Golub Capital BDC, Inc. (GBDC-NASDAQ)
March 16, 2012 Issue
The Most Powerful Name In Corporate News and Information
Direct Lending: A Fix for Fixed Income
Golub Capital BDC, Inc.
principally invests in senior secured, one-stop, mezzanine and second lien
loans of middle-market companies that are, in most cases, sponsored by
private equity investors. Golub Capital BDC, Inc.'s investment activities
are managed by its investment adviser, GC Advisors LLC, an affiliate of the
Golub Capital group of companies ("Golub Capital").
David Golub is President of Golub Capital. He serves on the investment committee for each of the firm’s credit strategies and, with Lawrence Golub, is responsible for the overall management of the firm. Mr. Golub also serves as CEO of Golub Capital BDC (NASDAQ: GBDC). Previously, Mr. Golub was a Managing Director of Centre Partners Management, a leading private equity firm. From 1995 until 2000, he served as a Managing Director of Corporate Partners, a Lazard-sponsored $1.5 billion private equity fund formed to acquire significant minority stakes in established companies.
Mr. Golub was the first Chairman of the Board and is a long-standing Director of the Michael J. Fox Foundation for Parkinson’s Research. He has served previously on the boards of several other non-profit organizations, including the Hudson Guild and the World Policy Institute. Mr. Golub is also on the board of directors of Burton Snowboards and has served on the boards of numerous public and private companies including Tyco Toys (NYSE) and Dollar Financial (NASDAQ).
Mr. Golub earned his AB degree magna cum laude in Government from Harvard College. He received an MPhil in International Relations from Oxford University, where he was a Marshall Scholar, and an MBA from Stanford Graduate School of Business, where he was named an Arjay Miller Scholar.
Interview conducted by: Lynn Fosse, Senior Editor, CEOCFO Magazine, Published – March 16, 2012
Mr. Golub: Golub Capital, by way of background, is a nationally recognized investment manager specializing in credit, with a particular expertise in direct lending to middle market U.S. companies. We currently manage about $5 billion in capital, of which $3.5 billion is invested in loans to middle market companies. These companies are generally controlled by private equity firms. People have very different perspectives about what middle market means, so I always like to define terms. When we talk about middle market companies, we are talking about companies that generate between about $10 million and about $50 million of EBITDA. For those types of companies, we provide senior debt, one-stop financings and subordinated debt. Our philosophy is really simple. Our philosophy is to develop and nurture long-term win-win partnerships with our private equity firm clients, with our investors, and with our team here at the firm.
CEOCFO: Why has Golub decided that this is the sweet spot as far as the middle market firms?
Mr. Golub: We were initially attracted to this niche because we believed there was an opportunity to build a partnership-oriented lender. We operate in a niche where our principal competitors are banks and non-bank finance companies and they tend to be very transaction oriented. They tend to be involved in lending to generate fee income, so they tend to be very focused on short-term profitability. Therefore, we saw an opportunity to come in and change the game by being focused on building long-term win-win partnerships. What do I mean by that? What I mean is that we are very straightforward. We give early, reliable feedback to our sponsor clients. When we like a deal, we tell them. We focus very hard on completing transactions on time and as proposed. Our key service proposition is reliable execution. Now you might ask how that helps our investors. The way it helps is if we can be the lender of choice for our private equity firm clients, we then get our pick of the litter. We get to complete the transactions that we think are the most attractive to do. Last year we looked at over 1,500 different middle market transactions and we completed about 58. Our selective approach helps us keep our credit losses low. We want to focus on very resilient borrowers where there is a very low probability of the borrowers running into problems.
CEOCFO: How does Golub evaluate a potential company; is it all numbers, is it some gut feeling; where do the personal and the technical come together?
Mr. Golub: Credit analysis can never be all about the numbers. The numbers tell you part of the story. We focus on earnings and quality of earnings, but we are also very focused on understanding the vectors that are affecting a business. Does it face headwinds or tailwinds? Is its management team strong and deep? What we look for is what I call resilience, which means, in a nutshell, a very low probability that the company is going to see such a meaningful degradation in its profitability that we are going to have a problem. We also want to understand what could go wrong with the business, as a key element of our credit process includes identifying a viable secondary exit strategy for each investment. This means that we focus heavily on borrowers with a strong market position that should be attractive to strategic acquirers even in a distressed scenario.
CEOCFO: Is there an industry focus, does it change from year to year, or does each transaction have an independent analysis?
Mr. Golub: Again, along the theme of resilience, we look for businesses that have consistency and predictability in their results. We stay away from businesses that are highly sensitive to commodity prices like extraction businesses. We stay away from businesses that are heavily cyclical, where demand and pricing can change very radically because of macroeconomic factors. We tend to like businesses that have very consistent demand and pricing. An example is mission critical, business-to-business software. These are companies that have very high levels of recurring revenues from clients who utilize their product. If their clients want to continue to send out whatever product that they are manufacturing or whatever service they are providing, they are going to need to continue to use our borrower’s software. That is an example of the kind of business we like because we could have a recession, or we could have a spike in oil prices, or we could have any of a number of macro economic changes and it is unlikely that this mission-critical business-to-business software company is going to see a dramatic diminution in its profitability.
CEOCFO: What about the asset mix that you have; is it where you would like it to be?
Mr. Golub: As a firm, one of our strengths is that we have a broad product suite. Financing solutions include senior debt, GOLD facilities (Golub Capital’s branded one stop loan debt product) and subordinated debt. The mix between those products tends to vary and we do not have a set target that we aspire to. We look to move in connection with where we see the most attractive opportunities in the marketplace. In recent periods, we have been seeing a shift in our mix toward our one-stop or GOLD loans. These are loans that are a bit more leveraged than a typical traditional senior loan. You might think about them as being a combination of a traditional senior loan and a mezzanine loan. Our sponsor clients like the GOLD product because it is simple. They do not need to have multiple lenders or multiple credit facilities, and when it comes time to do an acquisition or increase the capital expenditure bucket, they only have one lender they need to talk to. It provides a level of ease, both in an initial transaction and in the subsequent operation of a company that is very attractive.
CEOCFO: Has the economic environment over the last three years affected Golub?
Mr. Golub: During the financial crisis, many of our competitors were very badly hurt. They were badly hurt for one of two reasons and in some cases both. The first reason is that the downturn was deeper than many expected, and consequently, more companies got into credit trouble than in prior periods. The second reason is that many of our competitors had financed their lending business with short-term debt. When the financial crisis hit, in many cases the refinancing of that short-term debt became a problem. They had 364-day bank facilities that they could not renew, or they had total return swaps where the market value of their holdings suddenly became a big problem, or they had hedge fund financing where the investors in the hedge fund suddenly requested redemptions. In a strange way, the financial crisis helped us, because we had none of those problems. We went into the financial crisis with a very well positioned portfolio from a credit standpoint. In addition, we went into the financial crisis with a hurricane proof balance sheet. The combination meant that we could continue to do new business during a period when most of our competitive brethren were on the sidelines. That enabled us to gain market share and develop some important relationships. It also put us in a position as the market has recovered to use the momentum that we gathered in the financial crisis years to sustain continued growth. That has been a big part of our success over the 2010-2011 time period.
CEOCFO: From what you have been saying and as I have read, there is a very high quality standard throughout what Golub does; how do you ensure that through the ranks?
Mr. Golub: We have a concept at Golub Capital that we call the GOLD STANDARD. GOLD STANDARD is all about maintaining quality in everything that we do. One of the themes we talk about a lot is the G in GOLD STANDARD, which stands for goals, and in particular, shared goals. We spend a lot of time setting firm-wide goals, departmental goals and individual goals. By doing this goal-setting exercise very carefully, we make sure that everybody is rowing in the same direction and everybody is rowing at the same cadence. In that respect, we are attempting to be a lot like a well-tuned crew boat. It is remarkable how fast you can move when everybody is rowing at the right speed and in the same direction. Another thing we do, which I think is really important is we reflect every six months on how we did against the goals that we set six months previously, and what lessons can we learn from our experiences over that six months. One of the things we are really good with at Golub Capital is doing things well the second time or the third time. I say that because the first time you do something new, it is never easy. One of our real strengths is staying humble and learning from our mistakes.
CEOCFO: What is the financial picture for Golub Capital today?
CEOCFO: Golub had some recognition in the industry from various publications and sources; how is that important for you to be recognized?
Mr. Golub: What we feel most strongly about is not the awards that we win; it is the long-term win-win relationships that we have built. In 2011, 75% of the middle market transactions we did were with repeat clients. On the investor side, the vast preponderance of our investors are long-time investors who have been invested in multiple Golub Capital managed funds. We like to win awards -- everyone wants to be validated -- but the truth is we are more focused on building and nurturing long-term win-win partnerships.
CEOCFO: Are potential clients coming to Golub now, or are you out looking, or both?
Mr. Golub: It is always both. We believe in a client service model, so we are not standing by our telephone waiting for it to ring. We reach out to our private equity sponsor clients all the time, trying to help them and add value as they compete in a challenging environment.
CEOCFO: Final thoughts, what is ahead for Golub Capital, and why should potential investors pay attention?
Investors today face a dilemma. It is extremely difficult to find safety and
yield at the same time. We think Golub Capital offers investors a compelling
solution to that dilemma.
philosophy is to develop and nurture long-term win-win partnerships with our
private equity firm clients, with our investors, and with our team here at
the firm. - David B. Golub
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