Talk Your Book: The Private Credit Opportunity Set

Summary

Animal Spirits Podcast: Detailed Summary of "Talk Your Book: The Private Credit Opportunity Set"

Release Date: January 27, 2025
Host: Michael Batnik and Ben Carlson
Guest: Kyle Brown, President, CEO, and CIO of Trinity Capital

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Introduction

In the January 27, 2025 episode of the Animal Spirits Podcast, hosts Michael Batnik and Ben Carlson delve deep into the evolving landscape of private credit. The episode, titled "Talk Your Book: The Private Credit Opportunity Set," features an insightful conversation with Kyle Brown, the President, CEO, and CIO of Trinity Capital. Together, they explore the growing significance of private credit in the financial ecosystem, the competitive dynamics within the space, and the nuanced strategies employed by firms like Trinity Capital to navigate this complex market.

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The Expanding Role of Private Credit

Ben Carlson opens the discussion by highlighting the increasing prominence of private credit, venture debt, and related financial instruments. He emphasizes the importance of scale in private credit deals, noting that larger transactions often attract more competition from mega-cap private equity firms.

Ben Carlson [00:45]:
"We've spoken a lot about private credit venture debt and we're going to continue to speak about it because it's becoming a bigger and bigger part of the financial ecosystem."

Kyle Brown [03:17]:
"We deal in the lower middle market, sub $1 billion valuation companies. And those spreads have not been squashed the same as the middle market to upper middle market."

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Competitive Landscape and Spreads

Kyle Brown discusses the influx of capital into private credit, leading to tighter spreads, especially in the middle to upper middle market segments. He contrasts Trinity Capital's focus on lower middle market companies, where spreads remain more favorable.

Kyle Brown [02:50]:
"Spreads have been tightening... in middle market and upper middle market."

He explains that the concentration of large private credit firms chasing similar deals has resulted in compressed spreads, pushing investors to seek opportunities in less saturated markets.

Kyle Brown [03:17]:
"We're dealing in the lower middle market, sub $1 billion valuation companies... spreads have not been squashed the same as the middle market to upper middle market."

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Shifts in Bank Lending and Private Credit Opportunities

The conversation shifts to the declining role of traditional banks in providing credit, a trend exacerbated by regulatory constraints and diminished deposit bases. This creates a fertile ground for private credit firms like Trinity Capital.

Kyle Brown [05:03]:
"Banks are lending less... There's thousands of companies who raise money, who need to find an exit, who need to find a new home. And the banks are just not there to fund those transactions like they used to."

Brown underscores the robustness of the private credit market, especially for lower middle market companies that were previously underserved by traditional banks.

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Investment Metrics: Loan-to-Value (LTV) and Beyond

Ben Carlson probes into the investment metrics used by Trinity Capital, particularly Loan-to-Value (LTV) ratios.

Ben Carlson [07:16]:
"What are you guys looking at to feel confident that they're going to be able to make good?"

Kyle Brown [07:45]:
"We typically average around 10 to 15% loan to enterprise value."

Brown elaborates on how LTV is assessed against metrics like Annual Recurring Revenue (ARR) for enterprise software companies, ensuring that debt service is sustainable even in fluctuating economic conditions.

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Opportunities in AI and Frontier Technologies

Trinity Capital is capitalizing on the surge in sectors like Artificial Intelligence (AI) and frontier technologies, which require significant capital expenditure (CapEx).

Kyle Brown [12:00]:
"We're financing Nvidia servers, AMD servers, the power generation equipment that goes into the data centers... space and frontier technology and AI is for us right now just become a really big and interesting sector."

He highlights Trinity's strategic focus on "picks and shovel" financing, investing in essential infrastructure that retains value irrespective of a company's success.

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Deal Structuring and Risk Management

The structuring of deals is crucial for managing risk. Trinity Capital prioritizes senior secured positions, ensuring they are first in line in case of borrower default.

Kyle Brown [13:42]:
"We have to be senior secured, right? We need to be in front of the equity and any other financing that's in there."

He further explains the concept of getting "off risk" quickly by structuring loans that either fully amortize or allow Trinity to recover principal swiftly, minimizing exposure.

Kyle Brown [14:15]:
"It means we're going to get our principal back if things don't go right for the company."

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Public vs. Private Offerings

The discussion transitions to the differences between investing in Trinity Capital's public offerings versus private placements.

Kyle Brown [20:44]:
"When you buy the public stock, you are buying into all five of our different lending businesses... private funds... opportunity to just invest in equipment financing or PE backed software deals."

He articulates the flexibility and thematic focus available to investors in private placements, compared to the diversified exposure of the public stock (Ticker: TRIN) traded on NASDAQ.

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Investor Considerations and Due Diligence

Ben Carlson and Michael Batnik raise concerns about how investors and advisors can assess and trust private credit offerings, especially amid increasing competition.

Kyle Brown [24:15]:
"If you're trying to get into late stage venture debt or growth oriented PE backed deals, if you don't have a large portfolio that can handle some swings, it could be problematic unless you have some great niche and maybe you came from some other competitor."

He advises investors to evaluate funds based on Net Asset Value (NAV), dividend consistency, and portfolio health, emphasizing transparency and third-party valuations in Trinity's operations.

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Risks and Market Dynamics

The episode addresses potential risks in the private credit market, such as the rise of Payment-In-Kind (PIK) interest, which can indicate borrower distress.

Kyle Brown [17:40]:
"If you're a private credit firm and you have seen your pic interest is going up 10, 20, 30%, that is in a lot of cases, that is companies working something out on the back end... that can be a red flag for sure."

He differentiates Trinity Capital's approach by maintaining strong portfolio metrics and avoiding significant shifts towards PIK interest, which can erode investor confidence.

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Future Outlook and Growth Prospects

Looking ahead, Kyle Brown is optimistic about the continued growth of private credit, driven by the enduring demand from businesses transitioning away from traditional bank financing.

Kyle Brown [26:13]:
"The next three to five years should be really interesting. You have a lot of companies who were working with banks before who are now moving to private credit because the options and the availability is just not there."

He anticipates portfolio expansion and increased earnings, provided that private credit firms maintain high-quality investments and robust underwriting standards.

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Conclusion

The episode concludes with Kyle Brown reaffirming Trinity Capital's commitment to transparency, robust risk management, and strategic investment in high-growth sectors. He invites listeners to explore investment opportunities through TrinityCapital.com, highlighting the firm's unique position in the private credit landscape.

Kyle Brown [29:51]:
"We've been delivering mid to high teens returns for investors on a gross basis since 2008, and spreads have stayed relatively consistent during that time. So I think that's a good track record for investors."

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Key Takeaways

• Private Credit Growth: The private credit market, especially in the lower middle market, is rapidly expanding due to reduced bank lending capacity.

• Investment Strategy: Trinity Capital focuses on lower middle market companies, maintaining favorable LTV ratios and prioritizing senior secured positions to mitigate risk.

• Sector Opportunities: Significant opportunities lie in AI, frontier technologies, and essential infrastructure financing, which offer resilience and value retention.

• Public vs. Private Investments: Trinity offers both publicly traded equities (TRIN) and private placements, catering to different investor preferences for diversification and thematic focus.

• Risk Management: Monitoring indicators like PIK interest and maintaining consistent NAV and dividends are crucial for assessing fund health and investor confidence.

• Future Prospects: Continued growth is expected as more companies seek private credit alternatives, driven by ongoing innovations and the enduring limitations of traditional banking.

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For more information about Trinity Capital and its investment offerings, visit TrinityCapital.com.

Transcript

[Michael Batnik]

Today's Animal Spirits Talk. Your book is brought to you by Trinity capital. Go to trinitycapital.com where they have different investment offerings for institutional investors, wealth professionals and public shareholders. Check all their different alternative asset [e-mail] welcome to Animal Spirits, a show about markets, life and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Britholtz Wealth Management may maintain positions in the securities discussed in this podcast.

[Ben Carlson]

Welcome to Animal Spirits with Michael and Ben. We've spoken a lot about private credit venture debt and we're going to continue to speak about it because it's becoming a bigger and bigger part of the financial ecosystem. One of the things that we spoke about on this podcast that was interesting was I was of the opinion, or I am of the opinion. I think that if you're going to be in some of these deals, scale is a huge advantage. The space that Trinity Capital plays is, is a little bit downstream. It's not like these mega cap private deals. So scale is an advantage for the larger deals, but it's also where a lot of the competition is.

[Kyle Brown]

Right.

[Ben Carlson]

It's the same, I don't know, six to eight firms that are competing with each other, right?

[Michael Batnik]

Yeah. Because those huge private equity behemoths are all in this space now. I thought it was. So we talked to Kyle Brown today from Trinity Capital. He's the president and CEO and cio and I thought it was interesting to hear him talk about the fact that the businesses actually probably prefer to work with some of the different companies as opposed to the banks. There's probably a little bit more wiggle room there. Right. And I think the idea is that like, oh, if the banks ever came back into this space, it would totally change and maybe it would change parts of it, but I'm guessing a lot of the businesses probably prefer to work with these direct deals as opposed to going through banks and their different credit standards.

[Ben Carlson]

Yeah. Interesting conversation. Definitely a space that we're going to keep a close eye on over the next couple of years. So.

[Michael Batnik]

Yeah, and you and I are learning about this too as we go. And I think this is definitely a different part of the private lending space as well. So it's interesting to hear this from the tech side of things and late stage growth companies that sort of thing.

[Ben Carlson]

Yeah. All right, here's our conversation with Kyle Brown of Trinity Capital. Kyle, this year has been, or last year, I guess has been the year of private credit. Ben and I have said a lot on the show that if you look at my inbox, it's hot. It is hot. And so the question that I have for you is, are you seeing more competition? You must be seeing more competition for some, some of the deals. Are you seeing any sloppy investing behavior? Is this favoring the borrowers because there's so much capital coming in? Like, how is the environment different today than it was? Say, I don't know, you've been doing this for a while a couple years ago.

[Kyle Brown]

So you hear a lot of money is flowing into private credit. You hear kind of as a result of that, spreads have been tightening. Right?

[Ben Carlson]

Spreads are tight everywhere.

[Kyle Brown]

Spreads are tight everywhere. This is mostly true though in middle market and upper middle market.

[Ben Carlson]

So sorry to cut started now. I cut you off two times in the first minute of you speaking. But for our listeners, what are those terms? Because we hear them often, but I think most people don't know what those terms mean.

[Kyle Brown]

So these are going to be mostly private companies that are more at scale. So it's going to be larger companies, upper middle market. This is where, you know, Blackstone Carlisle, this is where they're trying to lend a billion dollars for a PE buyout deal.

[Ben Carlson]

Okay, so mega cap, private companies.

[Kyle Brown]

Mega cap, yeah, kind of mid to mega cap companies and a lot of private credit. You know, the attention has been primarily focused on, I'd just say a dozen large private credit firms. And if you're a pension fund and you're a manager of a pension fund, you have to deploy a billion dollars into private credit. You want to sleep at night. And so the idea at least over the last few years has been let's put that with long term established firms who've been doing this a long time. And that mindset has worked. But the problem is those dozen or so large firms have been chasing the same deals. They have a lot of money to deploy and it's turned into really beta returns, which is why you see those compressed spreads. And so that's not the area we deal and we deal in the lower middle market, sub $1 billion valuation companies. And those spreads have not been squashed the same as the middle market to upper middle market. So it's just private credit now you're having to, if you're an allocator of money or a high net worth family office, you're thinking, all right, where is the money? Where are the spreads, where are the returns? And you're having to get a little more creative. You're having to start looking outside of the 15th Blackstone Fund. And so there are lots of opportunities out there, but you are having to do a little bit more work to figure it out. If you're an investor.

[Michael Batnik]

With all the capital flowing in here from advisors and retail institutional investors, like, what is the actual capacity here? Are there enough deals and companies that need to borrow to go around?

[Kyle Brown]

There's significant, significant capacity from here in the upper middle market. Middle market, I think you have a lot of firms who are just crossing their fingers, hoping that private equity dollars start to flow, big transactions and M and A activity picks up. I don't know if that's going to happen or not. I think that sometimes perception matters more than reality. And right now everyone perceives 2025 and 2026 are going to be good years for business and finance. And so that might happen. What's really happened though is banks are lending less. They have more regulations on them, they have less deposits and they have to lend, they have to lend less. And so what that's opening the door for are for private credit firms who focus on lower middle market. And there are thousands, thousands of companies who raise money, who need to find an exit, who need to find a new home. And the banks are just not there to fund those transactions like they used to. So that's where the private credit opportunity really is exciting.

[Ben Carlson]

I'm sure you're hearing this question a lot given the rate environment. All right, awesome. There's a spread to which you lend companies and the, the, the income, the rates are healthy for the investor. But is there a point in which, like it's, it's. The pendulum swings too far into an area where it's now dangerous in terms of the rates that the borrower is paying?

[Kyle Brown]

Well, I mean, companies have certainly been challenged right in the last couple of years. And if they're highly leveraged or over leveraged, they're feeling the pitch. Right. For companies in the lower middle market that were taking on less debt, that has been less of an issue. And so rates have decreased a bit even if they stay steady. We have seen our portfolio really stay strong, that coverage for debt service payments has continued to stay strong. So I don't think, when I'm talking about lower middle market, I'm Talking about think 100 to 200 million ARR companies a billion dollars or less kind of valuation. They have the ability to service that debt and they're doing fine. So barring some economic macro changes that really reduce revenues, the debt service is sustainable right now.

[Ben Carlson]

Let me ask you a new bell question. So I was talking to a friend of mine and he's, he's in the industry. I'm like, what does LTV mean within the context of these companies? Like I know, I know what it means, but what does the denominator actually mean? So let's say that the LTV is whatever it is, 30%, 40%, whatever it is, to assess the ability of the borrower to repay their debt. What are you guys looking at to feel confident that they're going to be able to make good?

[Kyle Brown]

So it's one metric. So I'll give you one example. Let's say you're a 100 million ARR enterprise software company. You might be valued today at 500 to 600 million, right? Five to six times ARR. And so if you're at a 20% loan to value, that means you've got somewhere around 100 to 120 million of debt. So loan to enterprise value and that'd be on the higher end. I think we typically average around 10 to 15% kind of loan to enterprise value.

[Ben Carlson]

Why use market cap? Like why use enterprise value instead of like a cash flow metric?

[Kyle Brown]

You will. That's why I said it's one metric. Right. And if you are. So we deal a lot on kind of late stage venture towards PE backed 5 to 50 million of EBITDA. And so if you are still growing rapidly and still burning some cash, then we might look at you and think about your ARR and loan to value a little bit more than we would if you were a cash flow positive company where we're really focused on, really focused on debt coverage ratios. So it does flip.

[Michael Batnik]

What is the state of the late stage venture industry at this point? Because as you mentioned, there's not been a ton of activity on the IPO front and M and A and that sort of stuff has kind of calmed down. Where do we stand there? Are they needing to tap the debt markets more because of that?

[Kyle Brown]

So we have not seen a massive increase in loan to value for venture backed companies. It's a robust market. You have not a record, but close to a record amount of dry powder sitting on the sidelines for venture. And the money is flowing. If you take out 2020 and 2021, which were just wild years during the ZIRP policy, it's just a vibrant robust market. So money's flowing Deals are happening. The key though is that the deals are happening at greatly reduced valuations because the venture money, they don't care. They're looking for a 3-10x return. So if they can deploy money into a company at a much lower valuation, it doesn't matter if they've raised a lot of money to date. So they're looking for the right deals. And what you're seeing as a result of this is companies that have, we're hoping and praying that they could work into that valuation that they set in 2021. They have, they've had to come to Jesus moment and they're taking the money and they're taking it at a much lower valuation. So for a lender, we don't necessarily care about the valuation as much. Right. But for the equity, the money's flowing and it's, it is a pretty robust market right now.

[Ben Carlson]

When you all are looking at companies to lend money to, how much of it is balance sheet cash flow versus all right, we got to know the industry, we have to know the players because yeah, things might be good tomorrow, but there's this risk over there that, that this could go to zero if X, Y and Z were to happen. So how familiar are you with the business, not just the financials.

[Kyle Brown]

So you know, when you're talking about lending to late stage venture backed companies, it's 75% science, 25% art. Right. So you are getting to the financials, you are looking at past performance and how that might mean future performance, but you're looking at the technology. We've got multiple engineers on staff who can get in, underwrite a technology, make sure that we're not taking tech risk. Because when you're late stage vc, you should not be taking technology risks. So that's one of the things you have to underwrite. That's different than what banks or private credit firms have to do. Right. So we're getting in, make sure you're not taking technology risk, making sure there's a moat around that technology so that you know that the peers and the competitors are a couple of years behind you. And then, and then the art is who are the, who's the management? Have they done this before? Have they had to go through difficult times? Who are the investors? Do they have the, the ability to continue supporting these companies? That means like underwriting down at a granular level the fund that they're investing out of and what metrics they have in place to support this company on an ongoing basis. So that's less science. That's a little bit more art and relationships, but it is a combination of the two.

[Michael Batnik]

But what is your opportunity set looked like? I got to imagine over the past, I don't know, 5, 10, 15 years, this late stage venture market has changed appreciably for you. It's got to be a ton more opportunity than there was in the past.

[Kyle Brown]

There's a lot more opportunity. Part of that is a function of banks and the whole Silicon Valley bank mess a couple years ago. There's a lack of liquidity, banks are lending less, so there's that. But then the market's been growing, right? Companies stay long, private longer and then there's just a lot of innovation happening right now. AI, right. For example, you have tens of billions of dollars now flowing to an industry that wasn't receiving that type of capital just a few years ago. It creates new opportunities. So every three years, every five years, something new happens, a new market opens up and then there's a lot of capex needs or financing needs that has to happen. So right now I'd say two of the biggest things that we're financing that are really interesting are certainly AI the revenues do not justify the amount of CapEx spend that's happening there. And as such we're really focused on picks and shovel type financing. We've been for the last 18 months financing Nvidia servers, AMD servers, the power generation equipment that goes into the data centers. This is equipment that has value whether or not the particular cloud computing company we're working with survives or not. Right. So we think about that as like picks and shovel financing. And then we're doing a lot of frontier tech. Just think space tech. I mean, I think our largest hold right now is with Rocket Lab where we're providing a lot of manufacturing equipment for them to build the different machines that they're putting up in the space. And so space and frontier technology and AI is for us right now just become a really big and interesting sector as well as our legacy kind of enterprise SaaS that still receives more financing and funding, equity funding, than any other industry.

[Ben Carlson]

How important are the terms of the deal? Like all right, if this goes bad, who gets paid when? Like what is that? What does that process look like?

[Kyle Brown]

Yeah, so we have to be senior secured, right? We need to be in front of the equity and any other financing that's in there.

[Ben Carlson]

You know the term in front of, in front of, like would there be other, would there be bondholders or not? In the case of a private company?

[Kyle Brown]

No, no, we're Going to be senior, we're going to be first out. It's really important to structure these so that you can get off risk. So you know, about a third of our deployment is just straight equipment financing. These fully amortize right out of the gate. So we get repaid right away and we're typically off risk within 20 to 24 months. So you do structure it to get off risk quickly. Right.

[Ben Carlson]

What does off risk mean?

[Kyle Brown]

It means we're going to get our principal back if things don't go right for the company. That's one way to think about it. And then the rest of our term deals, term loan deals, their interest only for some period of time and then they fully amortize after that. So we're in these deals for three to four years. We're helping them achieve like a milestone that they have in front of them so they can achieve a higher valuation as they head towards another fundraise or IPO M&A type activity.

[Michael Batnik]

Let me throw a hypothetical out to you. So we've heard this story from a lot of different private credit funds that yeah, the reason there's such a big opportunity here is because following the GFC there was all these rules and regulations in place and banks can't lend as much anymore. So we have a new administration coming in. Deregulation is the big theme of the day. I don't know how realistic it would be to roll back all those provisions from the great financial crisis, but let's say they could and banks were opened up again. To lend in this space is beyond maybe, you know, spread compression. Is the current situation better than it was in the past for these borrowers? Do you think if, if banks were, if the floodgates opening and banks come into this space, would the borrowers prefer to go through the lenders that are out there today? Is there a better, is there a better mousetrap there than what the banks were offering?

[Kyle Brown]

Yeah, I mean a couple of things. Let's say regulation changes significantly tomorrow or rules have been put in place tomorrow, it's going to be two years before things trickle down to through the banks and to borrowers. So there's that like banks do not move overnight. That's not going to happen. The second piece of it, I think companies realized over the last couple years that a bank is highly leveraged. They're leveraged 8 to 10x on the deposits they have. And there's two problems. One, banks can only lend as much as they have capacity to do so and that's dependent upon deposits Deposits are down, they have less capacity, regardless of what happens with regulation. So there's that. And then you have companies that have finally realized, or have realized yet again, that there can be bank runs. There are things outside of their control that can limit their availability of capital from the banks that they might have borrowed from. And we're talking about private credit or a company like Trinity. We're permanent capital. There is no bank run that can happen with us. We manage a permanent capital vehicle and when we make commitments, we're making them based on the amount of capacity that we have available to us. And that doesn't go away. And so there is a increased cost of capital. When you're dealing with a private credit firm like ours, we have a higher cost of capital. But for a lot of these companies, it's going to be worth, worth paying that extra 2 to 300 basis points to know that you are going to have that money when you need it and when the company that you borrowed from said you could have it.

[Michael Batnik]

So Silicon Valley bank was a good thing for your business, at least from a reputational perspective?

[Kyle Brown]

They were good. They were, yeah. Well, yeah. Banks lending less certainly good for our business. And we still do a ton of business with Silicon Valley Bank. I mean, they're still out there doing what they were doing before. They're doing it more in the form of receivable type financing and providing bank services and then providing back leverage, which is what banks have always historically done because it's less risky. These are people's deposits. And so we're seeing more of that traditional banking than term debt financing and taking more risk.

[Ben Carlson]

Any concern or should investors be concerned? There's been a lot of noise about the payment in kind deals. Is that, is that like a canary in a coal mine or explain what's going on there?

[Kyle Brown]

Absolutely. If you're a private credit firm and you have seen and your pic interest is going up 10, 20, 30%, that is in a lot of cases, that is companies working something out on the back end with a company where it just has things have not gone to plan, they maybe cannot cover that debt service and so they're hiding it in the form of pic.

[Ben Carlson]

Can you explain what that means for the listener, please?

[Kyle Brown]

So let's say that you have a company whose revenue is down, maybe they're struggling with the increase in their rates. They might come back to you and say, hey, we cannot service this debt under the original terms we had agreed to and we cannot pay you your 12% interest rate anymore. We can only afford to pay you 8%. So what a firm might do in that scenario, if they're trying to keep the credit in good standing, they will take what they can get. So they'll take the 8% they can get from the company and then they'll create 4% pick, which is essentially just accruing 4% each quarter, each month.

[Ben Carlson]

It's like an IOU on the back end.

[Kyle Brown]

It's an IOU on the back end. If you see that ticking up significantly, that's bad.

[Ben Carlson]

But a counterpoint, isn't that better? How would that have been resolved back in the day if this was just like a bank syndicate, you would have.

[Kyle Brown]

Extended interest only payments or the amortization over a longer period of time to reduce the payment structure or you would just write it down and write down the value of that instrument. So yeah, I think there probably is some of that happening right now. Pick can be great if it's built and structured up front. But if you're trying to work out a deal, you're going to see that tick up with private credit firms. That can be a red flag for sure.

[Michael Batnik]

Remind us what kind of investors are coming to you because Michael and I have been talking for months now about the opportunity that private funds see in the advisor space and that a lot of the institutions are already pretty topped out. Right. A lot of the big pensions and endowments or whatever are already at their 20, 30, 40% alternatives and advisors are the really big next opportunity set. So where are you seeing new flows coming from?

[Kyle Brown]

Yeah, it's a lot of, it's a lot of high net worth family office. It doesn't have to be like our public company Trinity. These are a lot of retail investors who want some exposure to private credit and they love the dividend yield so they're getting into the public stock we have and manage private funds as well. And that's going to be primarily high net worth family office wealth advisory firms who are looking to clip a nice coupon for a long period of time. And so yeah, I think the next year to five years you're going to see a lot of wealth management who are adjusting some of their allocations to private credit or alternative investments. They're looking for good income, consistent dividends and quality portfolios.

[Ben Carlson]

So if somebody's listening and they say, okay, this sounds interesting, I want to learn more about Trinity Capital. What do they get if they invest in the equity which and you're a NASDAQ listed company versus if they get involved in some of the private placements.

[Kyle Brown]

So the public company is a. It invests across every vertical that we offer. So when you buy the public stock, you are buying into all five of our different lending businesses. So you get exposure to multiple different industries and sectors. And then you're also buying into the management company. So we don't charge a management fee or incentive fee. It's all part of the same company. So you're buying into an actual management company that has the ability to generate income above and beyond just the loans that we issue. Which is why you've consistently seen our dividend and our company growing. We're not just a stagnant pool of assets like most BDCs out there. That would be the benefit. And that's also liquid. You can buy it and sell it right on the nasdaq. Our private funds are a little bit unique in that you can a you're buying in at nav so you might end up with a little bit higher current return. There is some liquidity options available to you, but it's not as liquid as the public stock. And then those are more thematic based. Meaning if you just want to invest in equipment financing, we're going to give you an opportunity to just invest in equipment financing. If you just want to do PE backed software deals, you're going to have an opportunity to just get into those types of credits. So we give investors a little more optionality on the private side so they can invest in specifically what it is they're looking for.

[Ben Carlson]

Are there tickers for investors to buy or are these private placements?

[Kyle Brown]

The only ticker available to buy is TRIN on the NASDAQ which is, you know, which gives you access to everything.

[Michael Batnik]

Okay, I would love to do a perform a study of your more private illiquid funds versus the public in terms of investor behavior and turnover. And do you get a sense though that for that public, that Trin people still look at it as more like all they care about is the dividend and the yield because that, that's really the. I always tell Michael this is, this is a selling point for private credit, especially for investors who are a little nervous is just the yield. If I can bank on that yield, I am good. Do they look at the yield for the that public entity as well do you think? Because that's pretty high yield.

[Kyle Brown]

Obviously it's a high yield because the stock's too low. But yes, it is a high yield. They are buying it for the yield. Most investors don't quite understand. We're still new. We've been trading for four Years. They don't quite understand that this is not something to compare to any other bdc. You're buying into an operating entity that also lends money.

[Ben Carlson]

How is that different from other BDCs?

[Kyle Brown]

So you took Ares BDC. All that is is a stagnant. It's a pool of assets of loans that co invests and is managed by their management company. So Almost all other BDCs are simply a pool of assets that co invest with the ownership interest, main entity and whatever they happen to be investing into. So we're not a co or public stock is not a co invest vehicle. It's a management company. It should be more compared to ares, the actual management company.

[Ben Carlson]

Understood. Okay, so wait.

[Michael Batnik]

Sorry Michael. So if you own the trn, you're getting a piece of the management fees from your funds essentially, then 100% of.

[Kyle Brown]

Our management fees and incentive fees flow to the public company. That's right.

[Michael Batnik]

Gotcha.

[Ben Carlson]

So one of the things that I've been discussing a lot is that most advisors, and I would include myself in this category, we're not experts in this space. And so I understand everything you're saying. But if you're showing me your fund or your investment vehicle versus several others, how do I really diligence other than. Yeah, I like Kyle, I trust him.

[Michael Batnik]

Track, you pick the one with the highest yield. But I think that's how a lot of advisors do it. Probably right.

[Ben Carlson]

But seriously, I don't know that there's a great answer here because I'm not going to all of a sudden become an expert on this stuff. It doesn't matter how much time in the day have like, so, so how do you, how do advisors or clients or whoever get comfortable with, with, with this?

[Kyle Brown]

So I mean for me, if I'm looking at BDCs, first thing I'm looking at is NAV. Net asset value as a reflection of the portfolio. If it's going down, that means that they are valuing their portfolio lower and lower each quarter there's something negative happening in the portfolio. Right. So you start with NAV because that's the health of the portfolio. And then you look at dividend. Have they been able to keep the dividend steady? If they have, that's a reflection of their ability to collect on all of those assets consistently. Right. It means that their income is not going down or they're not having more negative deterioration in the portfolio. So dividend consistency, if you can see that, hey, they've been paying this 50 something cent dividend for a few years and NAV hasn't changed. There's not a lot of reasons for it to go down. You can actually look at that and say, I can expect that to continue on. So you look past couple years trends, they should reflect what's going forward. And then for public companies like ours, we have to value each of our loans on a quarterly basis so you get transparency into exactly what's going on in the portfolio. And these are third party valuations. It's done the same every single quarter. So there's no hiding the eight ball with the publicly traded stuff.

[Ben Carlson]

Third party. I'm just kidding.

[Michael Batnik]

If we looked out like five, seven, ten years in the future and thinking about some of your competitors and maybe some of them that you look and say they don't have as strong of quality metrics as we do, whatever, what would be the risk for investors and some of your competitors of what is the downside where these things go wrong? And I'm not talking about they completely go bust, but just they don't meet investor expectations.

[Kyle Brown]

You touched on a little bit. The pick is really important. If you see a significant portion of the portfolio move to pick, you know that they're hoping and praying that things work out for these companies. This is not a stable fund to be investing into. They're having deterioration and they're fixing it now, hoping that it gets figured out later. So I would say you're watching pick interest, you're looking at nav. If NAV is going down and has consistently gone down, you know that there are some issues in the portfolio and then it might be make sense to exit before the price starts to reflect what's happening with the navigation of the business. The next three to five years should be really interesting. You have a lot of companies who were working with banks before who are now moving to private credit because the options and the availability is just not there. And they have debt that's maturing and they have to find a new home for it. So you should see portfolios growing, you should see new investments being made and there should be growth not just of the portfolios, but you should see growth of the earnings as well. And if you don't see that in this environment, something is wrong.

[Michael Batnik]

What do you think are some of the. So Michael asked, a lot of advisors aren't experts in this space. What are the good questions that they should be asking in terms of investment process and fund structure when they're trying to figure out what to invest in and what to be in in this space?

[Kyle Brown]

Sure. I mean, I think the Incentives for the manager should align with the upside for investors, right? I don't think you always see that. But you know, I don't think a management company should continue to generate significant management fees, incentive fees if they are not performing for investors. And so, you know, I think that you've seen those spreads kind of tighten up a little bit on just management fees, incentive fees. And that should happen, right? There's more and more demand for it, there's more money flowing into it management. I mean you should have a long performance of this right now. There are a lot somebody mentioned at the beginning, there's a lot of new competition, there's a lot of groups trying to get into it. If you're trying to get into late stage venture debt or growth oriented PE backed deals, if you don't have a large portfolio that can handle some swings, who doesn't have some maybe warrant upside getting into a new fund manager right now that could be problematic unless they have some great niche and maybe they came from some other competitor where they were already doing this. So I think there's a lot of firms trying to get into private credit right now because it offers a great risk reward. But maybe not all these groups have been doing this for some period of time. So I think expertise and track record are probably really important right now. Liquidity. So, you know, a lot of these, I think you see a lot of larger firms are trying to raise as much permanent capital as they can. And let's listen, they're doing that because that means their management company is going to get more value because they're managing permanent capital. Right. That is not necessarily a good thing for an investor. So whether it's a public stock that you can get in and out of or whether it's a non traded BDC that has quarterly liquidity options, if I was an investor, I wouldn't want to be locked into something for the next eight years. Right now.

[Ben Carlson]

How diversified are these funds? How many loans are you making?

[Kyle Brown]

We deployed $1.2 billion last year. That is on the upswing. That would be 50 to 60 new investments to private companies just last year.

[Michael Batnik]

I'm going to throw you a softball. You talk about the importance of management and time in what is the background of you and your partners in terms of how long you guys have been doing this for.

[Kyle Brown]

We have a 17 year history doing just what we're doing right now. We have technical and engineering expertise to get in and underwrite technology at a granular level. That is a big differentiator for us. We do not want to take technology risk. We want to get in and make sure we're taking execution risk. These are, these are private companies. These are not. These, for the most part, these are not public companies. And so we do need to have a really clear and good understanding as to what these companies are building, how they're building it, what the milestones are out in front of them. We've got a tenured history, and our investment committee and executive team has been together for nearly a decade now. I've got the same team that we took this company public with. So the record stands for itself. We've been delivering mid to high teens returns for investors on a gross basis since 2008, and spreads have stayed relatively consistent during that time. So I think that's a good, I think that's a good track record for investors. We've got a lot of happy, a lot of happy investors.

[Ben Carlson]

Kyle, for people that want to learn more about your offerings, where do we send them?

[Kyle Brown]

TrinityCapital.com Easy enough.

[Ben Carlson]

All right, man. Appreciate the time, guys.

[Kyle Brown]

Thank you.

[Michael Batnik]

Okay, thanks again to Kyle. Member? If you want to check out more, go to TrinityCapital.com, email us. Animal SpiritsCompoundNews.com.