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Dry Powder is Dead Powder: Get your back up off the wall
By David Adam Goldstein, CEO of Stoke Inventory Partners Inc.
As a 9 year-old little leaguer, I was asked to play catcher in a pinch. Never played that position before, but as a budding control-freak, I thought that it was perfectly suited to me. The reality was tougher to square because the 9 year-old pitcher kept throwing balls in the dirt and too many were getting past me. Forgetting that I was a kid that had never done this before, my coach barked at me, “You’re a catcher; catch the ball.” Helpful — not.
How does that story relate to this article? When I speak to a lot of fund managers, asset allocators and other investors these days they say things like, “It’s too hard to pick winners in this environment so we are on the sidelines until things turn.” Or they say, “We are saving our dry powder for our existing portfolio companies, all (or most) of which are struggling.” Then they complain that there hasn’t been a capitulation in the sector and that they are not making money. This is why I am reminded of the story: they are paid to manage money, so manage the money. Sitting on your hands is not a strategy. It’s been really hard to deploy money right now, but that shouldn’t be why you stop trying. To paraphrase a famous investor, cut your losses on what isn’t working, look for what’s next and for opportunities that are uncorrelated to broader trends and focus on consumer products, especially in regulated sectors in which the demand is inelastic. As this investor famously put it, “be bold when others are fearful.”
All this is easy for me to say and I am quite sympathetic, as professionally I served asset management firms and have seen this mindframe before through almost 40 years of cycles. I’ve also seen myself how difficult it is to deploy money in the cannabis sector, which is experiencing a well-documented correction. Yet, at Stoke Inventory Partners Inc. have managed to do it safely while achieving superior risk adjusted returns and building a proprietary pipeline of superior investment opportunities.
We are doing this by investing in a pool of short-term senior secured loans that is managed by a team with the right people, processes and proven performance. Making short term loans reduces interest rate risk and the need to form opinions of outcomes in the distant future. We carefully vet our clients to identify companies that we think will weather the current storm, and we closely monitor them.
We use data to underwrite and monitor clients, we know how to use appropriate legal and secured lending structures and, importantly, we focus on the most liquid of assets as collateral. At Stoke, we believe that our underwriting and monitoring processes allow us to lend safely and at rates that are attractive to investors and to our clients. By focusing on the most liquid assets, we reduce our credit risk and enhance our ability to realize on collateral, if necessary. We forge enduring relationships with clients by lending at competitive rates and working with clients to come up with solutions to their unique challenges, which has the beneficial effect for us of reducing the cost and uncertainty involved with client acquisition. And don’t think that the fact that we call our borrowers “clients” doesn’t resonate with them: we are building relationships that we hope are difficult to undermine, leading to an ever-growing source of further investment opportunities with companies that we know well.
Significantly, our risk as debt lenders is remarkably different from the risk that equity investors face. Just because a company’s equity value is depressed doesn’t mean that it can’t repay its debts. As a debt investor, we are staying in the market, staying invested, and making money in a down cycle, building a portfolio of healthy companies paying interest on time in today’s high interest rate environment.
This strategy also protects our balance sheet from the effects of the interest rate volatility that took down some notable banks over the last few months. We have short-term deals with our clients so our portfolio doesn’t get stale with old loans made at rates that have been swallowed up by the Fed’s aggressive tightening over the past year. In other words, if rates come down, as I suspect they will for a bunch of macro- and micro-economic reasons, our portfolio will go up in value, though not by a material amount because our portfolio is primarily short-term in nature. If rates continue to go up, we won’t experience a material decrease in value for the same reason.
Get off the sidelines and start making money again. And call me if you want to learn more about how Stoke is making money right now.
For more information please contact Matthew T. Sheridan at Matthew@SpotlightFamilyOffice.com