Jeff Schwartz, Corbel Capital Partners
Ontra CEO Troy Pospisil and Corbel Capital Partners founder and Managing Partner Jeff Schwartz took a walk with Lola, Troy’s English bull terrier. They discussed Jeff’s career trajectory and how access to capital has changed for small- and mid-sized businesses in recent years. They also spoke about catalysts for the development of the private capital markets and recent innovations in private debt.
Troy Pospisil (00:02):
I’m Troy Pospisil, founder and CEO of Ontra.
I’m here in Marina Del Rey, California, with my dog, Lola, on one of our favorite walks. We’re here to meet up with Jeff Schwartz, the founder, and CEO of Corbel Capital, an innovative debt investment firm, to talk a little bit about the history and development of the private capital markets and how he built Corbel. Come join us.
Troy Pospisil (00:27):
Hey, Jeff. Great to see you.
Jeff Schwartz (00:29):
Troy Pospisil (00:29):
How are you?
Jeff Schwartz (00:30):
Good. How’s it going?
Troy Pospisil (00:31):
Good. This is Lola. Lola, this is Jeff Lola.
Jeff Schwartz (00:33):
Troy Pospisil (00:34):
She’s going to be joining us.
Jeff Schwartz (00:34):
How are you doing? Sounds good.
Troy Pospisil (00:36):
Well, thanks for meeting up with us and taking a walk.
Jeff Schwartz (00:38):
Absolutely. Looking forward to it.
Troy Pospisil (00:39):
Let’s do it.
I thought it’d be interesting to start with: What did you want to be when you graduated college? I know you’ve had a long, really successful career in finance, but when you were coming out of college, what did you think you wanted to do?
Jeff Schwartz (00:53):
Well, I never thought I would end up in finance, and I certainly never thought I would be a lender. I always wanted to be an entrepreneur, and I studied entrepreneurship in college and found myself on the investment banking track, as many kids out of business school find themselves, and worked my way towards private equity, always with an eye on moving into something more entrepreneurial.
After close to 10 years in investment banking and then close to 10 years in private equity, I realized that I could never actually operate a true business, and the only way to become an entrepreneur was to find an investment firm. That’s really what prompted me to start Corbel in 2013, after leaving the large-cap private equity industry.
Troy Pospisil (01:43):
That’s interesting. What was the initial thesis for Corbel? What was the opportunity you saw in the market?
Jeff Schwartz (01:50):
I think that the real opportunity that I identified almost 10 years ago, and we’ve continued to capitalize is really an inefficiency in the lower middle market in a structured investment product. I recognized that banks had consolidated and come under greater regulatory pressures and scrutiny and were lending less to small businesses. There were still certainly many small private equity firms that were interested in buying control of companies, but there was a big gap in the middle.
There were many, many, many small businesses looking for what we at the time called structured equity. Now, it’s turned into more structured debt but a structured investment product that provided them capital to either grow or recapitalize their businesses and also a level of private equity support and sponsorship that certainly doesn’t exist from a normal lending institution.
Troy Pospisil (02:46):
When I was working in private equity 10 years ago, the unitranche loan was just emerging as the preferred source of debt capital, but that was relatively new. When you started your career at Lehman Brothers and Ares, how were small and medium-sized businesses accessing debt capital?
Jeff Schwartz (03:04):
Well, the unitranche was a structure that made a lot of sense for buyouts in the middle market, but there still was a real lack of capital for small businesses that were looking to either make acquisitions on their own without a sponsor present or to take on growth capital or recapitalize their businesses. Banks were fundamentally not comfortable with a shareholder dividend or buyout as a use of proceeds, so there was a void in that marketplace, which is one that we feel like we’ve been able to fill.
The evolution of the private credit market has really filled that void and allowed institutional investors to back firms who are able to price risk in a different way. Despite the fact that a shareholder dividend is not an ideal use of proceeds from a lender’s perspective. That’s risk that can be priced into a transaction like any other risk.
Troy Pospisil (04:06):
If I were a middle-market business and I was looking to raise, say, $200 million of debt capital 20, 15 years ago, and the private debt markets hadn’t developed yet, where would I turn?
Jeff Schwartz (04:19):
I think there were 144A private place high-yield deals that investment banks were doing. There were syndicated leveraged loans that some of the more middle market and even the larger commercial banks were providing, but obviously, the private lenders recognized an inefficiency in that marketplace and an opportunity to develop a product whereby they could fill that void in the market, and there was enough demand for that type of capital that it could be priced at attractive yields for their shareholders and LPs.
Troy Pospisil (04:54):
What were some of the catalysts that led to the development of the private capital market? For example, what role did regulatory changes play in that development?
Jeff Schwartz (05:03):
Well, post-2008 in the financial crisis, many of the banks, there was significant bank consolidation, and the regulatory and reserve requirements placed upon traditional lenders increased significantly, so banks were less inclined to aggressively lend to small businesses, and lenders or other institutional investors recognized that there was still a need for this capital that was not being filled in the marketplace and formed private lending institutions, effectively private banks that were unregulated or less regulated than the traditional banks.
Troy Pospisil (05:46):
Obviously, in the last 10 years, we’ve been in a really low-interest rate environment. What impact do you think interest rates have had on not only the emergence but the massive growth in the private debt asset class?
Jeff Schwartz (06:03):
Well, in a low-interest rate environment, people are aggressively seeking yield and seeking return, and one way to do that is to lend more aggressively in a current cash-yielding product. While investors were not able to earn any money in the money market or traditional municipal bonds or investment-grade credits, or even high-yield bonds, to a certain extent, there was a demand not only for this type of capital albeit higher costs for companies, there was demand for investors to earn those higher yields in relatively low-risk security or investment, which has created the development, supported the development, both from the supply side and demand side of this private debt market.
Troy Pospisil (06:54):
What do you think are some of the more interesting innovations in private debt over the last few years? Obviously, Corbel has played a really important role in that innovation, in that movement downmarket in particular.
Jeff Schwartz (07:09):
Well, I think the flexibility in that this market relative to a traditional lending market is significant. It’s allowed institutions to price risk. It’s allowed companies to price the value of capital to them.
Back in the day, companies would lever up their balance sheet and use high-yield bonds, and they would make their own capital allocation determination as to whether it made sense for them to borrow at 10%, 12%, 14%.
Now other companies are in this, and the other smaller businesses are also given that same opportunity and that same choice as to what an appropriate cost of capital for them to borrow and make investments.
Troy Pospisil (07:59):
It sounds like the amount of capital availability for small businesses from the emergence of the asset class in the lower-middle market has created a lot of additional opportunity and liquidity for small and medium-sized businesses, at least in America. What impact do you think this has on businesses and the economy more broadly?
Jeff Schwartz (08:21):
Well, I think it’s created a dynamic and more efficient marketplace for small businesses to raise capital and allowed these businesses to grow without necessarily selling control of their business to more traditional private equity buyers, and it’s also kept our banking system safer and more secure because there is inherent risk in small businesses that are probably not appropriately taken by banks that have deposits and have regulatory requirements and are more appropriate for private debt funds or private debt institutions that are targeting a certain yield in return for their investors, and their investors are making that investment recognizing that risk and pricing that return.
Troy Pospisil (09:09):
That’s interesting. What types of investors are attracted to this asset class and do you target at Corbel?
Jeff Schwartz (09:18):
This is a great asset class for family offices, for smaller institutions, endowments, and for high-net-worth individuals, who are, in effect, a small family office or a multifamily office because many of these types of institutions have current cash requirements and obligations. Whether it’s a high-net-worth individual or an endowment who has expenditure requirements, having a current yield and a cash-yielding asset for them in their portfolio is very valuable, and the ability to create that current return through bonds and other fixed-income investments prior to the last six months or so, that interest rate environment has been difficult.
Offering a family office a fairly safe 8%, 10%, 12% yield, 12%, 14%, whatever the case may be, is a worthwhile asset class as part of a family office or an endowment or a high-net-worth individual’s overall asset allocation.
Troy Pospisil (10:22):
Jeff Schwartz (10:24):
We have a number of high-net-worth investors. We have a pretty diverse investor base. That’s a little bit challenging from an administrative standpoint, which is why a company like Ontra and some of the services that you provide for GPs like us or firms like ours and services that you offer LPs, giving them the opportunity to seamlessly and efficiently invest in funds like ours, is very valuable.
Troy Pospisil (10:54):
That’s great. I’m glad we could be a part of making the firm more efficient. As an emerging manager who’s obviously building a brand, how do you go about finding and developing relationships with LPs?
Jeff Schwartz (11:09):
We go to a number of conferences. We meet people through family office interactions, and we actually meet a lot of investors through the Small Business Administration and the SBIC program, a number of lenders who actually have vacated this private debt space, as we’ve discussed, they still invest in small private debt funds because they received what are called CRA credits for investing in small businesses in communities where they bank.
Troy Pospisil (11:41):
Jeff, thanks so much for coming out and taking a walk with me and Lola. It was super interesting to learn about Corbel and also to learn a little bit about the history of the private debt markets over the last couple of decades.
Jeff Schwartz (11:50):
Sure, my pleasure. Anytime. It was always great to spend time with Lola also, and thank you for all the support that you provide to Corbel and our investors, and congratulations on your success.
Troy Pospisil (12:01):
Thank you, Jeff. Good to see you.
Jeff Schwartz (12:02):
Troy Pospisil (12:03):
Have a great week.
Jeff Schwartz (12:03):
Troy Pospisil (12:04):
Come on, Lola. Let’s go.