gonna get it right, we're gonna get a new aircraft, a whole new crew, we're gonna get you out of here in a couple hours. And we're gonna get you down to Johannesburg as fast as you can. So he did that. And we ended up arriving 36 hours after we originally left. And it's a great example of how a marketing wizard can turn lemons into lemonade. I mean, here I am. 30 some odd years later telling the story about how a good consumer brand manager this guy is.

 

Rich Alterman  05:34

Yeah, it's I think I read about another situation with him for something happened as well. And he was there as people were coming off the plane, hopefully the woman that are the person had the problems on the plane was okay. And hopefully you got all those points for all the different MQM is flying around on their airline. So, you know, thanks for that. And but let's get down to business to, you know, to be really truly, truly knowledgeable in the investment world, there are a lot of terms to become familiar with, and understand their importance in the sector of our economy. And clearly, we can't cover all of them in a 45 minute podcast. And besides, there's great access to things like Investopedia that has really good information and content on the space. And of course, now you could just log on in this chat GPT to write you a research paper. So that said, I thought it would be good to start off by going over a few terms of interest that really come into play in the industries that you operate. First, why don't we start off with what is the definition of an investment banking firm, and perhaps share a month in the life of Tom McDermott,

 

Tom McDermott  06:31

Investment banking is a very, very broad term. You know, at a very high level investment banks provide financial services to corporations to institutional clients, we're talking about the investing side raising capital. And we all hear about m&a and managing an m&a process of effectively, you're dealing with the public markets, you're dealing with the private markets. And at the end of the day, investment bankers are intermediaries, essentially, with the objective of matching partners of matching in this case, the client who may be seeking capital and the investor who's looking to deploy it in a way that's consistent with the one who wants to get invested in So at a high level, we see 1000s and 1000s, there's big firms, small firms that I would say ours is on the smaller side. And let me spend a couple of minutes to talk about, you know, what is the month in the life of, of what I do in investment banking. And so first of all, high level just to explain, I focus on in the firm, we focus on raising capital for what we call middle market, lower middle market company. What does that mean? That means typically, a company with revenue somewhere between 10 million and 500 million, in our case, it's mostly raising capital, we do m&a as well. But the vast majority of what we do is raise capital. That's, you know, for us, that's 25 million, and up into the hundreds of millions. And we've got a few mandates in the billions as well. And so, we work in a variety of industries, as I mentioned earlier, financial services is a big part of it. But we're I've got, you know, fingers, if you will, and a lot of different industries. And so what do we do? We really and this is why I like what I do, we do everything from Michael cradle to grave. So what does that mean, in terms of identifying prospect customers, part of our job is to go out and find companies that fit a sector that we think our investor base will have interest, we go out and contact them, we work with them, we understand their needs. And if we're successfully understanding it, and they like what we do, we'll get engaged with them, meaning that they'll hire us and retain us to go out and raise the capital, whatever that might be, find a partner to acquire or sell themselves if that's the case. And then you've got the process of the raising the capital. So we've got hundreds and hundreds of investors. And what you want to do is you really want to match the right investor with the right investment opportunity. And so we'll manage that whole process, we'll work with them until they get term sheets, once they get term sheets, we'll go through what's called a due diligence process and all the way to what we call the closing process. And, you know, our, our goal is to make sure it's a great outcome for both parties. Because they're going to be working together a long time together with with that investment mandate. So that's a little bit about a day in the life.

 

Rich Alterman  09:20

So when we think about sources of capital, we talked about this at the very beginning, when I was introducing your firm family offices, private equity firms and venture capital firms are some sources of capital that you look to bring to your mutual customers. Can you briefly talk about what is a family office? It's a term that we hear a lot in the investment community, and as well, what is the key differences between a private equity firm and a venture capital firm?

 

Tom McDermott  09:43

Let me start with the family office side, family offices can be very small five $10 million in assets under management, all the way up to one of our largest multifamily offices with $400 billion in assets under management. We're typically what we would call institutional so Most of our family offices will start it I'm gonna say a half a billion dollars in assets under management and all the way on up. Some of them are what we call single family office, others or multifamily, I think that's pretty self explanatory. But what I think what's interesting about family offices when we will compare to private equity firms and other types of investors, family offices are very different. Since it's a capital set that's in from one family, or maybe two, there's not a lot of what we call LPs are people who have decide or give guidelines. So we find that family offices tend to have a longer investment horizon, we call that patient equity, because it's their own money, and it's one pot of money, they tend to be more flexible, about the structure of the deal to equity is a junior debt is a senior debt, they can work in all sectors if they want to. And so as a result, I may bring a deal. And I'll remember early in my career at Cambridge, Wilkinson, I asked a family office, you know, we've got this opportunity for a good equity investment, you know, what would be your idea of exiting this and cashing out, he says, Well, we're typically buying and investing in companies for generations. So probably the grandkids of the current owner of the the family office would be maybe wanting to sell at that point. And it's not hyperbole, that's very different. And I'll move now into private equity firms, private equity firms are backed by, in general by what we call limited partners, LPs, they can be pension funds, insurance companies, endowments, other types of asset managers. And when a private equity firm goes out and raises money, they have a thesis, they pretty much say over this, we're gonna invest in these type of assets, we expect this type of return. And we expect this type of duration. Yeah, typical duration, five years, seven years. So when a private equity firm is investing, they want to make sure they're satisfying their goals, which has been agreed to by the LP so they can change the rules halfway through the game and say, Oh, wow, why don't we do something very different, while they've got to go back to their LPs and get their agreement if that's the case, so the the private equity guys are bound by some some guidelines, if you will, for each of the funds that they have in these private equity funds may have three funds, we have some we see you know, 15 funds with different pockets of capital with different needs that they want to fill. So at a high level, that's a different that's, that's a private equity firm. Now, venture capital is another bucket of, of investors, and venture capital guys, like the early stage stuff, they are big believers in coming in when there's high risk, when they the company may have a minor pilot program, they may have a great team, but they haven't really figured out or having arrived at being profitable, they may know how we're gonna get to profitability, but they're probably losing money. And so venture capital guys invest, and their view is fine invest in 10, companies, maybe three will be very successful and hit, you know, a 10 time return, or more, maybe one or two will break even, and then the balance will fall off and have any returns. So very different profiles of private equity guys really need to make money on all their deals, they're going to look for businesses that have a sustainable cash flow, and they're looking to increase the growth targets in the margins. So the very different buckets of capital and VC that's symbiotic, you know, VCs, if they're good at what they do, they'll invest, help the company grow. And at that, you know, when they get to a larger stage, that's when the private equity and the growth equity guys come in.

 

Rich Alterman  13:28

So we go from patients on into very impatient funding.

 

Tom McDermott  13:31

Yeah, yeah. Although that doesn't mean that the family offices don't have their expectations.

 

Rich Alterman  13:36

Well, thanks. So one of the things I see on a lot of your tablets, where you're talking about the success of the deals that you've done, is a term senior secured debt facility, maybe you can just quickly talk about what that actually is. We're going to

 

Tom McDermott  13:47

talk about the capital stack. And the capital stack is, you know, when you use that term, that means you know, there's debt, there's Junior debt, we'll talk about that there's equity. senior debt is the safest, it's the it's the safest money in the corporate, if you will, the capital stack. It's secured by assets, you can have a senior senior debt at the corporate level, when you ask specifically about senior secured debt facility that's frequently used by companies who have specific assets that they want to borrow against. The most common is what we see is a pool of of loans out to consumers or small businesses, mortgages, real estate investments. And so as I said, it's the most secure part of the capital stack. And what the implication is, is that the return on that capital is lower than the other elements of the capital stack. So relatively speaking, it'll be a lower return because it's a lower risk. And you'll hear a lot about what's the risk and return profile, this is where you want it the in the senior debt investor typically is looking for low risk and not necessarily low return, but something that is that is commensurate with the level of risk they take.

 

Rich Alterman  14:59

So in Another term that you hear a lot in this space is something called mezzanine finance. For most people that aren't involved the investment community, they hear mezzanine and I think about going for a Broadway show and getting that mezzanine level, which is typically, if you're out in front, it's a pretty expensive level to be on. Where does mezzanine financing come into play? And what exactly is it in the world that you live in? Yeah,

 

Tom McDermott  15:21

so I suspect it did come from, as you said, the theater where you're sitting in the second level, and the people on the first level of the senior debt guys, and they have first access and you're sitting in the mezzanine mean, you have second access. And that's an oversimplification of what we're talking about here, mezzanine debt, which is also called Junior debt, it's called subordinated debt falls below the senior. And so that means there's higher risk. So if something goes wrong in the company, and there's some liquidation that takes place, the folks who are at the senior, they get their money first, and they walk away. And when all those senior lenders are satisfied, then the mezzanine folks are standing in line behind them, and they get their money next, so it's typically going to be a higher risk, and therefore will be a higher return, the cost of capital will be higher. In some cases, it's not just in terms of interest rate. Sometimes it's also paid in the form of warrants or you know, pieces of the equity over time. And at the end of the day, you have investors who like both, and it's a question of their appetite for risk and return and how they think they can manage that. Now, I

 

Rich Alterman  16:29

came across a term when I was doing a little research on mezzanine financing something called a haircut money. What is haircut money?

 

Tom McDermott  16:36

Yeah, so haircut money, it's a very industry specific term that's used typically in specialty finance. And what haircut money is, is the mezzanine piece in the corporate structure of a loan facility. So using some of the terms we've already discussed, a senior lender will come in, and when they are taking a position against the pool of loans, and I'll get to what some of those other assets can be. But when they're looking at the school loans, typically, that senior lender will come in and say, I'll pay you the first I'm going to make this up as an example, I'll pay you 65 cents for every dollar of loans or assets that you have in that pool. And so the owner of the business is left with the task to come up with another 35 cents of every dollar. And if you're raising equity that really sucks up a lot of your equity, and may not be a good use of that equity funds, they want to use it to hire the people and grow the business and spend on marketing. So therefore, the lender will go out and find a mezzanine financier who will sit under that senior debt and bring in and then using the same example maybe a little bit, bring in 25 or 30 of the next point. So instead of going to 65, they can get to say 90%. And they'll so they'll take that slug of 25% risk, they'll charge for it, it'll be a higher cost of capital. But the lender, the operator doesn't need to come up with 35 cents for every dollar Lent, it's only 10 cents. And thus, I'm not sure how it came about. But the haircut money is very frequently you'll be in a meeting and they'll say great, that's a great senior debt facility you have but how are you going to pay you? Where's your haircut? What do you

 

Rich Alterman  18:15

get? I'll get my haircut on Thursday. So it's gonna have Holloman meaning to me. So thanks, Tom for the quick classroom and going over some of the key terms in the investment banking world. So let's kind of jump from the classroom and into the market. You mentioned specialty finance. We know that's one of your areas of focus and a big focus for Cambridge Wilkinson. Can you kind of touch on what really falls under that umbrella of specialty financing? Give us an example of a company without mentioning their name if you don't want to about a deal that you might have worked on?

 

Tom McDermott  18:43

Sure, absolutely. So at a high level, again, what does specialty finance it's financing activity that falls traditionally outside the traditional banking system. And generally speaking, there's two big sub sectors. One is consumer finance, the other is commercial finance, think of it as like lending secured by financial or other hard assets, and then earning an investment that's earn tied to those the performance of those assets. So to be a little bit more specific, there's a lot of folks probably listening in here who are with companies that are lenders, and these lenders are creating their own senior debt facilities or selling it on a forward flow basis, whatever the case may be, in order to build their business and so that's specialty financing to finance a loan book. And so consumer lending is a big piece could be credit cards, it could be point of sale installment lending, it could be all sorts of of consumer loans, or it could be secured loans with cars can be secured loans with mortgages, but that's just part of it. You know, real estate is a huge part of this sector. But you may be familiar with the term fixin flippers. These are construction operators who go around and they buy houses they fix them up and flip them and And it's a it's an it's a big industry. And there's a lot of capital that's needed to support that industry. What's interesting is in specialty finances a lot of what I call esoteric assets, things that you may not even think about that people can use as collateral, or as assets. So litigation financing, there's a lot of firms that go out and buy cases that aren't maybe either fully litigated or have been litigated, but haven't been paid out yet. They'll buy those and work out a deal. Intellectual property. There's life settlements, where people buy the insurance, life insurance policies, and calculate what they think they can make or not make on buying them early or late. Another new one is music rights. So you may have been in the news lately, people like Justin Bieber and Dr. Dre are selling their music rights. And that's one thing, I'm not referring to that business, but a lot of the buyers of that music will then go out and finance it by getting specialty finance financing against that hook of music. And those are revenue streams that come in over time. And they're basically putting a value on that. And they have to be certain that those value streams will continue over 510 1520 25 years. And there is a really interesting industry.

 

Rich Alterman  21:09

I'm a little biased. I just saw the Eagles for the seventh time in my life and played in Knoxville. And I wonder whether any of these new artists out there will have the sustaining power of companies or groups like the Eagles

 

Tom McDermott  21:21

without even know those guys.

 

Rich Alterman  21:25

So Tom, I recently came across an article published by Price Waterhouse that spoke to the fact that following a period of unprecedented activity from late 2020, through mid 2022, there was a measurable slowdown in private equity activity in the second half of 2022, reflecting uncertainty and disruption driven by inflation, rising interest rates, shuttered debt markets and geopolitical turmoil. The article went on to say that over this period, private equity deal volume was down by 22% versus 12 months earlier. And it also stated that right now the US private equity firms are sitting on top of $1.1 trillion in idle investment, cash, also referred to as dry powder, coupled this with the fact that we are speaking less than six weeks since the collapse of can Silicon Valley Bank, and Signature Bank. So as you and your firm look at 2023, and maybe even start thinking about 2024. What is your view? And what are you seeing on the level activity going on for the rest of the year, as you kind of think about your forecast?

 

Tom McDermott  22:24

I mean, this is a milestone year 2023, for sure. And I wish I had a crystal ball that I could do, you know, predict that one? If I did, I'd probably be done on Wall Street, or retired by now. But let me tell you what I do know, and what we all know, right? Number one is we're seeing that investors are sitting on mountains of capital, and they're sitting on the sidelines, aching to put that money to work. And this is very different from 2008 2009, where there wasn't liquidity. Here, there is liquidity. But the issue is where do the investors want to put their money to work. So you've got private equity, you just talked about the amount of dry powder, we call that dry powder that they have, we're seeing the same thing in the private credit markets in the multi strat markets that they need capital to put at work. But now with everything going on, they're nervous. So what are they nervous about? Well, let me talk about at least the three things that are within the US from a macro economic standpoint. And they're all interrelated. Of course, the first, of course, is inflation. And we're seeing some positive steps and inflation, the Fed has put out a very aggressive goal of a 2% inflation over time. And as a result of that, to manage it, the Fed is increasing its rates. And there's another meeting in May, we're going to see if that goes up, there's probably 5050 money that it will go up or not. I think it will depend on some of the numbers that come out in the next few weeks. But we're seeing it we're in a position of rising interest rates. And that has an adverse effects on operators on companies, small businesses medium size, and the larger ones not so much because they have access to capital, that they probably can get at a more reasonable rate. But the small businesses and medium size don't. And we're you know, I can just tell you, from my own experience, clients were borrowing money at 7%, last year 6% 8%. And that same company with the same level of risk and success, will have to borrow that money at 12 1314 15%. And if you just do the math, that's a lot of interest to pay. And so it affects their ability to grow their business and an operator. So that impacts the third factor that everyone's worried about, and that's recession. So if a lot of the small businesses pull back, consumers do as well because their rates on their credit cards seem high, then that will minimize consumption. And that can turn into a recession. And I think in the last couple of weeks, most people are predicting some sort of recession and and all those three factors combined. Just make investors more cautious. And you know, I'm a big believer From my experience in the markets, as soon as there's confidence of what's going to happen, doesn't matter whether it's good or bad, but as long as investors feel like they know what's going to happen, then they can place their bets and put their money in projects are going to say, I think this is going to happen, therefore, by underwrote this against a certain environment, but today they can't, because there's too many things may happen. And so to get to your question, what's going to happen? I mean, we see SVP and, and signature, that was a surprise, I think in the, we look back on this, they were probably one offs. And there were probably some micro problems at that level, not necessarily at a whole economic level. But either way, it spooked a lot of people. And that resulted in people pulling back and being cautious. So you get to the question about the recovery, as I said, I think the recovery will come about when investors feel more certain about what's going to happen. I know that's a vague answer. But I find that's when you start to see things happen. And then in terms of the $64,000, question is, When will this happen? Because I'd like to know, so I can place my own bets. Yeah. Who knows? Is it going to be mid 23? That's the earliest but I think it's probably more likely, next year, maybe the you know, we may see some green sprouts coming up the end of this year, but this can go into 24. And there's some people say it's gonna, you know, we're gonna see a melees in the in the economy until 2025.

 

Rich Alterman  26:19

Certainly, the election will have a big impact on that. We think about Silicon Valley Bank, we all went through that a couple of days, and just how quickly that accelerated, you know, the bank was basically closed down on March 10. This whole thing kind of started on March 8. So here we are sitting March 13. And it kind of reminded me of, if you've ever seen the movie with Kevin Costner constantly called Draft Day. And he's in negotiation with this one guy, and they come up with structure at one point in time in the call, and then five minutes later, they're talking again, and Kevin Costner wants more money. And the guy says, We just spoke five minutes ago, he's like, Yeah, but that was a lifetime ago. Right? If I made it. And that's kind of what happened on with Silicon Valley Bank. You know, we're all sitting here on the following Monday, like what just happened, and you talked about some, a lot of those companies were seeing their loan costs go up, they had to start pulling money out to pay those loans, that reduced deposit. So it almost became a self fulfilling prophecy to a certain extent. So Tom, we talked about equity, we talked about debt. And when you think about the deals that you've done so far in your career, if we think about what percentage will debt be used versus equity. And you mentioned a little earlier, people don't want to be given up equity in their company if they can avoid it. But at some point, I guess they don't have a choice. So where to kind of like debt and equity fall into the percentage mix of a deal. And are there some economic factors that would impact that, like some of the things we just talked

 

Tom McDermott  27:42

about? It depends on a lot of a lot of circumstances. And when we think at a very high level of a broad transaction, someone is buying a company. As we probably all know, the acquirer comes in with equity, and it could be 30%, it could be 50%, depending on various factors, and then the balance, they typically borrow from it, or they borrow from the seller of the company, and they take notes from that seller. So at a high level, generally speaking, you're always going to see more debt than equity in terms of dollar values. From a view of transactions, what I see we tend to be more of a of a debt shop. And that's for legacy reasons, and probably some for certain relationships. And where we've gone out and raised debt, we sometimes see situations where the credit investor will like the deal. And in fact, like the company so much, they're like, Well, you know, what I'm going to do the debt deal that we're talking about. But I'd like to sprinkle in some more money in the equity doesn't mean they want to run the company, and have enough investment at the equity to have a control situation, but enough to participate in the upsides, what they see and how the, the the company is going to do. So we did that not too long ago with a payments company down in Florida, where we raised a good deal amount of debt. And the investor said let's do some equity as well. Another example in a completely different industry. We talked about ESG. I called the we had a client focus more on the E of ESG, the environmental being renewables and I'll get to it later, but various sectors. And as we started to raise equity for them, and they just said we're it's kind of a specialty finance investor. They said we need mountains of capital. So yeah, we need tons of debt, which was the original, ask if you will, but along the way, they said I probably need some mezzanine financing as well, and a slug of equity capital as well to run the business. And we ended up bringing in one investor who brought in $265 million for the whole proverbial capital stack. So they brought in the equity they brought in the senior debt, and they brought in the mezzanine and you know, our client, they really checked a lot of boxes. Typically, you may have to go out and do three different transactions or deal with three different groups. And so that quote, unquote, simplify their life enable them to move quickly to fund the business and the company is doing quite well now. So hopefully that answers the question.

 

Rich Alterman  30:07

When we think that timeframe from the time that you first start transacting with a company to getting a deal done. What's a typical time is it within three months, is it a year and a half?

 

Tom McDermott  30:17

Again, that's gonna vary, but we're as a firm were geared to move quickly, if you go to our website, you see the word speed matters screen. So we're guaranteed to get this in, in 90 days from the time we go to market with our clients ask if you will, to the time when the capital is put into our clients account, that's where we got into we've moved quickly, I know we closed the $20 million deal, like in 29 days, because we have to, and sometimes deals drag on for, you know, the investor or the client. And you know, I've seen things that take many more months than just three.

 

Rich Alterman  30:48

So for startup companies that are looking at the capital raise process successful, it can take them through many investment stages, right, including investments from individuals, friends and family angel investing, seed rounds, growth round and multiple series cross over culminating in initial public offering, and then late stage, resulting in a typical buyout. So when we think about Cambridge, where do you kind of focus on that time horizon? And can you share why you've decided to focus on that?

 

Tom McDermott  31:16

Sure. So what we don't do is early, they're really early in what we call pre revenue stuff. So the VC like deals when a company is they haven't proven themselves, and they have a great product, great idea, great team. But that's for venture capital doesn't mean it's not right for anybody to invest in our investors are not VC like investors, they our equity, and their investors typically like to start what we call growth equity. So when the company already has established itself, they've gone out, they've raised equity, usually institutionally, they have a proven model that has a path to profitability. And they are now seeking capital simply to scale it, they say we know what it is, this is how it runs, we just need to put gas in the engine. Right. So that's, that's growth equity, we get involved a lot of that, I don't want to complicate things too much. But it tends to be a minority investor. In other words, someone who puts money into the company but doesn't control it. And that allows the management team to still have control at that stage of their growth, they prefer to have growth rather than giving it prefer to have control, I should say, rather than giving that away, that wouldn't be a stage where we get started. And then with our private equity in our family offices, we go all the way through continuing to grow the company. And when it's time to sell, we can help establish an m&a process. We're not an IPO group. I mean, that's another type of investment bank, someday we may do that. But as for now, we're not an IPO shop. So we manage that whole spectrum from what ready to when you've established that you're growing. And you need capital until the end of the final stages of the company.

 

Rich Alterman  32:55

So I know you've done a lot of work with non prime or subprime lenders help them raise capital. And what I was thinking is at a high level, and even some of the audience is probably listening today, maybe if you kind of think about from a checklist perspective, you know, what are the things that you would look for, when you're evaluating companies that you want to represent and help them go out and grow and raise capital, I do

 

Tom McDermott  33:16

get faced with a lot of nonprime lenders, very sophisticated, very strong, and very profitable. And I love those businesses. So I've developed I think we kind of like my four factors, which frankly, you could use those same factors when you look at other types of lenders, but my list is I always start with number one, the management team, does the management team have the experience the track record to perform in this market, all these markets are very, very competitive. So being good may not be good enough, you have to really be great. And leading a company through change, these are going to be various stages of growth. That's number one, that the second is the model, you really got to have a proven model proven in the in the sense of the numbers prove it, ideally, something that is proprietary or different enough in the marketplace where no one can easily copy. And part of that is the underwriting. So if you're doing assets, if you're nonprime lender, you want to have at least 24 months of data to illustrate that you understand the trends, the charge offs, defaults and all that all that good stuff. The third bucket is profitable model. And you know, I say this explicitly, because many companies have a great product, they have a great proven scale, proven business and but when you look at where's the profits, they're like, well, that we'll worry about that later. You really got to make sure you've got a path to profitability of significant of of margins. So when something goes wrong, you've got some room to work within that. So profitable business model where you get them net, net interest margins, and your cost of customer acquisition all lined up in that. And then lastly is your balance sheet. Even though they're borrowing money to help their balance sheet they have to have a good balance sheet now, typically when I talk with a company, I'll Want to understand how much capital they have how much cash they have on hand today, and what their monthly burn is, and you really want to calculate how many months of cash that they have before they run out. And it's important that they have many months on hand, because these processes can be very circuitous and not always straight line is people hope. So you want to make sure that the clients have enough capital to sustain a proper capital raise good

 

Rich Alterman  35:25

takeaway, and hopefully, something that people on the phone on the podcast or listening to podcast today can take advantage of. So Tom, you mentioned ESG, a couple of times we mentioned at the beginning, stands for environmental, social and governance. So I'm pretty convinced if I surveyed 100 people, and said, What is it E and ESG? stands for? I think they've heard enough about it, that they're gonna say, oh, that's environmental. But if I asked him what the essence of G stands for, I'm not so sure many people would know. So given it's a big focus of yours, personally, as well as the company, maybe you can talk a little bit about the S and G in ESG. And what it's all about.

 

Tom McDermott  36:00

Yeah, absolutely. So we'll start with the social standpoint. And then that's we're talking human rights and equity. So what is the organization's relationship with its employees with its stakeholders, by way of example, we all remember back in the years, in Bangladesh, there were a lot of sports, sporting shoes and sporting goods, companies that had operations in Bangladesh, and the workers were working in very, very difficult work environments. And so that would be something that from a social standpoint, D or R, you're not just your employees, but in those cases, those would be stakeholders, third party outsourced vendors, are they being treated properly, so that you know that and that's social covers a lot of things about equity to across the employee base, but as well as the customer and their whole stakeholders? That's a little bit about social. Talk about governance, it's more about a heart issues. And that could be really focusing on the corporate board and management structures. So that could be things like, what are the company's policies? What are their standards? How do they disclose information publicly? Who is their auditor? And how do they disclose that? What are the compliance issues? This is a lot about transparency, and operating a company in a healthy way, not just in order to maximize the profits, but also to manage some of the software things that they need to look at on a governance side,

 

Rich Alterman  37:28

I read where they've developed or ESG score has evolved. And I kind of think about it being analogous to a Moody's or Standard and Poor's rating. From a consumer lending perspective, people might think about a FICO score or Vantage score. So when you're doing deals with ESG, is that score starting to come up in discussions? As you look to get companies to invest in these other firms? Is it something that they're really checking that box now and really making sure that it's something that they're comfortable with?

 

Tom McDermott  37:56

Yeah, there's definitely a strong desire in the ESG community to define a score that everyone can support. But the challenge is, it's really hard to find one score that everybody supports. And so as a result, investors may have their own scorecard. Not too long ago, literally. In March, I went to a big forum, a green forum in Manhattan, and boy there, they're probably 48 presenters, but I'm gonna say 12 to 15 of those presenters had an ESG scorecard that they worked very hard on and amazingly smart people, amazingly impressive ways to measure. So it's not a question of Is this good thinking? It's a question of getting people to rally behind one thing, and using that. And so I think this is still got, you know, we're in the early innings of a long play on what is that ESG score? You know, you mentioned, you know, Moody's and s&p s. And so, you know, those are standards already. So this is I think it takes some time. And I think it's really important that it is discussed, we've seen what I call, you know, greenwashing, you may have heard that expression, where companies kind of dress themselves in green, and then when you look behind the curtains, if you will realize I'm not so sure this is really beneficial to the environment in the world. And so it's a really important element. And I hope that to see the both, you know, from a corporate standpoint, as well as a regulatory and ESG community standpoint, they can rally behind something.

 

Rich Alterman  39:32

So over the last 10 years have been a lot of developments in the investment banking, or I should really say the investment space. We had the Jobs Act, Jumpstart Our Business Startups by President Obama, crowdfunding companies like Kickstarter, and more recently, we have safe which is a simple agreement for future equity. A lot of these are about democratization of investing, letting more and more people get involved with investing who may not startebe accredited. sirs. So when you kind of think about these different solutions that have hit the market, what's your thought on the value that they're bringing in? And do you think that potentially certain consumers may get over their head, as far as their understanding of what they're putting their money behind?

 

Tom McDermott  40:15

I think, overall, the trends are good, but you do have to be careful to protect the investor. And so I agree with you, this is a little bit about the democratization of the ability to invest in companies and large institutions. And let's face it, high net worth individuals have all sorts of access to invest in whether it's early stage, middle stage, or, you know, other types of assets in the economy. You know, a lot of the John Q Public people, you can buy a stock, and that's about it. But what we're seeing here, and with the advent of Kickstarter, and crowdfunding, we're seeing these communities brought up where the everyday consumers can go in and analyze a business and invest small dollars. And I think it's terrific, I think it's great that people can can get access to those types of investments, we just want to make sure that the disclosures and that the people who are providing those opportunities are real. And so the SEC and FINRA do have a lot of regulations around that, and have types of capital raises that require certain requirements to make sure that the investor understands fully the risks involved. And it may be in the fine print that they miss. So you know, they're How do you make sure that it's done correctly? I don't know. I'm not the right person to ask that. But you know, that that probably someone's gonna say, Well, I didn't know that. And they signed a document that said that they understood it. So that's in the smaller points. But I think the bigger picture here, you know, we're just seeing more people involved and more opportunities. And I think what that also, the other impact is, is that we're seeing smaller businesses get the opportunity to try it out more entrepreneurs, who, up to now didn't never had a way to fund an idea. Right. It funded and I think we're gonna see huge companies that would never have come about without the help of lessons to funnel and more and market. John Q Public facing investors.

 

Rich Alterman  42:04

Yeah, it's interesting, when you take the time to really read a TPM or private placement offering. And you read the risk section, which now is 80% of the document. And you kind of walk away like, should I really be doing this? So anyway, yeah, so well, great stuff. This has been really educational, informative. I always like to and my podcast with a personal question I got to for you, actually, when you came to Cambridge Wilkinson, you came with a very diverse background, including time with financial services, consumer product companies, positions in marketing operations, domestic and international business experience. So when you think about people that are coming out of college and trying to evaluate careers that they may want to get involved with either today or down the road. What advice would you give someone who is thinking about investment banking as a career? And is it something that someone right out of college really can think about? Or do they really need to get a lot of that tribal knowledge under their belt the way you have to really be successful? Yeah, I

 

Tom McDermott  43:03

don't think there's any right answer. But you know, my advice to folks who are coming out in investment banking seems to be incredibly hot these days, in the business schools, undergrads as well as MBAs. And so I get approached by a lot of folks, and I'm like, You got to do your homework. For me, that means getting on the phone or meeting with other investment bank professionals, all types, the big guys and the big shops, you know, JP Morgan, Morgan Stanley, Citi, as well as the smaller ones and really understand the marketplace, take internships, I've had G over 25 interns work with me at Cambridge. And I've been very, very lucky with the caliber of the folks and one of my mantras is, I'll help be your career coach, as long as you want me. That's why I love giving back. And having been through a lot, and we all have scars to show for it is helping young people along their career path. If you want to do that, then there's there's other things I would say that you want to look at, in terms of your skill sets. But it's not for everybody, you know, I've learned they're just not for everybody, and you want to do your homework. And there may be you may want to get into finance work for a company in the finance department, and understand how a company puts together its financials and their projections. And that can be very, very helpful. You may want to see how a company markets itself. You know, I look at forestry and marketing and sales in general management, and business development. So kind of a little bit of everything.

 

Rich Alterman  44:26

So the only question I was thinking about as we've been going through the session today, is I love the show of Shark Tank. I don't know if you're a big fan of it, but I would imagine watching it with you must be a little distracting. You're like, Oh, come on, guys. What do you mean you're giving that guy million dollars?

 

Tom McDermott  44:41

It is fun to watch. And you see how they negotiate. And you see how both sides are giving values to their company. There's a lot of theater there and you know, absolutely entertainment value. But at the end of the day, these are people putting many many years of their life into projects. And by bringing in one of these doors to to not only provide capital but to be part of the name brand on their business is phenomenal. And he's what these guys can do the the impact that these guys have in those businesses and sometimes it may be rational on what they do is that how do they come up with that decision, but it is it is entertaining.

 

Rich Alterman  45:17

I believe that a lot of people in a lifetime will have a million dollar idea, but very, very few people ever follow through. Yeah. And sometimes you sit there in Shark Tank and say I thought about that five years ago, right. But yes, I didn't do anything about it. Well, Tom, thanks a lot. This is Rich Alterman, we've been syncing up with Tom McDermott managing director with investment banking firm Cambridge Wilkinson. Thank you, Tom, for joining us today. Thanks for listening. If you've enjoyed today's episode, please be sure to subscribe on Apple, Spotify, Google, or wherever you listen to your podcast. And be sure to leave us a review. Follow us on LinkedIn and connect with us on Twitter at GDS link that's at GDSL I NK have a question for the show or have a specific topic you want us to cover. Hit the link in the description to drop us a note. Thank you for letting us part of your day. Make it a great one.