Welcome to the My Private Network Podcast!
Today's Expert Guest
Sean Rogister
Chief Executive Officer
Cortland Credit
Today's Questions of Interest
- 3:32 Sean, can you provide an overview of the company history and founding?
- 5:26 What's the ownership of the company look like right now?
- 7:00 But where are you now on employees?
- 8:48 How does your firm make money?
- 10:33 Can you just talk a bit about a typical profile of a borrower that you would work with?
- 12:32 Could you touch on senior secured, short term and asset based?
- 15:18 Could you explain the details of your Cortland report that you send out?
- 17:38 What percentages is factoring in your portfolio?
- 20:35 How would Cortland Credit deal with loans gone bad?
- 23:30 Can you explain the unique occurrence of the 24% Saskatchewan loan?
- 25:44 Do these issues in the portfolio affect performance?
- 27:35 Could you talk about the announcement about the successful repayment of credit facility for insulation technology group?
- 29:18 Can you talk about the process that you follow when you're underwriting new loans?
- 33:01 How many loans do you approve, what's the process?
- 33:53 What is your debt history?
- 35:12 What do you see in the portfolio that are the major risks in the portfolio?
- 38:02 Who's an ideal investor for this fund?
- 39:32 Compare investing in this fund to a bond fund.
- 41:58 What should investors anticipate when it comes to the fund's performance?
- 44:08 Could you explain the new equity linked version of your fund?
- 47:55 Final thoughts.
Transcript
Bob Simpson: Welcome back. Glad you could join us for the latest episode of My Private Network. I'm Bob Simpson, your host. This is the second episode in our due diligence series. Wealth Stewards, our wealth management firm, oversees portfolios for high net worth individuals functioning as both portfolio manager and as an investment funds manager.
We're obligated to conduct thorough due diligence on all investments we utilize, and we take this responsibility very seriously. As an investor, conducting interviews with investment managers can be very challenging. That's why we leverage My Private Network to give you the opportunity to listen in and hear directly from people managing your money.
In our process, we employ two types of due diligence interviews, initial calls, during which we determine if an investment meets our standards for allocating client funds and quarterly calls, which help us stay informed and decide whether to maintain, add to, reduce, or exit an investment. Today's guest is Sean Rogister.
Sean is Chief Executive Officer for Cortland Credit. In his role, Sean oversees the investment management while ensuring the integrity of the firm's policy is grounded on Cortland's core beliefs. He has more than 20 years of experience leading investment teams and fixed income strategies, that included private lending exposures in emerging and developed countries around the world, having built and led investment management businesses at world class financial institutions, most notably managing the fixed income asset class for Ontario teachers pension plan, which manages over a hundred billion dollars of, of assets.
Sean possesses a global and institutional perspective as well as possessing the unique knowledge base of how to manage successful debt based investment strategies. We've been working with Sean in Cortland at Wealth Stewards since 2017. It is one of our largest positions in our stewardship alternative income fund.
Average return over that period has been over 6%, which is really exceptionally strong considering that's been through a period of very low interest rates. But that doesn't mean that we should sit on our hands on this investment today. We're going to do a full DD call to get updated and share with you, our audience.
So Sean, that's the intro. Did I do an okay job there?
Sean Rogister: Well, yep. Fantastic job.
Bob Simpson: Fantastic job. Yeah. Well, thanks for, thanks for joining us again. You've been a regular on My Private Network. So it is a long process to go through a DD interview. So let's, let's just kind of rapid response. You know, we, we want to hear full responses, but you know, let's kind of keep it tight and cover off on the main things.
So if you're ready, let's get going.
Sean Rogister: I'm ready.
Bob Simpson: So question number one, can you provide an overview of the company history and founding? You know, you've talked stories about, and I think it's even on My Private Network about starting above a bike store or something. Just give us a, a little flavor as to where this company.
Started and you know, what was behind your idea to, start the company Cortland Credit.
Sean Rogister: Yeah. So Cortland Credit was started in 2013. It was founded by Bruce Sherk and I. I was, came from background running institutional capital on the fixed income side at Ontario teachers. And. When I was at teachers, I, was very, careful not to, you know, to make sure that we had a good diversified strategy.
And I've identified that to be about good risk adjusted returns that were uncorrelated. And when we drilled into what were the areas that had the best risk adjusted returns. It was, very consistent that it always came back short term, secured private debt. But it's hard to do this because you can't just go knock on a door and say, "Hi, I want to lend you money."
It's a lot of skill into what the legal documents are that support this and how to do the due diligence. So you had to work with other managers. We, we invested in about five different firms. My board required that I sat on the board of the companies that we invested in Because as a board member you get whatever information you ask for and they have to give it to you. So I like the transparency side.
We also got to know the principles well. One of the firms we invested in was being run by Bruce Shirk. When I left Teachers and he, Teachers sold that investment. It was bought by another, you know, specialist in, in asset backed securities on the lending side. And so he was free. We started up Cortland.
And since then, it's been, this has been our flagship fund and the focus. It is now going into its 11th year. We started taking capital in September of 2013, and we're going to be, on our 11th year after the end of this month.
Bob Simpson: So if we look at, you know, there's, it's really you and Bruce who started the firm.
Is it, what have you done? What's the ownership of the company look like right now?
Sean Rogister: Well, it's still a hundred percent employee owned. There's one more significant shareholder who happens to run the business development side, James Kelly. The rest of the firm, we, we compensate them very well, and we have a long term incentive program that is tied to the top line revenue growth of the firm.
So we think it's a good structure. It is you know, managed as a Exempt market dealer and portfolio manager in many, several provinces across Canada. We've also expanded to incorporate a Cayman , division for offshore investors that are not Canadian and want to have that, alternative.
And we've recently expanded operations in the U. S. As we've been regularly involved in lending in the U. S. and we're seeing a lot of interest and we're finding despite the expectations that that market is huge and everybody's doing everything down there, we are finding that we do not have a lot of direct competition even in the U. S. for the short term asset based lending model. So we see a lot of growth for that side there as well as continue to grow in Canada.
Bob Simpson: A year ago, right around this time, I attended your 10th anniversary. And you know, over the years I've met many of the people at your firm. I'm trying to think of the number 33 or something employees last year, is, is my guess.
But where are you now on employees?
Sean Rogister: We're at 38. We have really five, divisions and in each one of those divisions that's led by a, senior, a small senior team that is very experienced in this space. So we, you know, there's operations takes a lot of skill to do all the oversight of all the banking and treasury relationships with all of our borrower clients.
On the risk side, it's, you know, a background that's very good at doing a deep dive into appraisals and valuation of the firms and any liquidation, requirements that we might see in the future. And of course, on the portfolio management side, you're doing a deep dive and underwriting all the time. And you've got to be able to bring in these assets.
So you have to be able to, originate them. We've recently expanded on that side in the U.S. as well. And of course the business development team has to be able to explain what is a little bit more complicated than traditional bonds to investors, mostly institutional. We're about 80 percent institutional and maybe a 20 percent retail with a few family office groups and high net worth individuals built into that.
But I can tell you that all of them want to do a deep dive into making sure they understand the portfolio risk and we offer them full transparency, whether they're a retail investor or institutional, whatever information they need to understand the risk in the investment. I think the best model in my mind is to, open it up from a transparency perspective and that allows them to have comfort that we're doing things right.
Bob Simpson: You've always been very open with us. When we've seen or thought we had identified an issue, we give you a call. We get an answer right back. So that's one of the things we appreciate. How does your firm make money?
Sean Rogister: Well, we have two sources of economics. The first one. Is the management fee and that's a traditional management fee that a portfolio managers charge are just 45 basis points.
But, we also have a unique strategy that is focused more on revolvers as the majority of our portfolio. We also do term loans, for a smaller part, but, those revolvers take a. Significant amount of work. We do weekly calls with the treasurers. We're, valuing the borrowing base regularly. We still do quarterly reviews of all of the appraisals and understanding what the risk is.
We do monthly reviews of financials to make sure they're in line with all the covenants, such as, you know, how much leverage they have in the corporation and making sure they're in compliance with all our rules. And then we do, semi annual and annual field exams. So all that requires a little bit of work.
We're reinventing the portfolio all the time. We have economics that are 170 basis points, 1.7% annualized that is charged to the fund. But we look at it as to where that's, that's kind of a cost structure or a model because we've identified a cost of point and a half to two points to run this business.
And since we grew past about a hundred million in assets we grew to scale and it's been consistent since then. So the real component and what you'd see on a management expense ratio is the 45 basis points.
Bob Simpson: Now, let's just talk about you know, I think your portfolio is pretty concentrated. Can you just talk a bit about a typical profile of a borrower that you would work with?
Sean Rogister: Yeah. Concentration would be, you know, across, the 30, to 35 companies that we currently have in the portfolio. That some concentration, but that's bell by the fact that with most of the portfolio, it is accounts receivable, borrowing base. We lend to companies based on the amount of collateral they have and the liquidation value of that collateral and what percentage of that we will take as, the amount that we will be willing to lend to them.
So, you know, 80, 85 percent of accounts receivable, 50 to 65 percent of real estate, 50 to 75 percent of inventory and things like that. It's a various, various types of, scales that we'll build in on that side. But because there's thousands of accounts receivable in this portfolio in addition to the 30 to 35 forward names, it is much more diversified than you think. Now that being said and bob's going to address it, there is one larger concentration above 10 percent of the book. And that one is one that we are, we have since changed the guidelines to say, we cannot have more than 10 percent in any one single name, but that was after the fact.
And we're working very hard to reduce that. And we have a lot of, channels to do so. And we're working on that.
Bob Simpson: Yep. One of my favorite phrases is that's why we diversify, right? Not everything's always going to go your way. And when, things go sideways, it's always good to have, have a broadly diversified portfolio.
Now, one thing I know, because it's in all of your marketing material that comes out is, is really there are three major phrases that, that you talk about when you're managing money, senior secured, short term and asset based, just touch on those three and, just so everybody gets a complete understanding of what you mean by that.
Sean Rogister: Yeah, so senior security is, we're always at the top of the capital structure, and this is a very important term from a legal perspective when you're in a financial distress situation. The courts are very clear that if you have, a claim on the accounts receivable, you've identified that they are, sourced from purchase orders from the, what, from the accounts receivable counterparty, and you have proof of delivery that they've signed off on, you've got a legal claim on that accounts receivable, and that gets paid out first in a court process, where there's enforcement.
And so we're always senior secure on that. Any of the fixed assets, property, plant, and equipment, we're always named as the senior board when no one else can lend against that asset without entering into a, you know, an intercreditor agreement with us where they're subordinate to us. So, that is very strong.
And then the other side is that we are short term, which means in the world of fixed income under two years and our asset, our loans are a year to a year and a half long with renewals, built in sometimes six months or one year renewals, but we have to mutually agree with the borrower. And then it's usually one or two.
And then after that, they've got to set up a new agreement with us. But, along the way, we always have liquidation rights with them that gives us a ability to say we're not going to finance any further. And even on the accounts receivable financings, you know, we approve the borrowing base at our discretion.
So we're really clear that we have a lot of controls that things go aside and they can, they have to do so in a short period of time. So very liquid from a point of view of traditional non liquid strategies, other than public securities. And then you have asset based, which means that we always have assets that we've identified and in most cases registered in our name as collateral for our loan.
And that's just like a home on a mortgage. No one else can lend against that property without the approval of the top line senior secured lender. And that's us and no one else can come in front of us. And it's a very important part of this. So short, yeah, senior secured, short term asset based lending.
Bob Simpson: That's your game. Yeah. Okay. We get a, I think it's a monthly report that you send out and I'm looking at the July 31st report says 33 credit facilities, senior secured 99. 97 asset based 95. 54 floating rate. You're 99%. Estimated portfolio utilization. What do you mean by that?
Sean Rogister: So we're doing revolvers and the borrowers have a right to have some kind of seasonality in their portfolio.
So the average is that we might have committed to a billion and change of loans to the borrowers. But right now they're only using 820 million of the cash because across that book, some might be a hundred percent utilized, some might be 90, some might be 75 or eight.
Bob Simpson: Yeah. So it's, and that was a problem in the past when you were carrying.
When you had cash in the portfolio and rates were zero, right? ,
Sean Rogister: I'm just smiling because you have a long memory, Bob. And, that's very accurate. So we had a very big borrower set of borrowers that repaid us all at once at the end of 2020. And we had a bunch of new investors come in, in 2021. So as a result, and this was in the middle of COVID, all of a sudden we had had a slowdown and how quickly we could get lawyers to come into their office or get involved in doing the analysis and writing up the documentation.
Took us a lot longer than we expected. We put in place some rules that said we will never be above 15 cash again. But at one point in the middle of 21, we were a little bit over 40 cash. So it was very diluted for us. It was not because of bad loans in the portfolio but just an unexpectedly large amount of cash. And, we had to build in some structures so that that can't happen again.
Bob Simpson: Right. And we talk about annual, you know, upfront due diligence calls like this. We talk about quarterly calls. I think we were calling James Kelly every other day saying, how come you're only 3%? Like 3 percent is not what we were expecting. And, and that was the description that we had, but you know, part of our responsibility as investment managers is to have a long memory.
We don't forget, right? So you were, you know, one of the things that I've always been a big fan of is lending against receivables. You know, at one point in my career, I, I actually worked with a company that did credit insurance. Where we were insuring, those receivables against non payment. Listening to what you're saying, what percentages is factoring in your portfolio?
Sean Rogister: Well, factoring is a term where the sole collateral is the account receivable. But in our model, we have a claim against the borrower as a big part of it. We always look for the borrower to be responsible for debt service. But if they don't, then we have a fallback where we have excess collateral above the value of our loan, even after liquidation to get paid back for our investors.
Our model is a little different from factoring. It's a lot more like what the banks do with their own money on their loans. So but in the case of lending against primarily accounts receivable, which is over 60 percent of our book now It's because we have one larger loan on the term side and there's a, so a bunch of small term loans. But over time it's moving to like, right now we have a bunch of new loans that we're looking at, reviewing towards doing our underwriting process and putting them through towards potentially investing in them.
And they're, over 80%, even over 90 percent revolvers. So we're moving to a model that is less term and more revolvers. And that's where we have an edge in the market because it's really hard for the banks to do the weekly calls with the borrowers and for and to have a team that understands how to do that collateral analysis that we do in our group really efficiently.
Accounts receivable based financing is where you check on the quality of the accounts receivable counterparty. A good example is in the IT sector where they are looking at providing, you know, they, they buy computers from the big manufacturers IBM or Dell or, or, you know, Or HP and a value added reseller has to step in the middle and reconfigure those to suit the client.
So they'll sell to, there's one group that sells to Harvard Endowment Fund and Yale University and Standard State, Standard Bank out of, the Northeast. And that group of buyers is in every month buying another large cert. But they pay 90 days later. So the cashflow management of that it firm has a challenge in front of them in terms of managing that while paying all their staff And we help them through that. But the counterparties to the collateral are exceptional and very rarely miss a beat and that's the case in most accounts receivable financing and certainly in our model where we do a lot of work on checking on the credit quality of the accounts receivable counterparty.
Bob Simpson: Yeah preservation of capital Is paramount in your model, isn't it?
Yes. You know, just, just talk about what, you know, if you didn't do a great job of managing the loans, making sure you're being paid, keeping your portfolio out of trouble, how, how bad could that be for Cortland credit?
Sean Rogister: One example would be accounts receivable counterparty and I've seen this from people I know that work for the banks.
It was a loan was approved by the lending manager, but then the operations team didn't do their work. So they would, lend against the pool of accounts receivable, but they didn't check that the prior lending, amounts against accounts receivable had had the collateral turnover that had been paid back. And so if you allow for the accounts receivable to go past due and you still continue to use that as collateral the liquidation value of that drops off quickly because obviously the accounts receivable counterpart is not that good.
They're not making their payments. They're not paying for their goods That they bought what our model is much more about looking for repeat buyers of the same good or service that that borrower manufacturers produces and delivers. So that is a much better model. It's more efficient. We don't have to do as much real adjudication of the of the counterparty to the accounts receivable. We just check that the and we do monitor.
"Is that someone we've seen before? Is that still an investment grade pool of accounts receivable counterparties?" But if it is, then it's about how much do they have available in accounts receivable. If it's an 80 percent advance rate against 25 million dollar funding commitment, they can only borrow 20 million if they want to borrow 21 It's not available to them And so, you know, we make sure that we're very clear with them on how we do that. We do a full reporting with them. And because we do those, we'll do a selection of the accounts receivable and do an audit of it.
And because we do a constant check of the financials where we look at their monthly financials and they say, yeah, yeah, I just collected on 2 million of accounts receivable, but we'll say, well, we see the online bank statements. We're not seeing that cashflow show up. Can you point to us where it came in?
And then we could include it in the borrowing base. But anything that we don't see that we can't confirm that's past due It's almost like 2020 hindsight on the quality of the collateral. We can say that's not in the borrowing base that is not available to you as a source of collateral. And that's a very strong approach, and that's how we do it.
Bob Simpson: So, Sean, 31st report, you showed one investment. It was described as a first lien, senior secured, short term loan and revolver to a Saskatchewan energy firm at 24%, plus a similar loan, same province and same energy sector at 5. 5. Now, this stands out prominently As most of the others in your top 10 are in the 3. 5 to 6. 6 range. Can you just explain. Explain that to us as to what your thinking is and your positioning on that position?
Sean Rogister: Yeah. So the first loan is our largest borrower. It is a, a refinery in Saskatchewan. It did go through a working capital pinch and had to raise additional capital, behind Cortland.
However, the decision was made a watching them for a while to initiate a controlled sales process through C. C. double a, which is the company's creditors arrangement act that they have established in Canada. With the process the courts require additional capital to keep the firm operating and Cortland took this on to protect the overall exposure because what happens is it becomes 1st lean.
In the court's process to support the working capital requirements of the borrower during the court process. So we took that on to make sure no other creditor could step in front of us during that court process. Subsequent to coming out of the CC double a process, it was added to our loan and that's why it grew from I think it was 13 percent of the time up to 18 percent and it has since grown a little bit more, but, relatively marginally.
So, we're working to reduce the collateral. We're working very hard on it over the next and we think it'll occur over the next 1 to 2 quarters. And we are, we also have instituted a single name limit of 10 percent for any single name going forward and have other processes to make sure that that is very rigidly, maintained. The other refinery is a group that does, they, they use, used engine oil to create ultra low sulfur, which has, you know, very low carbon footprint diesel, and that's a completely separate entity.
It is in the same probe province. It is in the same sector, but it's completely separate.
Bob Simpson: Right. So basically you discovered in your portfolio that there were some issues. You had, you dealt with them, your current feeling about them is. Is that going to be a problem for performance of the fund or no?
Sean Rogister: Well, we are very, first of all, you know, very much a hands on manager. So we do go through workouts with a heavy involvement. We work very closely with the courts. We have, we work very closely with the lawyers that they appoint to go through the receivership process. And any accounting firms, we, we just are as the senior lender, we we have a we're first at the table on that, but the courts have to set the process and we work closely with what they come up with.
In this case, it continues to be a heavily over collateralized loan. We're confident that it will be, that there's no deterioration in the assets. We did go through an extensive process. With our auditors KPMG at the end of last year and finalized in March of this year, where we reviewed the portfolio and came out with their input, saying that it should be marked as is at the face value of the loan without a discount because of the excess collateralization.
And it is now operational, it is generating the diesel product to the spec required specifications required by that industry. And we believe that it is going to be a successful process and bring in other lenders because it's an operating entity and therefore much easier for them to value.
Bob Simpson: So you're continuing to work with them and, have a plan and you're working the plan.
Sean Rogister: We are working very closely with them and very closely with that plan.
Bob Simpson: Okay. Now, I was also reading, just recently, maybe even a couple of days ago that there was an article that popped up that said Cortland Credit Group announces successful repayment of credit facility for insulation technology group.
Just wondering why you would make such an announcement.
Sean Rogister: Well, it was because it was one of the larger, sort of success. One of the more interesting, successful transactions in our books. It was a group that, used our capital to acquire the 2nd, the 3rd largest manufacturer of the ceramic insulators that are used in all the high voltage wiring, in Europe.
And that was in August of 2021. And then in November of 21, the same, private equity group acquired the second largest manufacturer. So they became the largest in Europe and they had a lot more pricing power. The total of, you know, kind of, 10 million euros, 10 million in euros that they put into it.
Turned into a sale of the business at 450 million. So we saw it as an example of why borrowers really like working with us that they, even though they would have had a difficulty sourcing bank capital at the time, because it was relatively small firms that had some uncertainty in the predictability of positive EBITDA and, you know, just coming through COVID and all that kind of thing.
The banks were much more reluctant to jump into that. Because we knew the firm, because we knew the collateral structure, and because we had first claim and all the key assets, we were able to provide the financing, and it was a very successful loan, indicative of why companies come to us to help fund their growth.
So we, we just saw it as indicative of.
Bob Simpson: Next thing I'm looking at is, you know, it's good to look at some of the issues that have caused you trouble, but to just spend a couple of minutes and talk about the process that you follow when you're underwriting new loans.
Sean Rogister: Yeah, it's a very important, four step process that we are pretty clear on that it has several stages that require unanimous support by the credit committee and are, and that process is rigorously reviewed by the independent review panel. So, when a borrower comes to us, our team does some initial review with them to make sure it fits with our model. You know, it's, we are fairly industry agnostic, but, if it, If it doesn't suit our, our environmental, social and governance standards, if it doesn't suit our general criteria for the quality of the management team.
Then we won't put it in the portfolio. If it creates over concentration in the portfolio, we won't, we won't accept it and it won't get past stage one. That stage one sign off requires unanimous support from the four members of the credit committee. They're all very experienced individuals. It's myself and the other co founder of Cortland Bruce Shirk, and then the head of risk and the head of portfolio management.
So, we're too busy with, all the activity here. If one person doesn't like it, that shuts off that loan and it gets put aside and we we don't fund it. If it gets past stage one, we do a deeper dive into the financials of the borrower we want three to five years of history of accounts receivable and who the buyers of their good or service were. If they repeat they come back many times if it's got a you know relatively consistent generation of positive earnings, that's a good fit for us because it's efficient for us to monitor.
We have a lot of information on that borrower going into it through that the financials through the accounts receivable counterparties. We know their business and then we'll, that that generally looks like the kind of fit to get past stage 2 again, requiring unanimous support by the credit committee.
And if we get past that, we'll issue a term sheet. The credit committee meets and agrees on the rates that we're going to charge any unique steps in the due diligence, any guarantees or other unique characteristics of the assets we require. And that once we issue that, that would only come with unanimous support for the credit committee.
If they sign it back, we get a check from them to start the due diligence process generally in the 50 to. 80, 000 kind of range to cover legals and, initial appraisals on all the key assets, the field exams etc. And then we jump into a deeper dive confirming the financials confirming. We do a site visit in all borrower cases we always do a thorough review of their key assets including getting appraisals on those key assets and goodness and appraisals of quality of earnings and then we'll do a dive into the statements by their legal and accounting teams to make sure the representations and warranties, clearly state that this business is what the borrower says it is. And, if that is all in place, we'll issue a funding commitment, which is very consistent with the term sheet, but with a lot more details on it. And if they sign that back, we start funding.
Bob Simpson: So if you look at, you know, how many loans go in the top of the funnel and how many come out at the bottom., Are you looking at, you know, for every 10 loans that you look at, you write one of them, or what's that ratio approximately?
Sean Rogister: It's, you know, I think last year was particularly tough because we saw a lot of loans that didn't necessarily a higher percentage of them didn't necessarily meet our criteria.
We saw about. 9. 8 billion dollars worth of loans last year and we approved 250M of them. So a little bit more than, you know, 2%. But, it is, it's a rigorous process. There's a lot of work that goes into it. There's a big underwriting team that has to review those components. And it takes about six to eight weeks to get from stage one to stage four.
Bob Simpson: Yep.
Sean Rogister: But with all that being said, we target in the five to 10 percent range historically just because of the process that's required.
Bob Simpson: So you do a lot of work, very rigorous, as you described it. What is your debt history?
Sean Rogister: So we do, you know, we are in the private lending business. We do have some bad debts.
I know that in fixed income, people don't spend a lot of time talking about how good all the things are. They talk about what went wrong because, you know, fixed incomes like that. You don't participate in the upside of the borrower. You only get, participation in the downside, if they're unable to meet their debt obligations.
But we do have some bad debts. We've got, I believe there's 8 of them historically, that where there's been defaults and that they have in, . About half the cases, they did not result in a loss in 1 case. It was a small, it was a loss of it was a 20 million dollar loan was repaid down to 10 and then 5 million loss was taken on the balance.
And that was because it was in the cannabis industry, and that entire industry was collapsing. As we were going through that process. But outside of that the losses have been basically to cover administrative costs of going through the default process so really loss given default has been quite low.
Bob Simpson: Right.
So as we, you know, we've looked at the portfolio, we've talked about what you've got there as we take and look, instead of in the rear view mirror, we look out the windshield. What do you see in the portfolio that are the major risks in the portfolio?
Sean Rogister: Well, right now we have a higher concentration in fixed term assets.
They're under two years. They're sort of 12 to 18 months, but we are 62%. We current, we target, going forward to be in the 75 to 80%. We think we're going to get above 70 percent this year and we are going towards the revolving loans that are the major part of our portfolio, they're much more dialed into our form of risk management processes.
So we do a lot of work on tracking accounts receivable. We have a whole team that approves the borrowing base of accounts receivable on a weekly basis. It's a differentiating characteristic of our firm and it's key to our collateral management and analysis in identifying triggers. And we can stop funding at any point in time and just let the AR wind down and collect on that because we always have blocked accounts to give us first cash distribution from any collection of AR and we monitor their online bank statements so that we know what the cash is going through that firm.
So very close, attention to detail with these borrowers and the revolver is a, not only a key differentiator for us, but also a model where we have a lot of expertise and a lot of comforting managing that risk. It's a, I think that's the key. It also gives you good diversification at the borrower level, because there can come from any sector.
And at the same time, it's much higher diversification because you can have hundreds or thousands of accounts receivable underlying that giving you a much more diversified collateral base. And we're good at monitoring that. So that's the general picture on that side. We do have an expectation, as I said, that the single large name in the portfolio
will be significantly reduced if not, you know, over time. We're comfortable with the risk, but we think it's just too high a concentration. And we changed the limits to reflect that, but going forward, we will not allow, allow that, breach to happen.
Bob Simpson: Yeah. So Sean, one of the things that we're working on on this podcast is doing a live event called in the investing for income summit. So it's really targeted at the baby boomer who is looking to find better alternatives than putting their money in GICs at three or four percent. Or, you know, riding the equity roller coaster when they don't really have the time frame to be able to recover losses. If we do go through a negative period, who would you describe, you know, at thinking at the individual investor level, who's an ideal client, for this particular fund?
Sean Rogister: Yes, it's, it's a very good question and we think we're a little bit unique as an alternative investment manager and that we're very conservative and we have a long term strategy that's expected to reflect this model for years to come. And we see a lot of opportunity to grow the business through the high demand from, you know, this type of borrower. So as we bring in capital, we think this is going to be a good story for investors for years to come. It is good income.
It is well above the traditional income of short term or you know revolving and floating rate loans that are out there. It is a unique strategy and there's not a lot of investment alternatives that are as short term as this and first lean asset based loans. So it's a great diversifier for the portfolio and very strong as a contributor to a portfolio that is made up mostly of traditional fixed income assets So we see that as being, you know, the characteristics where it's a long term strategic asset mix for investors that are looking for something that has good income, reliable income in their portfolio.
Bob Simpson: Yeah, so we did a, we did an episode. I don't know, a couple of months ago where it was talking about bond funds and, you know, how your traditional bond funds have returned not much over the last three years, and you're paying fairly high fees for no return. Compare investing in this fund to a bond fund.
Sean Rogister: Well, a bond fund is a fixed pay, pool of assets that, you know, unfortunately are going to see returns deteriorate if interest rates rise. They will also see returns rise if interest rates fall. And right now we're in kind of the middle of the range historically so they could fall a little bit especially in environment where the central bank is easing on the monetary policy side. But the interesting thing is that the central bank eases affect short term rates. It doesn't affect long term rates. And if the economy is going to be growing very well you tend to see the longer term yields rising. If it's going to be really slowing It those yields will tend to fall because that everybody thinks the central bank is going to have to support it. But this the economy has slowed but it's not in a recession. And so the, you know, there's a story that says interest rates could fall a little bit, in the bond side, but it's always going to be that, that long term fixed coupon side.
Ours is floating. It's a very good diversifier. The yields that we earn are significantly above traditional fixed income assets in almost all scenarios, except when interest rates are falling very quickly, and that'll tend to be a temporary situation. So this is always going to be something that. In my view that adds positively to the overall return of the portfolio and is a very good diversifier with low volatility and very good risk adjusted return.
So it's good value in a portfolio
Bob Simpson: So sort of wrapping up now, looking at performance, you know, I, I took a look at, let's say your F class, and looked at performance and performance was pretty steady between 2017 and 2020 in the five and a half to 6 percent range. But 2021, I know your pal James there was phoning me all the time saying, yeah, rates are low.
Right now we're only coming out with like a three and a half percent return, but as rates go up, we're going to recover from that. And then since then we've seen really good returns. I think the last one year number I saw at the end of July was 8. 4. So just talk a bit about performance and what investors should be expecting or anticipating, maybe not expecting.
Sean Rogister: Yeah. The other thing James said to you was that, we had a higher cash balance in 2021 because we had, a large group of borrowers repay us all at once at the end of 2020. And a lot of new investor capital came in, in 2000, early 2021. And in the heart of COVID, it was harder to get deals done and hard to get the, new deals come in the door.
Cause everybody was unsure how to operate with, no staff coming into their offices and things like that. So the business growth model that is normally, characteristic of the firms that approach us, they were, they were struggling with, with identifying what the forecast was. So we were a little slower on that side, so cash got built up, and that diluted returns.
We've since put in limits that we cannot take in new cash unless cash is under 15%. We set a target of 5 to 10, so I don't think that low return due to dilution from excess cash can happen again. But going forward, what we do see is that there is some decline in interest rates because the central banks are being, a little more concerned about slowing growth and especially as inflation has declined.
So they're not worried about stopping out inflation. They're more about, they can bring the economy back to normal levels in terms of the monetary policy rates. And so we see an environment where our returns are pretty steady in this level or as a spread over the short term rates and that's traditionally why we add value is because it's significantly above those short term rates, which are still above the longer term yields that are available in traditional bond markets
Bob Simpson: Now you're also and I know one of the things that we've talked a fair bit and james has been has been calling about is you're looking at doing an equity linked version of your fund. Do you want to talk about that or what do you think should we?
Should we just have you back and talk about that in a, where you can go deeper and talk about that entire concept? What do you thinking there?
Sean Rogister: I'm happy to do either, or I would just do, you know, a two minute summary or the elevator pitch is that this is the first time Cortland has brought out something that has the ability to generate equity like returns.
And it's a, it uses our overall private credit portfolio and the conservative income that it generates. And we set a minimum target of 5%, which we have very consistently outperformed except 2021. And that that minimum return is, I think, a solid return for investors, but anything above that goes to use has been, you know, applied towards paying for an option up front that will give you an at the money claim on the upside in the stock market.
So, if interest rates, if, sorry, the price of those stocks that are in that equity side rise from here, they will this will participate fully in those and it's got a lower cost of lower management fee with some 10% participation in the upside above five percent. So it's a little different strategy. It is different from other strategies like that out in the market because it has unlimited upside If the underlying stocks do well, and in this case we focused on the ZEB ETF, which is an index of 6 major banks and the performance of their stock and they, that sector has been underperforming recently, but historically, the banking sector has been 1 of the strongest performance in the Canadian capital markets. And we think that that's unlikely to be a state case going forward that it underperforms. We think it outperformed very well. So it's got a target return in the sort of 12 to 16 or 17 percent range. And a 14 to 15 percent mid that we expect this strategy to generate. And it's a fixed allocation over 3 years, so it's a little different than our traditional.
Portfolio, which is gives you redemption rights in 45 days notice. This is a fixed hold, but it also has the ability over that period to earn what we think is a good annualized rate as I said in the 14 to 15 percent range over the period.
Bob Simpson: Yep, so good stability, but now you're targeting equity returns rather than just floating rate returns. So yeah, that's good.
Sean Rogister: And generating income from underlying assets.
Bob Simpson: Generate the income. I also saw that there was an upcoming release of the Cortland Credit Offshore Fund for investors who are looking for better tax efficiency.
When, when are we going to see more information about that?
Sean Rogister: Yeah.
Bob Simpson: Okay. Perfect. So this, you know, 1 of the things about these due diligence interview calls, they do, they are pretty long. So, just kind of final thoughts before we wrap up. Sean.
Sean Rogister: Well, I would say that, 1st of all, we greatly appreciate this opportunity. It's been a very thoughtful set of questions that we've always received from you.
And we love the opportunity. Because we're all about providing. Whatever information investors need to understand the risk in their investment. Private credit is a little bit more complex, perhaps than other strategies, but investors need to understand the components of it. When they jump in. We are very confident that this is an area that has lots of upside potential in terms of the ability to grow this book.
And we greatly appreciate that it's also an area that is getting huge demand from institutional investors. We like that you guys are doing it because you're bringing that due diligence required to retail investors to the the average individual Who can jump into it as an accredited investor? And so that's very important to us is to support you on this and happy to see it, bro
Bob Simpson: Yeah, well, it's good to be, to have the opportunity to open up the screen there, the curtain and let people talk to you.
So that's, yeah, we really appreciate you coming out and spending time with us today.
Sean Rogister: Same. I thank you very much for having me.
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