The Searchers Guide to working with Debt

Michael Kurland - Arrowpoint Capital: Speed and flexibility in Debt Financing and Embracing Wealth Transitions

• Tom McGhie • Season 2 • Episode 2

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What if there was a way to navigate the turbulent waters of debt financing with unparalleled speed and flexibility? Join us as we sit down with Michael Kurland, co-founder of Arrowpoint Capital, to uncover the secrets behind his journey from Investec to creating a formidable force in corporate debt lending. Alongside his partner Andrew McDonnell, Michael offers a fresh perspective on the crucial role that non-bank lenders play in today’s market as traditional banks are constrained by regulation. 

Michael shares invaluable lessons from managing complex business administrations and receiverships, shedding light on the importance of tough decision-making and close collaboration with management teams. We delve into the vast opportunities emerging from the impending generational wealth shift in Australia, driven by retiring baby boomers. This shift is poised to unlock myriad business ventures ripe for entrepreneurial groups with the right capital and support. As we look ahead, we’re eager for future discussions that promise to align interests and foster continued growth. Buckle up for an episode packed with practical wisdom and forward-thinking strategies!

Tom McGhie:

Welcome to the Searcher's Guide to Working with Debt. I'm Tom Magee. This year, at the UTA Forum, I'll be hosting a panel discussion with a number of experienced finance professionals seeking their views on how debt providers navigate business turbulence. So, for this season ahead of the UTA Forum, I wanted to take the opportunity to connect with each member of the panel and provide some background and context to who will be part of the group. This afternoon, I'm catching up with Michael from Arrowpoint Capital. Michael's joining us at the UTA Forum in September to be part of the panel where we'll be talking about how we navigate turbulence in business. We navigate turbulence in business. This afternoon, though, with Michael. I want to spend a bit of time, michael, just getting a bit more detail about where you're from and who you are, and what on earth led you to set up Arrowpoint Capital.

Michael Kurland:

Thanks, tom. I'm Michael Kurland, co-founder of Arrowpoint Capital with my partner in crime, Andrew McDonald. I'm a chartered accountant and CFA charter holder. I previously was in South Africa as you can hear in my accent, I worked at Investec South Africa and London for 15 years about mainly in the specialized debt and lending divisions, where I learned my trade and was lucky enough to meet our now chairman of Arrowpoint, Stephen Koseff, which led to the rise of Arrowpoint Capital, came to Australia in 2014, worked for a boutique investment house and continued in the corporate lending, private equity space, but saw the obvious need for another non-bank lender in corporate lending markets tighter bank regulations, speed, flexibility of structuring the usual things.

Michael Kurland:

It was pretty obvious and, given what's happening in the market, which we can extrapolate a bit more there's an obvious need, in our view, for another non-bank lender in this space. So Andrew and I set up Parapoint fortuitously with the ex-global CEO of Investec, stephen Krasov, who's our chairman and one of our main board directors, as well as the Smorgon Group on the one side Darren and Barry Smorgon Darren's also a director, as well as the Smorgon Group on the one side Darren and Barry Smorgon Darren's also a director, and then serendipitously with the Victor Smorgon Group, which is one of Australia's leading family offices in Melbourne. They are our single biggest Manco shareholder and together we have set up Arrowpoint to hopefully grow into one of the leading non-bank lenders in the Australian market, but focusing purely on the corporate debt space.

Tom McGhie:

And when you, I mean it is relatively obvious for those of us in the industry in the context of why you know there's a need for that. It's your point setting up another lender. But maybe let's kind of just dive into that a little bit more. There's obviously some different parts to that, including, obviously, regulatory frameworks that matter. That sort of you know force banks to do certain things. But I suppose in your mind, and particularly, I suppose, coming from Investec, which you, which really was a very dynamic lender and certainly, from my perspective, missed in the market what's the commonality or differences between, I suppose, the Investec model and really what you're doing now and that space that you're kind of pushing into more as your main mandate?

Michael Kurland:

I must be honest, aeroppoint's sort of a microcosm of how I learned and was brought up at Investec. In fact, when I met with Stephen before we set up with Arrowpoint, it was the week that Investec announced they were closing in Australia, otherwise he actually couldn't have been part of the Arrowpoint journey and I told him directly that Investec should have been occupying the space that Arrowpoint and all my colleagues in the non-bank space have set up Think of Metrix and Judo and Longreach and others. Quite honestly, investec could have and should have offered that space. It had the manpower, it had the wherewithal, it had the funding, it had everything set up. It was even marketing and advertising the Super Rugby and there really should have been the force behind the big four banks, just with speed, flexibility and all the things that the non-bank tenders are setting up, but with much cheaper cost of capital. I told Stephen there, Mr Trick, and he actually agreed cost of capital. I told Stephen and Mr Trick and he actually agreed.

Michael Kurland:

And, quite honestly, space should be occupied by some of the banks or divisions of the banks, but for various reasons it's not. Yes, some banks are more active than others and the banks definitely have their space. They'll do most of the lending in Australia. But there is this widening gap, you know well, let's put it this way there's just a lot more demand for capital in the space for various activities which we can discuss, and there's an opportunity for everyone. So yeah, investec, quite honestly, should have occupied the space like a Macquarie, potentially, but haven't really, and that's given the opportunity for the non-bank lenders to come in.

Tom McGhie:

So using I mean in that context, what are the main focuses for you now in the context of Arrowpoint in the market? Where do you like to play? What is your ideal deal?

Michael Kurland:

So you just have to look on what our investors require or expect, as well as borrowers. So on the investor side which we don't need to talk about now but really they're looking for safer returns uncorrelated to the property market and listed shares, diversification, unique access to good deals they otherwise would never see decent yield investments, those sorts of things. And we've actually launched now our second corporate debt fund on the back of the success of our first one. It's paying sort of 11%, 12% quarterly coupons. But more specifically, for our audience, the borrower side is the interesting space. We really do stick to our knitting.

Michael Kurland:

Each of us in the non-bank lending world have our nuances and specialties. For example, we don't want to lend to lenders. We don't do any mezzanine. We don't do any mezzanine. We don't do any property direct property. We really do focus on profitable, strong cashflow, generating operating business. In Australia and New Zealand. Our lending size is typically between, say, 2 or 3 million and 25, 30 million. Anything bigger than that we would look to co-partner with another one of our lenders who we get on really well with, and the key we believe is just sticking to your knitting and what you're good at.

Michael Kurland:

We see, like our rivals and friends, probably many deals in the market. The trick is to really say no to the ones you just can't do quickly and then focus on the ones you can do and then do a really good service for the borrower. And then that service not only speed or funding certainty, which we've touched on, tom, but the other key one is structural flexibility. A good example, if you just think of us versus banks is banks generally may give five years fully amortizing over the term. That still means 20% of capital a year. If it's an acquisition or buyout or something like that, with the changing of the guard, then you very much should give a capital holiday for the first year and not put pressure on the cash flows for the incoming management team and owner, otherwise you shouldn't do the deal. So if you can't actually get credit for capital for a year, as an example and that 20% is massive, so think of a $10 million deal. Now they owe $2 million to the bank. Yes, the bank may have a 2% or 3% lower interest rate, but from a cash flow perspective it's immense. And there are others structural enhancements which we could talk about, and another one is probably a good one for the audience would be asset finance as an example.

Michael Kurland:

The issue with asset finance and that's massive in the industry is that as a lender you have to make sure that the asset's always worth more than the loan, so you have to repay the loan quicker.

Michael Kurland:

Think of like vehicle finance or your car finance. The trouble with that is that requires again another hefty amortization schedule to keep that divide. Whereas if you take an holistic corporate view on a business, where there's equipment and property and receivables and everything in the one bundle and you're not just looking at a specific asset, then suddenly, if you're looking at corporate cash flows who you're dealing with, the people, the business as a whole you could take a much more holistic view on the business and its cash flows and then you don't need an aggressive amortization as an example, and that's worth a hell of a lot. So the angles that you can approach the non-bank lending market with which, each one to their needs, but these are the sort of things you think about to deliver, I guess, your borrowers with a solution which, yes, may be slightly more expensive than a bank, but certainly a lot more appreciative, a lot more relationship-driven, a lot quicker. So that's what any potential borrower really has to weigh up, I guess at the end of the day.

Tom McGhie:

Yeah, absolutely Absolutely.

Tom McGhie:

And so I mean we're going to touch on this at the forum, and so I suppose we're going to give the audience a bit of a teaser about it. But I guess one of the things we will talk about is sort of, I suppose, in deals when things don't go to plan, and sort of you know what that can mean in terms of flexibility, in terms of you know the way in which you've just talked about even terms or capital repayment requirements and that sort of thing. When things don't go well, what would be some of the common ingredients that you would see from your history and working with borrowers and that sort of stuff in the past that have helped get the deals back on track?

Michael Kurland:

That's a very good question and it's actually quite topical at the moment because there are not in our portfolio, luckily, but there are deals going bad, certainly in the property markets et cetera. And I'll give you an example of one which in our space, in our portfolio, did go wrong last year and then probably the learnings from that. That was a list of business called Halo. It went into administration at our accord probably about August last year. If we go back to that particular deal, there was a listed business where the management really didn't have that much skin in the game. We backed an acquisition pre all the interest rate hikes. We had the most beautiful glossies from well-known, I guess, due diligence providers financial, commercial, legal, you name it and I guess, if you actually go back, it never shouldn't have passed the sniff test in terms of the acquisition going back. There wasn't much skin in the game per se to who was managing it and as the acquisition started to unravel in terms of it needed more and more cash because of the interest rate cycle, because they purchased the healthy mummy, the management didn't want to admit that that was a bad transaction and they started deviating cash flows from the group or the main part of the group to the bad acquisition, so to speak, to the point that we continued working with them, spoke to them every day, gave them opportunity to sell the assets they did sell one to part, pay our loan. But we had to keep our finger on the pulse every single day and then at some point we had to make the unenviable call to put it into administration led by and receivership led by, kpmg Not easy. We even gave our own capital Arrowpoint's own capital for an invoice financing facility against one of their very strong debtors Because, to tell you the truth, us and all our other lenders, we don't ever really want to put any company into default. It's not pleasant and we'd always rather work with them or work out with them.

Michael Kurland:

Much of all the banks work like that, but certainly as non-bank lenders, the best is, particularly if you back the right people with the right amount of equity. Who's got more to lose? It's always best to get around the table and see how we can, as our chairman says, work it out together. Unfortunately, this was one of those deals. We have the battle wounds and we got out 100% with interest, with penalty interest, even with an exit fee, but needless to say, yes, we got out unscathed as a lender. It was a hard process. It certainly put gray hairs on my head and not something I wish upon anyone, but I think the key learnings there is interest rate risk Admit your mistakes when you make them.

Michael Kurland:

Back management teams who have, or shareholders who have something to lose. There is a general question mark around backing the small listed space that technically shouldn't be listed because the shareholders are disparate small, tiny shareholders they don't actually know what's really going on rather than, let's say, a management team and a strong private equity shareholder who really has their finger on the pulse and a lot more to lose. So we had a full debrief on that particular deal, even though we got out 100%, and there's some key learnings around what to do and what not to do. But quite honestly, it actually comes back up to the sector the sniff test at the beginning and the who before, the what, which is a key mantra we live by in terms of did the management really, when we did it sort of was it more gambling, so to speak, in the acquisition because they had nothing much to lose? So those are the sort of things we think about upon reflection.

Tom McGhie:

Yeah, absolutely. I'm looking forward to unpacking more of that throughout our session and the forum. Yeah, but I suppose it's known to me. I mean, we know exactly the answer to this question collectively but for everybody else, sort of how did you come across the ETA community? And sort of, how do you see it aligning and why do you support it in the context of your business and what do you like about it?

Michael Kurland:

I'm not even sure if it was from you, to be honest, or Pete Seligman or a couple of guys we know in the space.

Tom McGhie:

We wouldn't claim rights over Pete. Pete's done a wonderful job of telling the world?

Michael Kurland:

Yeah, absolutely. Look, it makes perfect sense what's happening in the ATI forum and the search space. I'll give you a quick quote that we sort of live by at the moment. According to PwC's one of its more recent reports, 1.4 million business owners employing almost 8 million people in Australia are contributing 500 billion in GDP to retire in the next decade. There's much data around this.

Michael Kurland:

The baby boomers who have set up terrific businesses got their real personal value in their businesses and we know a couple of examples already on deals we've done together in this space. But how do they unlock that value To whom? Now? Sometimes it's easy. It's just you know daughter, son and that's the succession. But the majority actually don't really think about it. They are the business, that's the risk. The majority actually don't really think about it. They are the business, that's the risk. And only when they get older and because they've been in the business, they've never really been able to think on the business and how to exit the business and how to set it up, which gives rise to yourself, like your sort of business, which really helps either the M&A on the sales side or the bar side.

Michael Kurland:

But there's just so many opportunities Now you can. You know the banks will do some. There are many that are too small, wrong sectors, et cetera. But even if you get, you know, as Arapoint and my colleagues in the non-bank space, even if you get just 0.1% of those businesses over the next decade, you're talking thousands of potential opportunities, right?

Michael Kurland:

So there has to be a shift of generational wealth. So there has to be a shift of generational wealth and who better to than a group of entrepreneurs at the ETA conference who are getting equity support to some degree, who obviously can sell themselves to investors, can find the deals, these jewels, and if they've got the equity and we agree the capital structure and then the multiple isn't as too high because, quite frankly, it doesn't have to be in these sorts of businesses then the deals to be done in the space. So we can talk about structuring and stuff in a moment, but there's just such a gap that needs to be filled and we would love to continue playing our part in that space. It just, it just makes perfect sense and there's just so much alignment absolutely, absolutely well, I mean the, the structuring part.

Tom McGhie:

We can leave, I think, until until september. I'm sure everybody will be keen to be involved in that conversation and looking forward to it. Greatly appreciate your time today. I thought it was, you know, useful for us to just get a little bit deeper and cover off a little bit of your background and certainly sort of the story of Arrowpoint and how that's come to be. So I appreciate your time, michael, and look forward to seeing you in September.

Michael Kurland:

Absolutely. Thanks, Tom. We'll speak soon.

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