0:01Welcome to the Credit Bubble, a podcast about the people and decisions behind the debt capital shaping our economy. I'm Derek Brunell. In each episode, I talk to credit officers, originators, and finance professionals about the moments that matter, from deal structuring to market shifts to the personal journeys behind the numbers. In this episode of the Credit Bubble, I sit down with Reuben Shafir, founder of Luna Park Capital. His path runs from Brooklyn, New York to Wharton at age sixteen, Lehman Brothers at eighteen, and ultimately to founding his own credit platform. We get into how an early sense of capital as a scarce resource wired him as a deep value investor and how running workouts at Lone Star Funds in London through the two thousand and eight crisis taught him the difference between cyclical and permanent impairment. We dig into his time building the European venture debt book at Arena Investors, why the market spent years underwriting sponsors rather than businesses, and how rising rates finally exposed the misalignment. Reuben also walks us through the thesis behind Luna Park Capital, credit oriented investments into capital constrained late stage growth companies, where the dispersion between debt and equity pricing is the opportunity. Now let's jump inside the credit bubble with Reuben Shafir. Reuben, welcome to the credit bubble to have you on. Absolutely. I think where I wanted to start is really, uh, getting just a little bit of an understanding of kinda your journey in credit. Like, where did you start? How do you get Yeah. Working in credit? Was there any, um, influence or influences early in your career that kinda steered you into this direction? So maybe let's start there and and then we'll go on. Yeah. I don't view myself as a,
1:41like, credit guy. Mhmm. I view myself as a deep value. A lot of times, I express my views through the credit or through credit. Okay. But there are times I say, you know, it is better to be an equity investor. Mhmm. It's a question of, you know, how much you're getting paid for the risk. Mhmm. Right? And so that paradigm, you know, changes, you know, through cycles, through, you know, either, uh, I would say kind of macro or even or micro. So I don't, you know, I consider myself more kind of a a deep value, and it's a question of price. Okay. And kind of I look at everything from a kind of cost benefit risk return lens, and I think everyone would say that, investors say that, but I I truly I truly do. I do probably just express that view more through through, you know, the credit lens. Right? What's my downside versus my upside? Right? Am I capturing some of that convexity that that exists or or that upside versus that. So am I getting am I getting paid for that risk?
2:48Okay. And and so, like, where where did you start? Or, I mean, it Got it. Yeah. Is that, like, a a a view that evolved over time? Or was that something you learned? Or was this No. So science? Or Yeah. So my story is
3:05really I would I don't know if it's unique. I grew up super poor single parent. I had no one in business. I didn't even meet anyone who wore a tie until I went to university, actually. K. I didn't even know this world existed. Yeah. I didn't buy my first stock, I think, until I was twenty six. Okay. Um, I went to Penn. Everyone everyone knows Penn or knew Penn or Wharton. Yep. And I went when I was sixteen years old, and I had no idea what I was doing, to be honest with you. At sixteen? I had no idea. Yeah. I went when I was sixteen, and I was kind of paying for university myself. Um, I never even visited. I didn't know I grew up in Brooklyn. I didn't know anyone who went away to university. I didn't know I'm first generation American. Mhmm. I didn't know I mean, honestly, I was super green, man. Yeah. Um, it's kind of but I was curious. Yeah. If that makes sense. I was always, like, a really curious guy. And so I went to Penn, and there at, you know, Wharton, you met I met people who were hardcore. And, I mean, they knew exactly what they were doing, and they knew exactly where they wanted to go. And Wow. They were I mean, they knew people that I didn't never heard about, or they already had this vision of themselves. And if it wasn't they didn't have a vision of themselves, they had their vision through their families, to be honest with you. Mhmm. Right? That's how it works. Yeah. Right? Their families were in business. It was either they were entrepreneurs or they were lawyers. Right? Let's be honest. And so how they were, you know, or they were or they were already in in in finance or, you know, whatever it is. And so being at Penn, if you were in finance and you were kind of intense or hardcore Mhmm. Which I was, uh, you oh, so so I another little caveat. I graduated university super young as well. Yeah. So I was, like, eighteen turning nineteen when I graduated. Right? Wow. Okay. And so I just knew I wanted to make, you know, I grew up super poor. Yeah. Wanted to make money. Yeah. I needed to make money. It's not I wanna like, I needed to make money. Right? Yeah. Yeah. And so wherever that routes and I you know, at that point, you're just following the herd. Okay. Being honest with you. And so that's kind of what I did. I started interviewing. I didn't have time. I was taking eight to ten classes a semester, and I was just, like, dropping my CV, you know, my resume Yeah. Into the Dropbox. Right? Or whatever it is or or email. Right? Whatever is, like, you know and so, um, I started getting some interviews, and, you know, the sexy thing to do was investment banking. Right? That was the that was the thing to do. You're on. I mean, consulting investment banking. Yeah. I mean, there were there were three tracks. There was the banking one. There was the consulting one. Mhmm. And then there was, like, kind of sales and trading, which, honestly, that was probably fit me the best, personality wise. Yeah. Yeah. Because you're you know, it was a little more fast paced. It was a little bit more, you know, it was an inherent view of risk management and how you manage risk. Yeah. Investment banking was a lot more it was very clean-cut. It was very, um, you were, uh, kind of barbarians at the gate. Yeah. You know, you were advising CEOs and, you know, that kind of thing. And at Penn, that was, like, the prestigious thing to do. We're at Horton. Right? Because, I mean, this was, like, you know, fifteen, twenty years ago, man. So it's twenty years. So that was the thing to do twenty years. So that was the you know, you would you know, that was and that is what I did. And I started work, um, at Lehman Brothers, and I never, uh, had an internship at any of these things because I mean Okay. So you Yeah. Super great. Yeah. I didn't have an internship. Yes. Yeah. And so I didn't know, you know, what I was doing. I got my offer at Lehman when I was eighteen. Actually, I accepted it when I was I was eighteen years old. They didn't even no one knew my age. I had offers from Lehman, uh, Citi. You know, uh, I was never get able to get an interview from, like, Goldman or any of the, like, the prestigious places. Right? It was only the you know, I didn't come from the right family. I didn't have the right connection. You know, it was it's just how it works. And so I, um, I just pay off for some Lehman at eighteen. Yeah. And they didn't know my age because it's illegal to ask in America. Right? And so you they just kind of I don't know. They just tracking with everybody else who graduated. Assume that was tracking with everyone else. Twenty one, twenty. Yes. Exactly. That's exactly it. Yeah. And so I started just going professional, started at Me Man, and they, um, I started in financial institutions group, which is, you know, banks, insurance companies Yes. Specialty finance businesses, things like that. And I was asked to move to London within a month, by the way. Wow. And so I moved to London, uh, when I was nineteen, um, and I'd never been to Europe before, actually. And so boom. Yeah. And so never been to Europe. Uh, my family is Ukrainian, actually, so I'm first first generation. Um, and, yeah, and and I was, uh, they asked me, okay, I was kind of part of the team restructuring Lloyd's of London. Yeah. Like, the bad book of Lloyd's of London. They, you know, I'm sure I honest um, and then I moved, and so it was super interesting. And then I moved back. I'm gonna kind of speed it up so I can go on. You know, moving to back to New York, got promoted to associate at Lehman, and I decided to stay rather than leave, which a lot of people did your two years or one year, and then you left. Mhmm. And, of course, I was working a hundred hours a week sometimes. It was like, that's what an analyst did or does. And, uh, you know, I guess I have a bit of a you know, most people leave after two years and have breakdown. Let's say, I need a break. I did not. Yeah. I need a, you know, I did not. I stayed. I got promoted to associate. I was, like, twenty one years old or twenty, twenty one, and then I moved to back to Europe and the Middle East. And so I worked out of the Middle East and Europe for the next two years Mhmm. At Lehman Brothers doing a lot of tech actually Oh, wow. And a lot more tangible industries. I know it sounds crazy, Middle East, uh, as well. So my story is kinda, I told you, unique. And then I decided I wanted to go back to the US, and the head guy said the only way of letting you leave leave is if you go to business school. And I applied to didn't ever think about going. I applied to HBS, and I got in. So I went to, uh, HBS when I was, like, twenty two years old. So I was, like, twenty two. I was the youngest one my year, and it was interesting in that I thought I was gonna I post my experience. I I thought I wanted to do kind of real estate, uh, and some kind of winding road. Yeah. And after I graduated HBS, I, like, I took an internship in development. I then I took I went on the acquisition side, and I actually did not enjoy it. No offense to anyone in in real estate. I found it too maybe locally driven in in a way. For me, real estate is very locally driven. Yeah. I didn't find it a lot of times. I found it almost, at least for me, to people were too, like, almost ideal driven, but without some of the without something sometimes I think more of the, like, the multivariates that I I look for. I like the complexity and things. Yeah. I like where you have, like, multiple, you know, option out. But it was also very kind of, I I think, just more locally driven than I kind of expected. And but real estate at its core is a credit driven asset class. Either whether you're doing equity or you're doing credit in real estate, they're still very credit driven. Right? You know, the cyclicality Yeah. Uh, to it. The there's a certain sense of kind of tangibility in how you define that, etcetera. And then I was here in the US, and I thought I was I mean, look. I was you know, I decided to then, uh, there was someone I knew who I was introduced to who was the I don't know if ever if you ever heard of Lone Star Capital. They are one of the first NPL large, like, credit driven investors. Okay. They did nonperforming loans on a kind of global basis. It's founded by a guy named John Raken. Super interesting. They started really, really a long time ago, um, and they were one of the early ones. Yeah. Both in Europe and in Asia, and they're still around. And they were probably one of the first, and so I ended up, um, meeting someone who was kind of the founder of Lone Star Europe. And he asked me I mean, he already started. He asked me to move to London and join him. Right? And that is what I did. So I moved back to London and lived there for about six, seven years. And I was the and it was really what I would say is I did a lot of, um, it was around two thousand eight. And what happened there, and this is where you kind of realize who you are, is I ended up joining right when the crisis within that year. And there was a bunch of investments made that I told them we should not make. I mean, like, you know, one was in, uh, consumer debt collections unsecured Okay. Or BPO business, very, very classic. And another one was in Europe in retail. And I, you know, I was very young, but I I said, you know, I knew there was something fundamentally wrong with these kind of assets or businesses. Yeah. Right? Fairly. And so what ended up happening is, you know, not to too much I was absolutely right. And a lot of the people who did those deals ended up getting fired, and I had to pick up the pieces. And they were literally turnarounds. Yep. Right? One was an absolute operational turnaround where the CEO chairman stole money. There was, like, money went, you know, missing. And what was interesting is I identified it. You know, even though I was fairly young, I identified it even though there was another p firm that was really the lead and how and they're supposed to be very, very smart. How can that happen? Right? And they were kind of actually, this was an emerging market. Um, and the other one was a pure financial. I mean, literally, you know, they mispaid or mispriced for the, you know, the the assets. Yep. It was levered. And what I learned about myself never having wanted to do this or having done it is when there was a fire in front of me, I never I didn't run run away. Yeah. Right? I almost kind of run ran towards it in a way. Yep. You know, I wasn't scared of situations where things just didn't go right or well. There were kind of, you know, problems to to to be solved. Yeah. Right? And so I had to end up kind of turning these things around. They're very emotionally draining. I'll be honest with you. Yeah. Yeah. You know, you're seeing you know, it's not the layoffs. It's, you know, it's a lot more to that. Right? You're not seeing the upside and this kind of you know, you're really managing risks on a, you know, almost daily, weekly, monthly based on my days to work out, and so I couldn't Yeah.
15:31That's right. For a year. And oftentimes, things are so so cooked that it takes a while
15:38for things to turn around, especially when there's a a cycle, right, which kinda That's right. That that's that's exactly what this was. It was not only a cycle, but you also realized they just mispriced the risk incorrectly. And and they mispriced the assets. That's how that's how that works. Right? And and a lot of these were permanent impairments, and that's what you realize. There's cyclical impairments, and then there's also permanent impairments. Right? Mhmm. A lot of times, you don't get that second chance, especially when you lever yourself. Yeah. You know, considerably. But I learned that I was absolutely right. But it wasn't like, you know, I understood exactly that I know there was a we were at the peak cycle and there was a cycle ahead of me. No. I didn't. Yeah. What I did know is that we weren't underwriting the risk correctly. Mhmm. And I didn't really understand that at that time because you're in your twenties. You're just kinda figuring that out. Right? What does that really mean? What does it doesn't it? You know? But I knew that there was something fundamentally wrong in both situations. And what I realized is that the fund manager, you know, or or the, you know, the, uh, the the founder who I worked for, I only realized later why he did these also deals to a degree other than mispricing the risk. And you realize there's a lot of non economic drive it was a lot of non economic drivers to him. Right? He wanted to do a favor back to someone who helped him. You know, he regretted not investing in this asset class at Lone Star ten years earlier. Yeah. And so even though the yeah. And so that one. I wanna get this one and you're Yes. I miss exactly. Biased a little bit. Yeah. You're changing. That's right. He was already, you know, biased. I missed that one. That's exactly what and I didn't you know, he kind of communicated it a few years later to me, right, on on email. And I understood, okay, what was kind of driving him because before that, you just none of it made sense. Right. A lot of it didn't make sense to me. And so I did that, and it was a super interesting also just running around, you know, not only doing that, turning because what you what you really do is you understand what risk means when that happens. Mhmm. You understand what happens on downside. You understand what happens, how work how difficult workouts are in execution. Yeah. You understand how time and resource allocation is a big part of risk management. And it also makes you a much better credit investor because credit is about managing the downside.
18:16One of the big things I took took away from it is if you've never done a workout, I think you just think things are always gonna go well. Being aware that there's so much uncertainty in the future. Well, seem to think that if you underwrite something, it's like we've we've analyzed it. It it's like, you know, there's still a lot that could go wrong.
18:37It's realism versus optimism, I like to say as well. Yeah. Equity investors, I think, are natural optimists Sure. To that degree. And I think it's very kind of venture inventor equities, especially. Right? You you know, I mean, you have default. By default. Wired.
18:55To think that way. But
18:57That's right. Yeah. Um, and so I also you know, running around, like, you know, just being in Europe post crisis, and it could have been in the US or in Europe. You understood kind of I, you know, liquidity Yeah. Much more and how important that is. You understood permanent impairments much more. How you define kind of risk. Yep. Right? I I just think all these things, it's it going through that cycle was, I think, looking back, such a great experience. So so I ended up going back to coming back to the resigning. I ended up coming back to the US. Uh, took some time. I actually looked at a kind of did a few deals. One was, like, in property. One was I was in buying a, funny enough, a newspaper out of bank you know, out of bank Okay. In Ireland. If you ever I don't know if you're Irish. I'm not, but Sunday is called the so you have to say if anyone's Irish, there's Sunday Business Post. I can talk about that story and kind of what happened. It was super interesting. And so what I realized is, like, I think also, you know, when I said, like, you know, people run away from fires or fee you know Mhmm. You know, fear doesn't scare me. I hate saying that. Yeah. We all have our fears. Sure. But to me, I look at it from a very, very different lens than I think a lot of people. Yep. And I look at, you know, when I see that fear, I ask I actually see opportunity. Yep. Right? I see that's where you see these imbalances, these dislocations. I wasn't able to define it then. And I think when you speak to investors a lot of times is match your investment to your psychology. Who you are, you know, I I have a natural tendency even when I'm looking at equities. I'm looking at all time lows and fifty two. I'm looking at what's kind of That's what I'm kinda curious about because I feel like
20:53like, if you're looking for value, like, how do you start to determine whether it's down because it's just mispriced or it's down because it really should be down and should be nothing you touch. You know? Like, that to me is always the you know, I look at the charts too. It's like, oh, it's trading down. It's like, well, why? And is it Yeah. Yeah. Is it gonna recover? Is it gonna take a year, five years? Is it so that's what I I'm just curious to get your thoughts on how you what's your thought process as you're looking at stuff that's trading down or that you think is, um, distressed or undervalued or mispriced? Do you have a framework for how you start to I think yeah. I do. I think to certain degrees.
21:40I think it's I mean, we're we're veering off a little bit in the sense of I think if you're looking at equity or debt, they're very two different paradigms. Right? So, you know, especially in equity, if it's I look at leverage, and then I look at to see where the debt is priced versus the equity. Yep. Right? I think equity has a lot more retail driven investments, so it's very much more sentiment driven Mhmm. Versus credit. And so a lot of times under equity versus debt paradigm, I'm gonna see, you know, equities may be down fifty percent, but the debt is still trading at par. And I'm being very, very kind of, you know, general. Right. Yeah. And that to me says, okay. What is driving that equity versus because if the credit is straight trading at r, right, versus equity being down fifty, seventy percent. Now you either ask yourself, is the equity you know, it's it's either credit is overvalued or equity is undervalued. Right? So I'm always looking at these kind of, I think, kind of paradigms or shifts that are happening. What's causing the selling or the buying as well? Right? Yep. That's another thing. You know? So there's these, like, we could talk about fundamentals, but there's a lot of times I hate saying the word technical, but there's other non fundamental drivers. Right? I think especially more so now than it used to. And you're right. I'm I think a lot of the time, a lot of I think a lot you're right. A lot of times as you shouldn't touch it, things can get absolutely lower. There is a sense of, you know, this can be you know, this business may not exist anymore. Right. Maybe, you know, uh, it could be, you know, default on its debts. It could I mean, there's a there's a lot of kind of, I would say, variables that can happen, but you're right. And it's always it's a little bit of an arts and and a science, I think, as well. Do you
23:34is time element to this too when you see something that's,
23:37you know, undervalued or distressed? I mean, do you do you make a snap decision, or do you kinda, like, no. I wanna see this thing Everyone yeah. Marinate a little bit. Right? And then maybe you Yeah. Yeah. It's a great question. Show, Cara, like, missed that. Yeah. I should've I I think it's I you know, I think I like to let it marinate a little bit. Yeah. But then you also have to position size it correctly.
23:58Mhmm. Mhmm. So
24:00I think everyone has their styles, um, and you're never gonna get it fully right. But I I like to I think position sizing is really important where you kind of learn to nibble a little bit and then you go deeper and deeper as you do as not only you do the work, you you see how it trades. You see the, you know, the drivers. You know how you know what I mean? Yeah. You know what's kind of driven, but that's me. And I think everyone has their own kind of style to that. Yep. Um, the one thing I would say is is, like, I think just natural psychology for me is I, you know, I I like to say this, you know, some people go into a store and they, you know, buy they're like, I need the shirt. I like this shirt. I'm buying full retail. I'm paying the MSRP price. You know what I mean? Right. Yeah. You know, it's kind of like buying SpaceX right now. And you know what? You can do really well. You can be really happy. And that's not to say, you know, they're not gonna make money or they're not gonna be, you know, satisfied. Mhmm. There is right. I would I go into a store and I literally wait for that thing, you know, that either item or even the store to go into eighty percent liquidation. Yeah. You know what I mean? Yeah. And go on setter. And, you know, sometimes and you're like, oh, I will I may, you know, I may not get the color I want
25:31exactly, but it'll be, you know, great. I may you know? And so that's the way It's satisfying, though. I I I can relate to that. I've done I mean, just on some general Yeah. Consumer stuff that I bought. Right? It's like something you you you fall in love with it, and then it just you let it sit for a while and you get it. And it's delayed gratification, and it's the sweetener is you got it for, you know, x percent off or something like that. Yeah. And I'm waiting for
25:56that deep value. Right? And that's just my psychology. Mhmm. You know? Psychology, I I think some of it comes and I, you know, you hear people in, like, you know, the Carl Icons or whoever. I don't know if the he's the right example, but Yeah. Others, um, where I think it's also just growing up poor. So poor where you realize that's what you, you know, it's all about, I would say, capital allocation. Yeah. Your your capital is very, very limited. So you have to know how to allocate it correctly for what and it's just not it's not just capital to your resources. Right? Yeah. And so you have to you learn
26:33that's the only way to actually it kind of it's ingrained in your psychology. It it it's almost like it would be impossible for you to think some other way. Like, it would it would be such a departure from your psyche that you it'd be you'd have, like, a reaction or it'd be something you wouldn't even you can't even fathom.
26:51You I've seen I think about it. I was like, what if? You know? Yeah. I can go with you know, you get better at it, especially, you know, we you know, everyone has needs. Right? Sure. Sometimes you see that you don't need, but that's the general Yeah. K. There's a general limit. Yeah. Yeah. Now so
27:08you're you're back in the States. Yeah. And now now how do you get to Luna Park? Because we I wanna
27:15I wanna hear about it. Great question. Yeah. And so I came back to the States, and I, um, had an offer from someone pretty well known. And, basically, he was restarting his operations at Arena, and he said to me how you know, I'd like you to open up our London office and and build out our European business from scratch. And so that's what I did. And the essence of Arena is literally, you know, I would say it's kind of it really fit me in the sense of, you know, it's you it was about looking for dislocation, looking for these imbalances where you can come in and, you know, reprice the risk. And it could be anything and everything. So it it didn't have to be very broad. And you're doing it from such a tight, again, I would say kind of allocate, you know, resources because I was starting building out the office, starting the office. I was only able to hire, you know, one analyst and two analysts. You know, we didn't even really have a kind of a mid or back office. So you have to be really smart on what you're focusing on because of that broad mandate. Where can I capture the greatest Yep? Greatest benefits or least cost or greatest return for, you know, per unit of risk. And so one of the things having been in the US is I looked at a bunch of venture debt deals. And two things I've noticed was there was a a lot of mispricing on the downside. They weren't pricing the risk, I think, a lot of times correctly, at least from a single credit perspective. You know, you also have portfolios, and that's a whole different right? And then I thought the return they were getting wasn't really I again, I think that went down, and it wasn't so I didn't think it was very commensurate with the risk. With that said, when I went to in Europe, I said, okay. I actually find the risk return there to be way more interesting on a relative basis for what you were getting in the US. And so I ended up focusing on that, and I ended up doing, um, over, like, a hundred and fifty million. And and what would you kinda characterize as kind of the venture space? Yeah. Venture side in the venture debt space. Both and it was both US and Europe. Okay. Right? And so I ended up doing a lot of it, both direct and in partnership. And the the pricing was still I thought it was kind of, you know, I hit the nail on the head in that degree. It was that two thousand nineteen, twenty two thousand nineteen time frame, and then also COVID hit. Right? So we were able to really put some interesting capital out the door. But what was even more interesting to that was the returns, the warrant coverage, the spreads, but really the attachment points that we were doing the deals were very, very good. Right? Especially early on. But what I noticed was and the portfolio has done very, very well. But what I noticed is and and how it led to Luna Park was in two thousand twenty two, as rates started rising, I saw within not only kind of not so much in the portfolio, but also just within their my origination, kind of what's been shifting and how the ventured debt market, what really was how it worked was in that the lenders were not underwriting the businesses. They were underwriting the sponsors.
30:52Yep. Mhmm. And and, I mean, I'm sure it's Silicon Valley very soon. Just to just to take a little bit of a a side road here, but that that was kind of the evolution of, you know, my time in SEB was so much of the early stuff was, you know, so and so top tier fund is in the deal. We're gonna do a deal. And and then, you know, as as at least the that bank matured, we spent a lot of time underwriting the business. And and in fact, that was a lot of the the regulators. You know, we were doing that ourselves, but the regulators were also kinda getting keen to that idea too. But what we saw was other competitors Oh, interesting. Who came Mhmm. Who became, like, really enamored with the space, and they they kinda came up with their own me too innovation economy thing. They kinda went back to, you know, well, we're gonna compete and and we're gonna be we're gonna go to the floor on a Sequoia backed deal because That's right. So it's Sequoia start to get market share with that firm.
31:52Right. So Right. Some of it Because you're underwriting the sponsor. Competitively driven is is what I'm getting at. That's right. The leverage was also with the sponsors. Mhmm. And what I saw was that, you know, each of the sponsors, whenever you ask them, you know, they you'd ask them, well, if something goes wrong, do you have reserve? Right. And they'll all tell you, of course, yes. We have reserve. We reserve Yes. For this business. Right? We love all our children. We love all our children. And then when there was a you know, when it actually had a potential problem and there was various at times for different credits, and then you went back to them, and you're not you're you're smiling. Yeah. Exactly. No. You know?
32:34No. Put some money in if you if you defer principal.
32:37That's right. We don't really you know? Or And this was in the good times. Yeah. Right? Yeah. And then once two thousand twenty two hit, you realize they didn't have any reserve. Not only that, whatever reserve they really had was allocated
32:53Oh, really? Towards Their a Yes. Their a deals. Yeah. Their a deals.
32:58And you and what was even more interesting is on the venture debt side, none of these guys would enforce.
33:06None of them. Right? Wow. Why? Yeah. Very few. Very few. That's true. So, you know My my experience was, like, banks were really reluctant to do that because they're they're playing a a bigger game, if you will, where I have just portfolios and and And sponsors. They're getting they're getting their relationships and everything. Sponsored relationships. Where you saw a little bit more, um, I I don't wanna say aggressive because I don't think it's aggressive behavior. But where you saw a little bit more enforcement was with the non bank funds that just candidly were more transactional. And, you know, they've got
33:42Yeah. A little bit. And but even on the non bank, they're still all sponsor driven. Sure. A lot of Right? Yeah. And and the sponsor will will tell you, if you do this, we're never going to give you another deal again. And Yeah. Yeah. That's right. And in a lot of these in their fund docs, they actually can't do non sponsored deals. Right? Venture debt by almost definition is VC backed businesses.
34:10There's usually they're they're almost at least a lot of a lot of them need to see at least an institutional investor in in the cap table. So you're right. Right? And and I think there is some reputation risk concern with about, you know, enforcing.
34:24That's right. I also think a lot of them it wasn't even on the sponsor. It was, like, they were really kind of almost more rather than quantifying or analyzing the business, they were quantifying the debt equity ratio. What does that mean? How much equity was invested Yeah. Versus the business itself. What what does that mean? Yeah. What's the burn rate? What's the issue? Right? What's the unit economics? What's the no. It was, well, they invested eighty. We can give them ten. Yeah. Yeah. So Wow. You know? Yeah. Within within that yes. And so I saw as rates started rising, I don't think and I remember working on a deal in auto kind of. It was like a online, uh, auto leasing business. Right? I wouldn't say online, but kind of what and we were doing something on I was doing something on the on the credit side. I mean, it's a pretty it was a pretty good start up. The founder was incredibly arrogant. And as we're executing the deal, he said, you know, I don't need it anymore. My equity my VC is gonna give me another fifty million. I'm like, well, that makes no sense. You're why you know? And I'm like, that's not sustainable where the cost of equity is below the cost of debt. Mhmm. Your equity investors should only be giving you money if that they think the total return is gonna be right? Yeah. This is where I'm giving you that asset back Yeah. On a pricing, you know. And so I realized, I mean, that's just not sustainable. When that happens, you are you know that there is something fundamentally wrong within the capital market. And so it's either my debt was too expensive, it's always possible, or the equity is, like, you know, too cheap, or equity is almost, like, free money, and they're just putting it to work because they have to Yeah. So they can raise the next fund. And with the rate, you know, increase in in in rates, I kinda saw I said that paradigm is going to change or is changing. Yeah. And I think this is a real fundamental shift in how they perceive and price the risk within growth. Yep. So that's how the idea for Luna Park came to be. Okay. Luna Park itself, the name Luna Park, I people think it's like, you know, it's actually the name of the council housing estates or the projects that I grew up in. Oh, wow. So I'm gonna ask you about that. I'm so glad you covered it. Yeah. It's called it's called Luna Park Housing. Back to your I was always very embarrassed by it. I was gonna name something else, and and someone said, why don't you name it, you know, that? And, actually, people really kind of appreciate it or enjoyed, I've heard. So That's great. Um, it's a, yeah, it's a unique name. Right? And so what I saw was not only and so this was a fundamental shift. Mhmm. And when you have a fundamental shift like this, what I realized is that there was a massive dispersion that's that was gonna happen. And there's that dispersion between debt and equity in VC kind of back businesses or growth back businesses Yeah. Is pretty pretty high. Right? Because of how they price their return expectations both on the top and then the bottom end. Yeah. And so when you have such a massive dispersion, that's where you have an opportunity. People will misprice that kind of risk or perceive that risk to be differently. So that allows me as a, I would say, kind of hybrid capital or capital solutions or however you wanna call it, um, uh, ability to kind of say what what we do, which is, you know, credit oriented investments, uh, into capital constrained growth companies. But what it really is is that, and then, you know, where you're able to capture some of that upside as well. Mhmm. So managing the downside versus some of some of that upside. And you felt you had to you had to create this outside of Arena because of I think Arena, you know, I think it was a question of two things is one is I'm still there as a was still there as a senior adviser, but Arena is much more on the distressed side. At least that was their repute that's their reputation. Okay. So I thought that was important. I also think Arena the the remit for Arena is so wide. I think in this asset class, I think it was there's so much more there's scale. I think it was important that you have to be known for that as well Yeah. To a degree. Yeah. Right? Um, and so that was the kind of, you know, the rationale that was that was driving me. Okay. And, honestly, it's also economics. It's time to create your own. I'm a super entrepreneurial guy. I partnered with a former colleague, uh, who's very, very smart, Evan. And so we're doing something that it's also not only is there a real opportunity, I think we're really we're solving a big problem. I I think a lot of investors I don't know if you agree, but I think both capital sources and and a lot of the founders and and investors don't know this kind of product even exists. Yeah. I think a lot of them think it's either either get VC equity or you get bank debt. That's it. Or and there really is a much larger kind of that
39:36middle. Yeah. So maybe for for listeners, I mean, maybe just kinda broad stroke, what what are you looking for, and what's kinda the check the size or just kind of the, you know, the high the high points on Yeah. The industry. Yeah. What you're structurally, what you're trying to position?
39:56The that's a great it's a great question. We are you know, I think I think we have to ask ourselves, the markets are always changing, right, the opportunity set. A year ago, it's very different from today even if the the fundamental drivers are very, very similar. But at its core, we are underwriting unit economics. We're looking for those real good businesses that haven't hit those major growth or that those growth expectations that the investors originally envisioned. That's what we're we're underwriting. So we're underwriting real unit unit economics. With that said, there's all these other alignments is important. That's really, really important here. It being led by a credible management team Yep. Important. I mean, all these other things, don't get me wrong, but we're really underwriting unit economics. And then with that said, we have certain minimums. We wanna see at least a minimum twenty, twenty five million of revenues or ARRs of at least ten to twelve. And that's more because we wanna make sure there's no infant mortality risk. And what that means is if there's a real there's a buyer's market at the end. And if the company is too small, that buyer's market is much more limited. Right? Yeah. It has less of an impact. What we're also doing is, you know, we're looking for those, like, what it says, it's kind of they don't fit the classic. Otherwise, they're gonna get so, you know, non sponsored, for example, is a great one, like we talked about. Right? And that's still the case today. Whether it's bank, whether it's non bank, and it's some of these classic growth lenders, whether it's the BDCs. You know, I think people don't realize that the way the market defines private debts really is what they're talking about is sponsored driven financing. That's ninety five percent of it. Yeah. That's kinda funny to summarize it. I mean, that's really what it is, is sponsor driven financing on all of it. Okay. And so then, in terms of allocation, like, what's So I would say it's kind of out of favor industries is a good example. Consumer is a great example from, like, a year even a year or two ago. Anything that's ecommerce or consumer driven, people don't even wanna underwrite the business or the unit economics or the churn. It's just a no. And those are the ones where we can come in and actually do something really interesting, position size it correctly, reprice some of that risk, and really solve, uh, and solve the issue for either for provide us a solution for the for the business. Are you taking out facilities? Yeah. It's a great great question. Originating? We don't that's a great question. To do a one hundred percent refi, that is not what I don't think that's a good use of capital. It's not what we do. It's past the buck. I think you're gonna see a lot more interesting opportunity sets in that just because, especially in software, we're gonna be doing a lot more of that. I think just because that reset the clock, that twenty million is not worth twenty million anymore. It may not only be worth twelve. So if you're coming and say, hey. Let's reset the clock. Okay. Well, you know, you're not getting that twenty. Yeah. You're getting ten. You're getting You know, that's thirty you're getting thirty minutes of the clock. That's right. That's right. And I think the I think that we're in, like, inning one of that. It's to be to be open. Yeah. Well, you mentioned it earlier, because of how how people kinda underwrite simplistically in terms of how much money it was in. And, I mean, there's the enterprise
43:16value to debt math too. Right? And I think that's what's gonna start to complicate a lot of refinances is businesses are fundamentally
43:25kinda be deemed as over levered even if it's a straight refinance. It's, oh, there's gonna be like this. Even if you deem the business to, you know, have a place in in have a product that really solves a need, I think, like you said, they're over levered. The structure that, you know, the amount of capital that was given to them, their the cap structures are upside down. Yeah. And they haven't been able to grow into them because it was based on a certain growth rate of ARR ARR or what whatever, and that's just not gonna happen anymore. And now also on the liquidity or exit or DCF, it's now half of what they assumed. Mhmm. So you've got some real, real drivers of why not only the equity is way out of the money, probably worth nothing, especially if it's, you know, it's pretty if it's levered. Yeah. But the credit is probably worth, mostly will have value, but that could be worth fifty cents, sixty cents, seventy cents
44:24on the dollar. Yeah. Yep. Yeah. What I was gonna say is, you know, it's like we're we're we're heading into this phase where there's gonna be a lot of at a you know, I think we use the word pain, but this is basically just like capital destruction in terms of, um, people taking hits, whether it's on the credit portfolio, the equity portfolio. I was reading some stuff the other day where some funds were writing first lien debt at a fair value of zero. And I was just like, yeah. I was just, like, scratching my head. I was just like, how how does that even What does that mean? What does that how does that even happen, really? But Yeah. Um, and then people were chiming into the comments around, well, what does that what does that say for the equity, you know?
45:08Yeah. People aren't talking about the equity. I think the I think the and and some of these growth equity firms and private equity firms, I think the problem with with credit versus equity, let's say, the VC is a good example. All you need is a few companies to go right, and you've already hit your targets for your investors. Right? Your all all you need is a few to go right. In credit, all you need is a few to go wrong Right. Because of the way and and you're out of the money already. All you need is, you know, a few to go pretty wrong, and that's it. You're, you know, you're below your hurdle or you're below par on a portfolio,
45:52and that's much harder. I I I have a lot of conversations with with folks who are looking for debt capital, and, really, I try to explain to them the the difference between the two kind of asset classes and and kind of the cap upside that fixed income investors have. And That's right. There's always, you know, folks trying to basically use credit to solve what really are equity equity profiles. And we would talk about this all the time at at SVB and even at JPMorgan when I was there, but something that comes up quite a bit in the conversations with with particularly founders who are maybe less familiar with debt capital markets and and kind of the way to capitalize a business as it as it grows.
46:31Yeah. It's a good good point. I tell some I say that to founders where, you know, you really need equity.
46:38That's what you really need. Right? Yeah. And, you know, you mentioned consumer, and, of course, we we we touched on tech. And and, obviously, there's a lot going on in the software space. But any other industries that are are are something that you you're interested or you're paying attention to? I mean, we're pretty industry agnostic.
46:56So I'm not industry specific. I think a lot of subcategories have their own cycles. I'll give you an example in energy, climate, uh, or whatever it is. I think we probably saw, like, you know, a year or two ago, especially or, you know, maybe the case is very hard because a lot of it was subsidy driven. That's another one where there was a lot of equity invested. A lot of there was a lot of capital destruction. The take up wasn't as high. The subsidies went away depending on the product. So that creates kind of these dislocated opportunity sets. Um, unfortunately, you also know is, like, a lot of these companies, unless it's generating meaningful revenues like we talked about, there's not much we can do. I mean, sometimes there's a real asset basis to them, but a lot of times the IP is not worth anything. It's very IP is worth much less. A lot of founders think it's worth to be open. Again, I think that's that that's what's
47:55part of the conundrum is is a lot of you know, and I could appreciate it too, especially if they're they're entrepreneurial people. Like, they're they're trying to figure out a way That's right. Scrappy. Solving. They're they're hustling, and they're trying to figure out how to do this thing. And they feel like they're close to a breakthrough. If only they had a little bit more, and and then the equity markets are kind of pretty challenging or they have been. Yeah. And so they they kind of shift to credit, and they hear things about, you know, all these great things about venture dead. And and it's like, oh, well, wait a minute. Like, I you don't you don't actually,
48:27you know, fit the criteria for that. You know, I think, um, we're much more industry agnostic. I think it's more situational. I'm looking for companies that have been around, so there's, like, been durations to them. Mhmm. Right? This isn't they haven't been founded a year ago or two. You know what I mean? Yeah. That's probably the best for classic venture debt driven. You know, it's growing eighty percent, early stage, etcetera. Right? There's a real gap in the market for late stage. There's still a lot of early stage money out there, but I think late stage, especially on the equity side, it is if you're not hitting those kind of targets or that those liquidity returns, there's a much, much lower lower capital availability, and that's where we can kind of come in. It's been around, you know yeah.
49:14Geographically, are you I mean, you're you've spent a lot of time yourself over in Yeah. UK and Europe. Yeah. Are you looking at those markets or as well? Yeah. I mean, yeah. It's it's exactly. We're a little more focused on the US or crossover.
49:28We'll look at the UK especially just because it's it's, uh, easy. And I think over time, yes, we would look at those markets more and more. I wouldn't do emerging markets. I think that's just very, very different fundamentally, and Mhmm. You have a lot of, you know, you have to hedge the FX. And when you net out the political risks and the currency risks, you know, you're not doing any better and liquidity, right, which is much lower there than you have in the US. Yep. But there are a lot of kind of these, I would just say, kind of US and and kind of crossover Western Europe or Europe, yeah, in the over the longer term. Yeah.
50:09And in terms of, um, activity now, like like, are you are you kinda guns blazing? I mean, there's a lot of kind of chop in the market. We've got, you know, we got this Middle East war I mean thing, and we've got AI disrupting and eating software companies who were Yeah. Like, not I think looks kind of the I think the AI headline risk is
50:34been both a good a negative and a positive in the sense of it's creating a lot more fear, so it's creating a lot more rational pricing that's kind of happening maybe. But it's also that fear, especially with investors, it's also gone the other way where they're scared to do anything at all, which is, you know, that's why it's gonna be interesting to see where enterprise spend is going. Because now, not just from a customer basis, contracts are getting completely repriced or either by length or actual quantum. But I also think just from purely from an investor basis, everyone is fearful anything within this growth, you know, the the let's say, I would say the the growth capital ecosystem. Durations being pulled in
51:18Right. Spends being Right. You know, curtailed or or, um, at least in obviously, in certain.
51:26Insertion. But it doesn't matter. Yeah. We're doing it, I guess. That's right. Baby with the bath waters. You know how how that works. Yeah. And I think more so today, headline risk matters. Right? Meaning, there people are much more driven by that today than it even was ten or fifteen years ago, I think. Mhmm. Right? I think you're just being pushed these headlines all the time. Yeah. No matter what platform, no matter you know? And so it's very it's, you know, for most, they're like, why, you know, why take the take that risk? Or it's also how they perceive that. So I actually think there's gonna be a lot of opportunities coming through. Yeah. Um, I think we're in I'm I I don't know what your view is. I think we're in the first inning of that, but I also think it's also getting harder from an investor perspective because people are being driven by that those headlines more than the kind of what's really kind of happening. Yeah. Well, I I think for my
52:18my view is is where to your point on the beginning of of this I don't know if you wanna call it an unwinding or rebalancing. And what I what I because I I worked at SVB during the GFC and Oh, interesting. Kinda what I observed was just, again, the the amount of time it takes for things to get back to, uh, like an equilibrium. You know? Yeah. It is cyclical and there are points where things are kind of at this point of stasis where it feels like, okay. This is good, and then it might be exuberant, and then it might be too Right. Too doom and gloom. And and so it's like we're kinda going through that right now. And, um, Yeah. Yeah. We do feel like I mean, private credit or credit in general was really popular when rates were zero and people were looking for yield. And so you had a lot of money rush in and a lot of, uh, capital go into credit. I think some of that's gotta get re Yeah. Rebalanced. Right? Yeah. And maybe the the the regulated banks pick up more Yeah. More of that flow and the regulator the regulatory environment they're in creates some stability there. So it's just like this, like, sloshing of massive amounts of capital moving around. Yeah. Yeah. And it's I think you fascinating Yeah. To observe it. It's sometimes difficult to understand where you are, but I find it really interesting. And and, um, that's partly why I like talking to folks like you is to get your perspective on it and learn from people that are actually allocating capital and making decisions.
53:52I think in software, in particular, you're a hundred percent right from a macro. I think there's a massive unwinding that's starting. Mhmm. And you can call it equilibrium both on the kind of private credit, like you said, that I think it's gonna go maybe a little bit more, like, bank driven. I think a lot of private credit is also just been sponsor driven. Right? But I think in, like, just talking about software, thinking about it, it used to be even if we go back six, seven, eight, you know, years ago, you went, you would lend out on a, let's say, you know, point five times ARR or point six or point whatever. Less Yeah. You know, less than one. And you gave yourself a lot of margin of error. Sure. Right? What happened in the last x year, especially in in the US, you know, those creeped up. Right? ARR was the neck it was never gonna go away. It is this long life. You can go out twenty years and and now and so they crept up to, like, two times and three times and four times and, you know, five times if you're looking on the leverage alone and the large caps, you know, and then even in venture debt, it's gone on to three times and not giving yourself any margin of error. And now we're gonna be going through a massive, you know, re equilibrium or or unwinding. Yeah. And I think we're gonna go back to what it actually maybe originally was. Well, I mean, I But some of these attachments
55:12too is the space got so hot Correct.
55:16GPS
55:17Competition. Money, managing money, and then you've gotta deploy it. And That's right. There's not a I mean, I think people will argue about, well, we're we're different, but at the end of the day, the product is money. And it's Yep. Yeah. So you only have so many ways to differentiate yourself. And so that's why you see some of these terms kinda creep. You know, someone will give you one time. So I'll I'll do one and a half. It's like, oh, okay. Well, that's a better deal. And you could justify, well, we're only doing it for that deal or we need to get market share or we need to deploy, whatever the reason is. Whenever it is. Yeah. At the time, but to your point, you're not you you you're kind of eliminating some cushion
55:57that a prudent credit structure should should probably have. So That's right. There's a misalignment there. Right? Yeah. You're putting capital you need to put that capital out the door. That's what you're being paid for. You're not paid to hold the capital Right. Right. For that, you know Yeah. For that right moment. And and I think that's also where a lot of these private credit managers have gotten. It's not that they've gotten wrong, but I think a lot of LPs as well. Banks have have done a a better job of it to a degree. Right? Uh, I think if we've kinda looked back, I wouldn't say they're the largest lenders
56:31within tech. Wow. Um, they're very, very specific, I think. I mean, I think some of the the the smaller boutique banks are are but, again, I think the regulatory framework, which is a whole another version in terms of what and how should some of these non bank entities be be managed or, you know, how do they mark mark their assets, and is there a transparency around that? I mean, that's a whole separate conversation, but I think the That's right. Like, the the banks have been through a lot, and so I think they're capitalized appropriately.
57:02I think it's a good question. Like, you were at Silicon. I think when Silicon Valley Bank went under couple years ago, everyone thought that's it. That's that kind of catalyst Yeah. That people were waiting for that was gonna create this massive unwinding and the kind of, you know Yeah. The chain reaction, and it actually hasn't. Um, it was pretty limited.
57:23Right? A couple of hours. Weeks. First I mean, I I think there there are a couple of, um, arguably, probably some innocent bystanders that got taken out because of their exposure to what people probably thought was a similar market dynamic that caught up SVB. But, um, net net, yeah, it didn't it didn't have the contagion,
57:44uh, effect that I think people were were were were No. Right now. I think the the that's because, also, the Fed stepped in really quickly. Quickly. Right? Yeah. And they've been doing that. You know, COVID, they did that as well with the mortgage markets. Yep. They did that here as well. They're I think they've learned from o eight zero nine. They're they're gonna yeah. They they're stuck in playbook is is tuned up to to address these things. But, um Exact exactly.
58:08Uh, I know we're we're we're over on time, and I really appreciate this conversation. It's I mean, I've got so many more questions, but I I think we should we should wrap it up. But where can people hear about you or learn about you? I mean, you got a website. I mean, are you Yes. I got a website, l l p dash c m Okay. Dot com.
58:27Um, we're actively originating, executing. We're executing an IT service deal right now that's about to close. That's focused on RPA on automation. We've got a few health care tech deals that we're in advanced status on, um, um, as well. We'll do we do private and public. Um, we we're focused on really that ten to thirty, ten to thirty five million segments of the market. And specifically, like, what we talked about, it's like it's those companies that have don't hit that unit unicorn potential, but are fundamentally good businesses, have good unit that's not, you know, unit economics. And where equity made straight equity would either be, you know, quite dilutive or not even really available, especially in that kind of growth space. And I think we're gonna be seeing those, uh, more and more, and that kind of fits, I think, the entire ecosystem. And on the bank side or on the credit, you know, some of the more the lender side, it's those that don't hit their kind of classic underwriting boxes that become tighter and tighter. Right? Doesn't have the right sponsor, doesn't have, you know, the right, uh, or or sponsors are tapped, doesn't have the right, you know. I think what we're seeing more and more, I think sixty five percent or sixty six percent of all new VC capital has gone into AI companies last year. So you have thirty four percent. Right? You know, of of that capital, and that capital keeps getting smaller and smaller. Yep. Twenty four thousand companies are fighting for the for the residual amount. Wow. And I think that's even I think that's gonna be that's even accentuating more so far this
1:00:12year.
1:00:13Yeah. So that's kind of what we're we're we're capitalizing on. Okay. And because of that mass dispersion, I think our capital fits that very well, that kind of structured capital, hybrid capital, uh, approach. And we're here to solve a a major problem also not only for the for the sponsors, if it's sponsor driven, but also for the founders. Right? A lot of it is kind of bridge driven. You know, they're bridging to something. Yeah. You know, it could be they're pivoting their business model. They're bridging to a search and exit. They're bridging you know, that's really the a lot of it is that kind of use of of proceeds.
1:00:47Okay. Great. Yeah. Maybe we we we'll we'll end it there. I see you. I really appreciate your time. Definitely. It's been a fantastic conversation, and I wish you and the team all the best as you kinda navigate these, uh, interesting times.
1:01:02You got it. Thanks a lot for having me, Derek. This was fun.
1:01:26Thanks for tuning into the Credit Bubble. You enjoy today's conversation, please follow the show and leave a review. You can connect with me on LinkedIn, x, or through my website at thecreditbubble dot com. You'll find all the links and additional resources in the episode notes. Until next time. Thanks for listening.
