December 2023
WhiteHawk specializes in lending to companies that cannot secure loans from traditional banks or capital providers. Because of this structure, WhiteHawk tends to perform well during economic downturns when organizations face difficulties accessing capital markets. Their primary focus is on the liquidation value of the assets that a borrowing company possesses rather than solely relying on the company's performance. Bob highlights consumer goods, healthcare and automotive as industries that may present more opportunities for lending due to market conditions.
Looking to watch some of the live sessions from our Investor Symposium? Stay tuned as we release more episodes like these in the coming weeks such as A.I.: Possibilities and Pitfalls of Artificial Intelligence, Generating Attractive Returns Through Creative Private Lending, and Bond Alternative: A Smarter Way to Lend to Corporate America. Stay tuned for more episodes from the Investor Symposium like A.I: Possibilities and Pitfalls of Artificial Intelligence!
Watch previous episodes here:
Ep. 61 Decoding Bitcoin: The Future of Crypto
Ep. 60 Across the Pond: Navigating the Expat Financial Journey
This is Bob Louzan. I'm really excited to introduce Bob with WhiteHawk. He has probably the biggest shoes to fill for two reasons. Numberone, he's up against happy hour. And number two, his partner, John, who was at our symposium last year with WhiteHawk, was the star of the show. Every client,CROI prospect that we talked to.
They left that symposium saying, "I want to invest with WhiteHawk. And that guy John was amazing." So WhiteHawk is one of our private lending companies that focuses on making loans to companies backed by physical assets. You know, I said it earlier, if you follow some of those hard-written rules that our industry says, like investing only in index funds and such, and don't look outside the box for other opportunities.
You're missing out on some tremendous opportunities. So Bob's herewith WhiteHawk. Bob, why don't we start by talking a little bit about whoWhiteHawk is and what you guys do?
Yeah, sure. And had I known that Jon was such a hit last year, I would have sent him back. So apologies in advance. WhiteHawk Capital. We are a direct lending fund, and I know you've all heard about direct lenders. We focus specifically on companies that are rich in assets and most likely short on cashflow. We focus on companies that can't get loans or any type of debt from what you call "regular way" capital providers, mostly the banks.
So we focus only on the assets. We hold the company and their management team to their business plan but are out, and our exit is through the value ofthose assets. And we'll talk a little bit about that.
Okay. So you're lending to companies that are asset-rich, probably can't get a loan from a bank. You care a lot about the assets. We're in a weird environment. Banks are closing. Some small to medium-sized banks are shutting down, worried about inflation, higher interest rates, fears of a recession. And you're lending to companies that can't get a traditional loan.
How many people think that sounds like fun, right? But what type of environment do you really thrive in?
It's coming to us right now. You know, I've been doing this a long time, as well as my partner. We go back through the various cycles, and it can go back to '91, '92, 2001, 2002, the financial crisis. Those are the best markets for our type of strategy. Now, I'd say we still do well when the credit markets are really, really buzzing, where they're really good credit markets, and credit is readily available to most companies.
But when it comes to the time periods where companies can't access the capital markets, that's where we do the best. And the focus really for us is, like I said, on the assets. But it's not just some book value that's placed on the balance sheet or what someone may tell us. It's about the liquidation value of those assets.
Because if you looked at my portfolio today, and if you worked in a bank, you would say, "Well, that's a workout portfolio." I think one of your other speakers was talking about how they've got to look for advisors with great workout skills or workout teams. Our portfolio is a workout portfolio, and our whole team has experience doing that, and that's what we do.
So we determine what the liquidation value is. An asset of the assets are, we determine, are those assets, can they be liquidated in probably the worst possible time for those assets to be sold? And we figure out that value, and that's what we lend against, and then we monitor the heck out of it, and we stay on top of it.
Do we receive monthly reports? Yeah, in some cases weekly, and we may lend out money. And I've heard a lot of things talk about how direct loans or direct lending is more of an illiquid market. And it is, there's no doubt about it. And I'll lend money to companies for 3 to 5 years, but our portfolio returns every 18 to 20 months.
And the reason being is, go back to the first one. These companies don't generate cash flow, so they're either going to succeed, turn their company around and refinance us out or they don't. And I'll go and collect the money through the liquidation of those assets, those very same assets that we lent against.
I think I'm feeling a little bit better about the fact that you're loaning money to companies that aren't doing well and can't get a traditional loan because you're valuing the assets, worst-case scenario. But you mentioned to me on a call and some other conversations that we've had that in times of uncertainty and times of volatility, you're seeing 5 to 10 times more opportunities to make loans.
And so you can be a lot more specific. You're not lending to everybody. And so when you're only seeing one or two deals across your table, that's when you're like, man, I'm not feeling so good. But in times like this, you're seeing a lot more opportunity.
Yeah, this is it's a little counterintuitive when the markets are really well. I'm not going to say this market is really poor, but when they start to suffer, we start to see what, in the past, would be a mediocre company that could obtain credit from the bank. And they can no longer do that. So they'll come to firms like ours.
Now, during COVID, correct me wrong, was one of those companies Neiman Marcus?
Yes.
I mean, I feel pretty good about shoes and purses and handbags. People can't go into a store because the malls were closed, but I'm pretty sure there's value there. Right? So if Neiman Marcus is coming to you saying, hey, I need $10 million to kind of get through this shaky period, a bank is not going to loan money to me because my stores are closed.
You guys are presented with a great opportunity.
That's right. And we do we're industry agnostic. So I really don't care what industry they are. But retailers are a great example. And we've lent money to Neiman Marcus, J.C. Penney, Barneys, New York, RadioShack, some companies that don't exist anymore. But we not only got our of our principal back, but we got our principal and our contractual return.
So when companies fail and no longer exist, they go through a bankruptcy and or liquidation process. We actually earn more money in those companies. So it's not a a you know, how much did you lose? No, it was or how much did you make? And it's not because we take the asset and we we sell it for more than we were owed.
We can take the asset and sell it for what we are owed. And that's how we kind of design and underwrite every transaction.
I think that that's a real key differentiator when you're making these loans, you're valuing those assets. Look, if I get to sell these things within the next 30 days, what am I likely to get out of it? How much is that worth? We're willing to make that loan and charge this interest rate. Now, our compliance officer just sat down, so say the right thing.
What's your target yield that you guys are going for? Right now?
Our target is in the low to mid teens, net to the investor. And you know, we've been doing this, my partner and I for close to nine years now, and that's been our target the entire time. You know, I think when rates were at zero, it was a it was a difficult environment for us. We still achieved those returns.
Our portfolio probably and I'll talk a little bit about the portfolio in a second, but we had a lot more liquidations in that environment when the markets were really good because we were dealing with really bad companies. And today, you know, given the rise in rates and can I say yeah, I mean our current cash yield on our portfolio today is 16.2% and we collect that on a monthly basis.
All of our customers are cash pay. We don't pick any interest. Even when they stumble and fall. We still collect cash interest even when they go into bankruptcy and I'm liquidating the assets, I'm still getting, I'm collecting and getting paid cash interest and all of our rates are floating rates with SOFR floors. So as rates have risen, our floors have risen and we're locking in these rates as we come down.
I don't fix the rate. I'm not playing the interest rate environment. I'm not playing a commodity. I'm not playing on the success of the outcome of the company. So our outcome in the portfolio is totally uncorrelated to the success of the company that we're lending money to. And that's a little counterintuitive to what a lot of people think.
And so when you say floating rate, you're just referring to the fact that if interest rates rise, the yield on your loans is going to go up and then the floor, meaning that's like the minimum interest rate that you're expecting to earn on that loan.
That's right. So when LIBOR or so for the base rate was at zero or 50 bips, we'd have that plus some form of a a margin on top of that. Today we do the same thing except our floor is somewhere in the range of across the portfolio of like 3.5%. So even if rates were to bottom out and start to drop again, our floor and it goes through that, our floor stays there.
So we're always going to have at least a minimum of 3.5 plus our margin to obtain these, you know, returns that we're trying to target.
And how long are the loans that you typically make to these companies? And then how often do you review the collateral that's behind this loan?
So the collateral is a big piece of our equation or the success of our equation. So we'll lend out money anywhere. It could be assured as a bridge facility for six months, but we'll go out as long as five years. A lot of that more is for optics, for for the companies, for their their vendors, their suppliers to give them some stability in what they're trying to accomplish.
But because of our high costs and or because of the performance of the company, they tend none of the companies that have repaid us to date have ever gone to maturity. I've had one company go past two years on a five year loan. Just to give you an idea, we've done over the last eight years about 80transactions, which represented a little bit more than $3.5 billion in total debt to date.
And we've had 55 of those loans repay us. The rest are performing. About a billion is still outstanding. And out of those 55, this is where the kind of the proof is in the pudding. 14 of those 55 companies, they went into bankruptcy and they no longer exist. Sears, Canada was one of them. Sears U.S. We lend to Bon-Ton stores, Payless Shoes, a lot of retail names.
You would know some other companies in other industries you may not know. So we talk about the retailers a lot, but 14 of them no longer exist. And we got repaid. And it wasn't a function of, wow, we're lucky we got our money. We got our our $10 back on a $10 loan. Now we got our $10 plus all of our interest that was owed to us, plus
Now we we treat this whole process a lot differently. And I've been doing credit, like I said, my entire career. Typically, you would go into your credit committee and say, hey, here's a great management team. This is a great company. This is where they sit within their industry and these are all the good things and this is why we're going to lend to the company and this is how they're going to pay us back.
Well, our investment committee, my partner, I it's a lot different. Okay. Don't believe the management team. You don't trust what they say. You don't believe they can achieve their business plan. What are the assets worth? Okay. How do we get repaid? That's every single one. And there are some some good management teams out there. I'm not knocking them that are in our portfolio, but I have to assume they're not going to achieve what they say they're going to achieve.
And I'm going to have to go to the assets to get our money back. And in those 14 transactions, we did exactly just that.
This sounds eerily familiar. If anybody knows our chief investment officer, Megan, she basically has that same point of view when she's sitting in the room interviewing him. I don't believe you. I don't trust you. How am I going to get screwed and how are you going to follow through on that? Right. That kind of.
She still says that to me. Yeah.
She's very charming when she does it. Tell me. Look, I think most people in this room that are still listening to us are happy that we have a manager that says, Hey, I like times of uncertainty. If something goes wrong, I'm going to find a way to protect you and you're going to get a really nice return for investing with us.
Tell us about a deal that you've done recently that you know you like or we're excited about. I think it was black Rifle coffee.
Yeah, so we do. And again, you've heard a lot of different investment options and structures today but will do companies that they could be public companies they could be private companies, they could be owned by a private equity firm or they could be just independent ownership. We did a company it's a public company called Bright Black Rifle Coffee Company.
Some of you may have heard of it. You know, they're in a a real growth mode. So I know we talk about companies that are failing all the time and bad management teams and whatnot. That's how we look at these things. But here is a company who could not get a loan from a bank. They had a loan with a regional player down in the Southeast, but the company was growing dramatic dramatically and needed some additional cash.
And they didn't want to tap the equity market because the equity to them was expensive. And now they find out that I'm probably more expensive than that. But but what what they realized was they could not get the extra the extra term of capital they needed to fulfill their plan. And obviously, we met with them, we analyzed their business plan and they've got a good business plan.
They really do. I won't tell my my juniors that, but they do. But they had great assets, they had great meaning, they had real estate. And we also have leans on the inventory and obviously the bank had the accounts receivable, but there was a transaction in there for us because because of that growth, the company wasn't showing enough cash flow to meet certain requirements that the banks required.
So there we came in perfectly. Now will that company liquidate now? It should now I would I don't bet on any company, but it shouldn't. And we've been in the deal for about two months now and we've already seen their plan continue. You know, I don't have too many companies that achieve business plan. I just don't and I'm okay with that.
This one is and it's a surprise. It's pleasant, right. It's nice to see that. But it's a it's a it's one of those companies where it's not one where we are underwriting it to a full liquidation. Do I expect that to be the outcome? No, I don't. We are prepared for, but it'll be a different outcome.
Yeah, and I think, you know, sometimes people look at this and go, man, high cost of capital. You know, you're making sure that you've got assets behind it. Are you really just betting for people to fail? And no, that's not your business plan. It's just how how do I best protect ourselves? And then we're able to provide the need.
That's that's right. Look, I am like I said, I've been lending my entire career and always looking for companies that are good companies. I'm not looking to put a company out of business. I'm not alone to own player. I'm not alone to liquidate, even though some people could think that that's not the goal. The goal here is, look, the company has a plan.
They're all in transition and they're trying to achieve it. We could be, andmost likely in some cases are their last opportunity to do that. I just want tomake sure that I don't throw good money after bad. And that's how that's why westructure it and look at things the way we do. And you know, everybody, as soonas we lend to them, they can't wait to get rid of us because they're soexpensive.
And the ones that liquidate aren't happy that that's the outcome and they'renot happy with us. But at the end they always come back to us and say, You knowwhat, thanks for giving us a chance, every single one of them. And that doesn'tmean it makes me feel good, but that's not why we're doing it. We actually aretrying to provide a company an option here to survive.
If they don't. It wasn't because we lent them money. It was because theyjust weren't operating or their company shouldn't. Not That has no no reason toexist any longer.
I'm not sure RadioShack was going to have a future with or withoutyou anyways, or companies like Blockbuster for that matter. But where do yousee opportunities going? The next call it 6 to 12 months.
Yeah. So like I said earlier, we're we're industry agnostic, so we'll gointo all the different spaces. Retail was obviously a big player part of ourportfolio going back to 15, 16, 17. We've seen a little bit coming out ofCOVID. Now it's not so much the retailers, but we're seeing a lot of theconsumer good companies. So they experienced some first supply chain issues atthe end of last year, which caused some liquidity issues.
And now to be honest, and some of us are could see it. And, you know, thesedays in your own environments, the consumer, the consumer drives a lot of whatwe see. So if the consumer starts to feel some pain, those companies that deal directly with the consumers will start to see that liquidity tightened. Sowe're starting to see with some some consumer good companies do that.
We're also seeing a little bit in health care a lot of rising costs withinthat health care industry in that space, putting some some restraints on theirliquidity. So we're starting to see some in the health care industry andobviously with the strikes that are going on now or the strike that's going onwith the UAW, we'll start to see and have seen in the past some of the in theautomotive space in that sector.
I guess we need a Taylor Swift effect outside of football a little.
Bit, right? Yeah.
You know, Bob, I'm again, really appreciate you coming all the wayout here and sharing this with kind of what makes White Hawk unique. I knowthat we talked about a lot of different things, but just to highlight thepoints that you thrive in opportunities that we're heading into because you'reable to look at a lot more deals and be really picky on the ones that you doand making sure that you have sufficient assets behind those loans.
Yeah, let me state and Megan, this one's not necessarily for you, but foryou. We are picky. Trust me. We don't just do anything that comes across ourdesk. We see a lot of transactions. This is the the largest our pipeline hasbeen to date over the last nine years. Like I said, I've been through severalcycles. I lent money during the financial crisis.
Coming out of the financial crisis pipeline today is bigger than when I wasdoing it back then. Not saying the market looks like that. There's a lot ofsimilarities, a lot of differences too. But our pipeline is it's really largeand it's growing and a lot of it has to do with what's going on, whether it'sthe banks pulling back or just the overall, you know, global environment.
Definitely we're seeing, like I said, larger companies, better performingcompanies that can access the banks capital. And it's giving us a tremendousamount of opportunity ahead.
Thanks, Bob. And for those of you that really owe Larry one second,for those of you that really like White Hawk, just know that they're there.Fund is currently closed, can't really get in, but there's a lot of opportunityand other we're in talks for some future opportunities and relationships withwith white Larry you have a question yeah.
You know it's I love the question in a blender how they lose money istypically through fraud and it's the assets you think you're leaning againstdon't exist. So we do a lot of work on that front end and throughout the lifeof the loan to make sure that we have eyes on it and that the systems that thecompany uses to report those both through vendors, through their own customersthat they're reliable, are valid.
So we've got a whole bunch of tests going on both before and after we lendthe money out. But that's the really the largest and most the largest risk forus in an able structure.
Thank you, Bob.
Information presented is for educationalpurposes only and is not intended as an offer or solicitation with respect tothe purchase of any asset class. This podcast should not be relied on forinvestment recommendations. The private investment opportunities discussedherein are speculative and involve a high degree of risk. They are availableonly to eligible clients and can only be made after the client’s careful reviewand completion of the applicable Offering Documents. Although the information contained in this report is from sources deemedto be reliable, Morton makes no representation as to the adequacy, accuracy orcompleteness of such information and it has accepted the information withoutfurther verification. Past performance is not indicative of future results.Each investment opportunity is unique, and it is not known whether the same orsimilar type of opportunity will be available in the future. Targets or otherforecasts contained herein are based upon subjective estimates and assumptionsabout circumstances and events that may not yet have taken place and may nevertake place. If any of the assumptions used do not prove to be true, results mayvary substantially from the target return. Targets are objectives, are shownfor information purposes and should not be construed as providing any assuranceas to the results that may be realized in the future. Many factors affect performance includingchanges in market conditions and interest rates and changes in response toother economic, political, or financial developments. There is no guaranteethat the investment objective will be achieved, and Morton makes norepresentations as to the actual composition or performance of any fund. Performancedata presented is net of fund fees but does not reflect the deduction of yourMorton Capital investment advisory fees. Your returns may be reduced by theadvisory fee and other expenses incurred in the management of your account. Forexample, the deduction of a 1% advisory fee over a 10-year period would reducea 10% gross return to an 8.9% net return. All investments involve risk,including the loss of principal.
