What is Venture Debt It is a debt instrument to a rapidly growing company that would not otherwise qualify for traditional loans. The debt has a reasonably high interest rate (10 to 15%) and has a small warrants package attached which provides the debt provider the option to purchase equity at a pre-agreed valuation […]
Donald Trump, 100-year drought, Royal Commission, Kim Jong Un, Trade Wars, Climate Change – this is all starting to sound like Billy Joel’s famous song “We didn’t start the fire”. Every day the papers tell a new tale of woes, a new set of threats on the horizon. Is this just background noise that has been “always burning since the worlds been turning” or is this a genuine signal that bad times are ahead?
Before you gaze into that crystal ball and reach for your pre-prepared dinner party spiel about either:
– All is good in the world. We only read about falling property prices, Trump and Kim Kardashian because that’s what sells papers. Rupert Murdoch and the wave of clickbait chasers are to blame.
– The credit supercycle is coming to an end. The record levels of consumer debt will need to be unwound causing a collapse in consumption, leading to a collapse in employment, leading to default rates that have our banks faltering, that leads to Pauline Hanson being elected in a populist backlash that leads to the Sydney Swans collecting the wooden spoon in 2019!!
Who is right and wins this dinner party duel? Generally, the person who has drunk more wine and talks the loudest. But forget the answer. You are asking the wrong question. The honest answer to what will happen is “I have no idea”. The correct question is always “what could happen and what will I do if it does “.
There’s a great saying from Keynes “there is nothing so disastrous as a rational investment policy in an irrational world”. This is a fantastic quote and was the origins of the well-renowned trading quote “Markets can be irrational a lot longer than you can stay solvent”. The point is a simple one. Markets are at their core a social construct and are driven by people’s views, attitudes or… how they felt when they woke up in the morning. You could be perfectly right, rational, logical but your business will still go to the wall if your key stakeholders are swimming in a different direction.
The most real example of this is the relationship that you have with your creditors. If your lender loses the faith in your vision or develops a “sky is falling” view of the world, it doesn’t matter who’s right or wrong. What matters is that you have a maturity date, a covenant breach and don’t have access to alternatives. Of all the risks facing mid-market companies, the lack of access to credit is the one that becomes the focal point as this is the one that will result in the company tipping into insolvency.
So, if your business isn’t getting the right hearing from your current bankers and you’re walking out of the meeting both thinking the other person is crazy then perhaps it’s time to talk to someone else. In the words of another Billy Joel classic: “You may be right, I may be crazy, but it just may be a lunatic you’re looking for!!”
Donald Trump, 100-year drought, Royal Commission, Kim Jong Un, Trade Wars, Climate Change – this is all starting to sound like Billy Joel’s famous song “We didn’t start the fire”. Every day the papers tell a new tale of woes, a new set of threats on the horizon. Is this just background noise that has been “always burning […]
In the world of money lending, Goliath very regularly sends David packing with his sling shot between his legs
What you should think about when Private Equity is knocking at the door.