CrowdOut works with a variety of companies across North America. We look for great, established business that are seeking thoughtful debt and meet the following criteria:
- done Loan Sizes: $5 – $50mm
- done Revenue: $10+ million
- done EBITDA: $2+ million
- done Industry agnostic
- done Seasoned management team or equity sponsor
- done Loan exit strategy
- done Reasonable leverage ratios
CrowdOut focuses on making senior secured loans to established, growing companies that are seeking thoughtful, differentiated capital. CrowdOut seeks out both traditional lending situations, as well as complex situations that require a more creative and nuanced approach. Examples of such situations include those companies that are not private equity backed, but rather may be small-cap public companies, founder or employee owned businesses, overlooked or difficult industries, or situations that require deeper and differentiated due-diligence, more thoughtful structures, and/or novel approaches. CrowdOut targets consistent, high cash yields and greater risk-adjusted returns across all economic cycles through its differentiated process.
Our investment strategy is focused on loan opportunities that provide (i) protection of principal, even in downside economic cycles, (ii) significant margin of safety, and (iii) attractive internal rates of return based on the underlying risk. Our investment strategy begins with our philosophy of underwriting great companies and providing them with the right amount of debt.
CrowdOut has continued to evolve its strategy, seeking out niches within the market that are exceptionally under served. This has included examples such as providing shorter duration loans, small public company financings, and complex acquisition financings.
CrowdOut brings a disciplined, margin of safety-based approach to its investment process, performing deep due diligence (private equity style), and value-based analysis that have been tested over time through multiple credit cycles. CrowdOut’s focus first on return of principal, then on return on investment, underlies its conservative approach.
CrowdOut’s investment process can be generalized into four major phases:
- Sourcing & Initial Screening;
- Business analysis and credit thesis development;
- Credit thesis confirmation, deep diligence, transaction structuring and investment approval; and
- Loan portfolio monitoring and risk management
Deep Due-Diligence, Starting with the Five C’s of Credit
Our rigorous due diligence process starts with the traditional 5 C’s of Credit:
- Character – getting to know our borrowers and ensuring that they are honest, transparent, and high in integrity
- Cash flow – ensuring that the company has sufficient cash flow to manage its debts and is not burdened with too much debt
- Capital – making sure that our borrowers have significant ‘skin in the game’ and are as aligned with us as possible
- Collateral – lending appropriately against assets and enterprise value provides a significant margin of safety
- Conditions – understanding the situation necessitating a loan, market and economic conditions, and overall performance of the borrower is critical to properly evaluating and structuring a loan
Using the framework of the Five C’s, we thoroughly vet and review potential borrowers. The due diligence process often includes several of the following confirmations, though each opportunity may not necessitate all of them:
- FOCO Review: CrowdOut will reach out to its network of investors (‘Friends of CrowdOut or ‘FOCOs’) to solicit input on loan opportunities. CrowdOut’s FOCO network is largely comprised of business owners and managers that have significant industry and operational expertise (all of whom are under confidentiality agreements).
- Background Checks: CrowdOut generally requires third-party background checks of key management personnel of the borrower.
- Corporate Legal Review: CrowdOut diligences the corporate legal structure of every borrower, typically through full review of all corporate documents by outside legal advisors.
- Comprehensive Quality of Earnings Analysis: CrowdOut typically retains third-party consultants at the borrower’s expense to analyze thoroughly the reported earnings of each borrower; the analysis can extend to full, tri-party cash reconciliation to confirm every dollar in and out of the borrower.
- Third Party Appraisals: CrowdOut requires third party appraisals when making loans to companies with substantial hard assets, such as equipment or real estate.
- Insurance Reviews: CrowdOut typically performs a comprehensive insurance review of its borrowers to insure they are properly covered.
- Legal Review of Key Contracts: CrowdOut often will engage third-party legal review at borrowers expense of key contracts, such as purchase orders, joint venture agreements, employment agreements/non-competes or other documents key to value and financial performance.
- Reference Checks: CrowdOut typically contacts a potential borrower’s counter-parties, customers, and competitors to seek additional information.
During the confirmatory diligence process, in which CrowdOut performs its detailed due diligence and seeks to confirm and improve upon its credit thesis, CrowdOut works with outside counsel to work towards documentation and closing. During the documentation process, CrowdOut negotiates protective covenants it deems important and ensures that the structure is designed to meet CrowdOut’s objectives.
Once a loan has been approved by investment committee, fully executed, and funded, CrowdOut begins monitoring the loan. CrowdOut typically requires monthly reporting with compliance certificates signed by the borrower. Additionally, CrowdOut often creates custom reporting package templates for the borrower to complete on a monthly or quarterly basis. This helps the borrower readily fill the monitoring requirements that CrowdOut deems important. CrowdOut’s borrowers submit monthly financials within thirty (30) days of the previous month’s end. In addition, most of CrowdOut’s borrowers submit monthly compliance certificates, which attest the borrower has not violated the financial covenants, representations and warranties in the previously-executed loan agreement. CrowdOut tracks and updates each borrower’s financial progress using a variety of tools including Confluence. Internally, CrowdOut meets specifically once a month to discuss the existing portfolio.
In additional to formal reporting, CrowdOut regularly maintains a dialog with its borrowers, discussing the happenings of the business and industry. Further, CrowdOut actively works with its borrowers to add value where possible. For example, CrowdOut regularly forwards acquisition opportunities and seeks out potential customers for its borrowers (where appropriate). As a loan begins to mature, CrowdOut also helps its borrowers prepare for a transition to its next round of financing ‘ whether with CrowdOut or a more traditional banking partner.