Golub Capital — Unique in Every Aspect
Without question, the news from Golub Capital has been steady even during the darkest days of the recession in which the loan market all but ground to a halt. ABF Journal spent some time with Lawrence Golub, the firm’s founder and president and the leader behind this remarkable success story…Reuters Loan Pricing ranked Golub Capital as the #1 traditional middle-market bookrunner in 2009. Buyouts Magazine named the company as the “Middle-Market Lender of the Year” for two years running. And in April of this year, M&A Advisor conferred it with the distinction of “Debt Financing Agent of the Year 2010.” The list of Golub Capital’s accomplishments seems to go on and on. Without a doubt, the provider of financial solutions with capital somewhere northward of $4 billion has been recognized for keeping a robust pipeline of deal flow while others in the space pulled back noticeably.
With more than 100 employees and offices in New York, Chicago and Atlanta, Golub Capital is frequently lauded for its flexibility, decisiveness and the value it brings to the table for its borrowers and investors alike.
But founder and president Lawrence Golub attributes the success, at least in part, to the values he learned as a self-described painfully shy young man growing up in a then-modest suburb of New York. “Both my parents came from poor immigrant families and my Dad grew up during the Depression,” Golub explains. “I think my father’s experience of having his family struggle created an atmosphere that I picked up on … an atmosphere that had me realize that I wanted to achieve financial success. That’s what steered me toward a career in business.”
As time passed, Golub learned his lessons well and found his scholastic aptitude opened some very important doors. He recalls, “When I was in graduate school, I landed a summer job at Goldman Sachs as one of Goldman’s very first summer interns in the M&A department. And while it was clear to me that Goldman was a fantastic firm, I spent most of those summer nights making presentation books on the copier. I asked myself, ‘What am I doing wrong here? I’m at this great firm that has this great business and I’m in a great graduate program.’”
The Smart Kid From New Rochelle
Golub’s midsummer night’s revelation had him reconsider his options and sent him in pursuit of a career in principal investing. In 1984, he joined the ranks at Allen & Company. He says, “I was lucky enough to be hired by Stan Shuman here in New York as his assistant in a small sub-group working in a wide range of businesses. In those six years, we did all of Rupert Murdoch’s M&A transactions. We also did a lot of principal investing from growth capital in software and technology companies to leveraged buyouts to structured financing and even some turnaround work.
“Stan was a great mentor and under him, I learned to think like an owner … like an investor. Those years changed me from being ‘the smart kid from New Rochelle’ to someone who could really understand how to take risks in business and be successful a good amount of the time.” Golub is quick to add, “I will also tell you that I’ve lost some money along the way and that was a harrowing experience. But one of the things that my time at Allen & Company taught me was that you can lose money on a deal and the world doesn’t come to an end … that was an interesting lesson to learn.”
Rounding Things Out…
In 1990, Golub pursued an opportunity to join the investment bankers at Wasserstein Perella. The firm was barely two years old at the time, but Golub remembers, “They had already built a great M&A business … in those days, they were looking to diversify and expand into structured finance and capital markets. I was hired to head up a capital markets group and was named managing director of the newly formed Wasserstein Perella Capital Markets Group.”
Golub joined the firm in the dreary days of February, a time on Wall Street made drearier by the collapse of Drexel Burnham Lambert. “I joined the very week that Drexel filed for bankruptcy,” Golub explains. “and we were going to focus on high-yield financings, which went from $28 billion in 1989 to just about zero in 1990. So I had to do some quick re-thinking and we started a debt restructuring group.”
The professional development that began at Allen & Company continued over the next two and a half years at Wasserstein Perella. Golub notes, “I had full responsibility for the P&L of the Capital Markets Debt Restructuring Group. We staffed up, we trained people and we brought in business — we worked on a number of successful restructurings and our biggest case was a public homebuilder that struggled in 1988 through 1989. The company went through bankruptcy and eventually came out and preserved a great deal of value for the previous shareholders.”
Golub notes the experience he gained by running the shop was of tremendous value and complimented the skills he developed at Allen & Company. But in the end, Golub explains, he missed principal investing. “By that time, I had gained business operating responsibility, but I came to the conclusion that I wanted to go back to a situation where I was one of the owners acting on behalf of the owners.”
As Golub describes and as many will remember, the early ‘90s was a somber time for those on Wall Street. “It wasn’t very fun then and I was lucky enough to win a White House Fellowship. It was a non-partisan presidential appointment and worked at the end of the Bush-41 administration and during the Clinton administration. I’ve had a life-long interest in healthcare and healthcare services, and I continue to pursue that interest on the nonprofit side. Those years were mostly spent on healthcare-related issues.” As a White House Fellow, Golub worked under Louis W. Sullivan, the Secretary of Health and Human Services under President H.W. Bush and then participated in Ira Magaziner’s healthcare reform task force. He adds, “That never really got anywhere, but it was exciting to participate in the effort.”
Golub returned to Wall Street in 1994, worked briefly for Bankers Trust and then launched Golub Capital. “We started on an incredibly small scale and looking back, that was probably a mistake. Our first fund was on $20 million of equity capital, and we had great investors. The individuals who came in as limited partners were business super heroes and their support was inspiring and terrifying at the same time.” By all accounts, the new firm’s first fund did well.
“Still,” he maintains, “the deals were too small. There was no proportionality between the hours of aggravation and the dollars of profits for the general partners. In spite of it all, from 1994 to 2000, we established a great track record. We learned a lot about ourselves during that time … a lot about our strengths and weaknesses. By 2000, what started as Lawrence with a helper doing transactions grew to eight to ten people and a fund that raised a couple of hundred million dollars.”
Adverse Lending Conditions Prove Pivotal
Golub marks the time many remember as the dot-com bust as pivotal for the firm. “Most people think of the dot-com bust happening, but simultaneous with that, there was a very sharp contraction in the availability of cash-flow loans … both in senior and subordinated debt. It was sharp at the time, but not as sharp as what we’ve witnessed in the last couple of years. In 1999 and 2000, we had done well when others hadn’t, and we made the first of a series of decisions that would prove to be absolutely essential to our success in the direct lending business.”
It was at that time, Golub explains, when the firm defined itself as a full-fledged mezzanine emphasizing such loans to private equity-backed companies. “If we were going to do that, we needed to eliminate any perception of a conflict of interest with our clients. We discontinued private equity investing except as a co-investor with other private equity firms with which we were doing business.” He explains, “Even in the case of a micro-buyout, we weren’t going to do those anymore. We were going to be 100% dedicated to being the best lending partner a private equity partner could find. We’d bring our experience in the junior portions of the balance sheet to be the best risk-understanding and risk-loving lender … and not in a crazy way, but really thinking about enterprise value and not about loan covenants and fixed charge ratios.”
Golub Capital identified that junior capital was scarce at the time and by 2003, in an effort to provide a broader product offering to its private equity clients, began structuring one-stop loans. Golub notes, “These structures included both senior and sub debt. By 2004, Golub Capital began participating in traditional senior debt as a club participant in middle-market deals.”
Expanding in All Directions
The next three years represented a growth spurt on several fronts: balance sheet, size of staff and capabilities. By 2007, the firm had expanded to include full-fledged senior loan capabilities as a lead lender and arranger. Golub says, “Since 2003, we’ve adopted a conscious strategy of offering a full range of cash-flow debt products to middle-market private equity firms that focus on what’s best for the borrower. After all, the best loan structure maximizes the chance that the deal will be successful and a successful deal makes everybody happy. To sum it up, we’re enterprise value-oriented and we think like an equity investor thinks. At the same time, we design capital structures that keep our borrowers out of trouble.”
And the strategy has more than paid off. During the darkest days of the most recent recession, Golub Capital has managed to maintain a markedly sunnier disposition than most of its competitors. When asked why, Golub notes. “I haven’t thought about it in this way, but if you consider what went wrong in the subprime residential mortgage industry from top to bottom and from investor to originator to regulator to borrower, we’ve succeeded because we approached everything by doing the opposite.” That strategy, Golub admits, was not a conscious one. He says, “I wish I could tell you that we were smart enough to figure out how dumb the subprime market was, but I can’t. I can tell you that two of our alumni — Jamie Mai and Charlie Ledley — made a ton of money on it and were profiled in Michael Lewis’ book The Big Short. We were focused on our core philosophy … designing structures that make for long-term, win-win partnerships. Winning is part of our culture.”
‘Buy and Hold’ Strategy
But to the issue at hand, Golub easily illustrates the differences between the disordered world of subprime mortgage investing and Golub Capital’s systematic approach to conducting its affairs. “We pay attention to our investors in contrast to the subprime arrangers who just went for the ratings, got the stuff out and could have cared less what happened later. We cared what happened later to our investors and, as a result, we’ve had excellent returns. For example, one of the funds we formed in late 2007 and early 2008 has earned a 10% IRR to date … even though it was formed at the worst possible time.
“Secondly, our borrowings are set up to be very long term, and they are practically bulletproof whereas subprime credit facilities are set up at a very low default rate. So, when the default rate goes up a point or two, everyone starts getting into trouble. And third, the way we compensate our people is very long-term focused. Our people get bonuses and they include a look back at the credit performance of their deals. But we also offer long-term equity incentives. Every senior person here has hard dollars invested in our funds. Others here get equity grants in the funds and it’s a big part of what they earn. As a result, everyone here cares, and when we do our internal distribution of quarterly performance, our people care more than our outside limited partners do.”
If the proof is in the pudding, then for Golub, the pudding’s main ingredients are the firm’s great track record for low credit losses and its ability to keep borrowing costs down. “By keeping our credit losses down, we have a lower cost of capital. So, when we like a deal, we’re able to be very competitive. If you add our underwriting and investment strategy to that — essentially being a buy and hold investor — we focus on loans where the borrower will be able to pay us back.”
The buy and hold approach is critical here. He emphasizes, “It’s not about how much volume did we originate or how much fee income we earned, it’s about the distributions we made and what our credit losses have been. That way we all get a piece of what the income is going to be next year and the years that follow. Not only do we eat our own cooking, but we keep it in the freezer and have it again and again … year after year. And if it doesn’t taste good, we’re all going to remember that.”
Beyond the firm’s ability to serve its clients throughout 2009, Golub is most proud of the people who make up Golub Capital. “Being at a place where deal professionals want to work has been very satisfying in and of itself. We consistently promote from within and we’ve developed our professionals into excellent senior dealmakers. We have a number of really great people here who have been with us for a number of years. And I’m happy to report that we’ve never had a senior managing director leave the firm.”
On the topic of Golub Capital’s BDC launched earlier this year, his explains with audible exuberance, “This is really is BDC version 3.0, really the first of its kind. It’s the first BDC that gives public shareholders the same kinds of opportunities that sophisticated private institutional investors get in private funds. I think it’s great and one of our biggest accomplishments and while it’s still small — it represents less than 10% of our assets — it’s going to be an important vehicle for growth for us.”
By all accounts, Golub keeps an active personal life as well. His wife, Karen Finerman, is both a hedge fund manager and panelist on CNBC’s Fast Money. And to intensify matters, both are parents to not one, but two sets of twins and still find time to remain active politically and in not-for-profit causes. But Golub says it’s easy to keep it all in perspective and he has his 13-year olds to thank for that. “They re-teach me humility every day…”
Stuart P. Papavassiliou is a former senior editor of ABF Journal.