Game-Changing Strategies in High Growth Investing

Eric Chemi 0:05
Welcome to Wealthion. I’m your host, Eric Chemi. Today we are talking to Kyle Brown. He is the CEO of Trinity capital, they are a direct lender to growth stage companies. And Kelly, you just became the CEO on January 1. So I know things are very busy. I know you’re talking to me from the road, right outside of a major conference going on right now in California. And if my reading is correct, do you have five kids and and you’re also the brand new CEO of this company might Am I getting my research right here?

Kyle Brown 0:33
I do have five kids, I’m married to a lovely lady and have five kids. Youngest is in diapers and the oldest is in college. So kind of everything in between there.

Eric Chemi 0:46
I only ask because I’ve got baby five do any minute now. And it may come he or she may come between the time that we record this and we actually publish this. So it’s like imminent any hour now. So that’s why I was curious. It I wonder, do you get any sleep right? You’re on the road? You’re the brand new CEO, you’ve got all these kids? Are you sleeping at all? My

Kyle Brown 1:09
wife wonders why need to travel so much for work? And she says Why can’t you just zoom it? And I said, Well, I just have to that’s how it works. And truth is I’m gonna get some sleep here and there. So and you get it at some point, you know, you don’t care about sleep as much and you’re playing zone defense. So you just kind of live in the crazy and it’s it works. You know,

Eric Chemi 1:28
you know people talk about oh zone defense man demand and I think about it when the beginning of the season, you know, those Division One teams they play they’re like one double A teams and the score is 73. And you think, I don’t think the defense scheme was what was going to make that score any different. It just, they’re just gonna lose their outmatched no matter what the scheme is.

Kyle Brown 1:48
Yeah, well, somebody told me, I mean, the every single person I talked to is 7080. You know, just kind of towards the end of life. There’s not a single person that’s ever said, I regret having, you know, X amount of kids. It’s always somebody saying, I wish I had more. So my wife and I believed all these people we’ve we’ve heard say that over the years. And so we’ll see it is crazy. But life’s very full, which I think is a good thing. So

Eric Chemi 2:10
yeah, definitely, definitely. So Trinity does a lot of different things in the lending space, right. So there’s there’s debt, there’s equipment financing, there’s direct lending, there’s so many things that when we hear in the media, we always hear about private equity, venture capital, we often hear about the equity side, we don’t hear enough about the debt side, which is non dilutive, right? If you can pay that loan back, you didn’t have to give up any ownership, you got some pretty good rates, especially when rates were a lot lower. What is your pitch to companies? And then we’re gonna get into more of this macro stuff. But what’s your pitch to companies for? Hey, you should be taking on more of a second look here on the debt side rather than continuing to raise equity? Yeah,

Kyle Brown 2:51
so we, you know, it’s not it’s not completely non dilutive. So it’s, we like to say it’s less diluted, so less diluted. So So listen, if you’re a company, you’re raising, you know, either venture capital or private equity, and you’re giving away some part of your company to do so. Our pitch is for growth stage companies. And that’s what kind of loosely defined is, for more mature companies had 20 to 100 plus percent annual growth rates, who have raised significant equity dollars who are at significant scale. So these are either pre IPO companies, some are going to be smaller public companies, but they need to meet those metrics growing rapidly needing capital. And so what we what we, what we talked to companies about is just providing this less dilutive slug of senior debt, that they have the ability to service, and they’re able to get much further down the road or make acquisitions with the capital and build that valuation as they head towards that next inflection point. So but all focused on growth stage companies, what we’re building is a really diversified direct lending platform focused on those types of companies. And it really is it’s across many different industries. I mean, I’m here to healthcare conference in San Francisco. So we do a lot we do some life science and health care. And in technology, we do a lot of manufacturing equipment. So but but really, we follow the money, the private equity and the venture capital dollars, and then we come in to support those types of companies.

Eric Chemi 4:19
What are you seeing right now from the macro point of view? Because, you know, I’ll talk to people every day, a lot of people are really concerned about the economy. They keep talking about soft landing, hard landing, maybe we avoid landing, right, what is the Fed going to do on rates? We know that equity markets are basically at all time highs, but there’s this uncertainty about what’s happening underneath all of it. And I think you’re dealing with companies that are closer to the ground right companies that are pre IPO, they’re not multi billion multi trillion dollar companies are not necessarily all household names. They’re fighting in the trenches right now. Are you seeing a concern from just even talking to your clients, you know, Talking to internal your colleagues that, hey, we’re concerned about 2024, we’re not sure it’s going to be as safe as the last couple years where? Yeah,

Kyle Brown 5:07
it’s really industry specific, right? Because you got certain enterprise software, really anything that’s got a strong AI component to it, that’s receiving a lot of equity support and growing rapidly frontier technology. Certain manufacturing industries are growing significantly. So it’s really industry specific. You know, I’d say what’s obvious is that, you know, the real estate market has slowed a little bit mortgages have slowed. So they’re, I mean, they’re certain industries, you can point to and say, you know, that’s, that’s it, they’re having a difficult time right now. Right? You know, what we’re seeing in real estate,

Eric Chemi 5:39
not to interrupt you, but just since you just mentioned, do you mean, the commercial side of the residential side? When you when you see real estate? Or do you mean both?

Kyle Brown 5:46
Well, both, right. I mean, because, you know, even though we might see valuations still high on the residential side, there’s really no supply. And and then you have, you have this big gap between what people can afford and where rates are right now, and what people are making. And so at some point, there has to be some kind of correction there, whether it’s rates come down, whether it’s valuations come down, or whether it’s a combination of the two, it has to happen, right? It’s not gonna, it’s not gonna stay stagnant forever. So you know, the other thing we’re seeing, which is really kind of against the narrative a bit is pretty significant volume of deals happening and volume of deals or dollar amount of deals. And so if you look at quantity, yeah, so if you just look at, for the venture capital industry, you know, we saw there was $170 billion deployed last year. And that’s about the same amount that was deployed in 2020. And so we had two big years there, 21 and 22, where it was mostly larger private companies that received a significant amount of capital. And then a lot of companies just raised at ridiculous valuations. But, you know, the deal volume has, is really kind of still at record pace, taking out the last couple years. And so there’s a ton of money out there it as it sits right now, just in the venture capital realm alone, there’s a few 100 billion dollars of dry powder. And so, you know, what does that what does that what does that mean? How does that play out? I don’t know. Exactly. But I guess if you’re counting on greed, and you know, the managers can’t make money unless they deploy it. Right, you so they’re going to be sending that money back, unless they can figure out a way to deploy it. And this is not too different on the private equity side as well, where you have trillions of dollars, right? of dry powder. There’s just a dance happening right now, for private companies. And they raised evaluations over the last couple of years that were well above what they should have, right and so, but if they need capital, they’re growing, they need capital, they are going to have to take that money. And so you’re seeing lots of, you know, creative ways to avoid that diluted down round, which is typically comes in the form of insiders doing convertible notes, you’re seeing a lot of that right now. I some of the metrics I’ve seen have even shown that we’ve kind of leveled off on this valuation dip. But I don’t think that’s true. I think that’s just hidden and disguised by these convertible notes and insight arounds. And so what we’re seeing across our portfolio, we’ve got 100 plus companies, we have about 100 portfolio companies right now. It’s pretty diluted down rounds, anywhere from 25 to 75%, valuation corrections, and, and or your might see some of these convertible notes where companies are hoping they can, they can build into that valuation over time. And so there’s this dance happening of dollars want to get deployed, but companies are not quite ready to take the pain. And so you’re gonna see that play out this year. And that’s, you know, I think that’s, that’s what we’re what we saw at the end of last year, and what we’re gonna see a lot of this year,

Eric Chemi 8:38
I like what you said that your managers can’t get paid unless they deploy the money. So even if they’re bearish, they’re not going to want to give the capital back, they’re going to want to put it somewhere or you got to find some opportunity, you got to at least try to participate. Because if you’re not participating, you’re not getting paid. So I like I like your point just for people to understand that, you know, no matter what people’s point of view is, especially on the institutional side, you have to put the money somewhere, or you’re out of business. Yeah,

Kyle Brown 9:06
yeah. And we don’t, you know, as a senior secured lender, we don’t really care about where that valuation lands, whether it’s high or low, we’re sitting at a low loan to value. It doesn’t make a big difference. Now, where we’re seeing a lot of opportunity for us is, even within our own portfolio, we’ve been very proactive on making sure that anytime a company does a recapitalisation or brings in money to lower valuation, and we get warrants I think I mentioned this in the beginning, it’s less diluted, we do get warrants and a lot of these companies and so we’re being very proactive and making sure we get that lower valuation on our warrants, but on new deals or last couple quarters it’s been it’s it’s a very interesting time right now because if you’re coming in at a 25 to 75% reduction in valuation to these companies at a senior lender with warrants, it could provide some really interesting upside potential as these companies kind of grow and and build and so for us we’re you know, I’m I’m cautiously kind of opted mistake, I think there’s lots of, you know, there’s lots of things I have to play out this year. But for the companies that you can get across the finish line for us, that we find it’s, you know, these are really interesting companies that might have been funded otherwise by a bank, you know, a year ago, and banks are just not things have fundamentally changed in the banking world. So

Eric Chemi 10:18
I’m gonna get that. I’m glad you mentioned that. So we’ll talk about the banks in a second. When you talk about industry specific, you mentioned real estate is one that’s not doing as well, what would you say? Is your the industry you’re most excited about? If you think about our 20 24x? Right, is it? Is it healthcare? Is it manufacturing? What stands out to you is, I see a lot of opportunity in the particular industry for this year.

Kyle Brown 10:40
Yeah, the healthcare industry generally is is a right is I think, at this is a great entry point, valuations were already relatively low, they had been coming down for years, you’re seeing the same thing in that space with just continued down rounds, and valuation corrections. And so the entry points, excellent there, that’s a market that’s clearly not going anywhere. And so, you know, anywhere from, you know, pharma and biotech, which is really kind of the biggest part of, of that industry, and then, you know, healthcare services, but also, we focus a lot on med device and post kind of posts, FDA approved med device, that’s an interesting space for us. On the tech side, you know, we’re seeing, we saw a pretty significant value corrections on the enterprise software. And so, really like that space as an entry point, you’re getting in it five to seven times EBIT, da, and it used to be twice that right now, not so long ago. So the entry point there, I think, is excellent. We have done a lot of Frontier Tech, I kind of loosely just call it frontier tech. And these are companies that are disrupting old and archaic. You know, could be travel, it could be space frontier, and there’s a lot of CapEx need there. And so I really, like we made a couple recent investments, I don’t know that we’ve announced it yet. So I don’t know, I can’t share it with you. I’m not sure when this is going to air, but you’ll see some really interesting investments. And so those companies have a lot of CapEx needs as we provide a lot of equipment financing. So I’m bullish on kind of this frontier tech space. And then also just manufacturing, generally, you’re seeing more and more manufacturing come back to the US. Companies are spending more on infrastructure. And this is something we do a lot of is covered this capex financing for manufacturing, testing equipment, et cetera. And so we are we’re pretty bullish on the manufacturing sector. And that, you know, it’s gonna be industry specific, but we, you know, we’re, we’re looking to finance a lot of that and Karolina capex there.

Eric Chemi 12:44
Is there an industry that maybe you’ve dealt with in the past that you want to just stay as far away from as possible right now something that you’re just saying, I’m telling all my analysts telling all my VPS I don’t want to see a single deal in x. Is there something that really scares you right now?

Kyle Brown 13:01
Well, I mean, listen, the obvious thing is the crypto. It’s just such volatility. You know, we we have made some investments in equipment financing. That’s, I would say, kind of around that industry. But the volatility there is just too great is for a lender, especially a lender, like us who’s focused on consistent and increasing dividends, and wealth preservation. It’s just it’s too volatile. Right? Maybe one day that changes, but I don’t see it changing anytime soon. So that’s one obvious one. That’s, that’s really sticking out right now. And then, and then also AI. Right. And that’s, that’s a, that’s an interesting. That’s a hot, that’s a hot topic right now. And you have companies like Nvidia that are, you know, I don’t know what the market cap is, but you’ve saw to it, you know, to FX growth and their stock, and they’re, you know, the GPUs are a hot market hot item right now. And just artificial intelligence. I mean, really, there is no such thing as artificial intelligence. It’s all machine learning, and it’s getting better and better. But that’s another one where you’re gonna see some winners, probably some of the biggest winners ever, but you’re gonna have a lot of losers in between. And that’s, so that volatility and hit rates just not there yet. For us. One day, I think there’ll be an opportunity to invest in that space, but not right now.

Eric Chemi 14:22
Yeah, I was gonna say when you mentioned crypto, you mentioned the volatility, the wealth preservation, and I started laughing and that’s exactly what is not happening in terms of if you were lending to a crypto company right now you’re getting all the volatility, you’re not getting any guarantee of wealth preservation, so I can see why, you know, for your, for your investors, especially that might not be the way to go. And I like what you said about AI. We’re going to see some huge winners, but we’re going to see a lot of losers I think people forget we’re gonna see a lot of losers. So trying to try to pick those might be very difficult right in video, find maybe they’re going to be a winner, but now pick the next nine winners, right? Like who knows who they’re going to be?

Kyle Brown 15:00
Yeah, yeah, yeah, we’re, we’re not in the business of making those big Gamble’s if we a deal is successful for us, we’re making a 1.25, you know, multiple, mid to high teens return, you can’t have big losses with that model. And so you will see some winners, I don’t know how they’re gonna be, and it’s not going to be anytime soon.

Eric Chemi 15:20
And then going back to what you said about the banks, all of a sudden, in the last year, right, we’re less than a year, we’re less than a year, from when we saw the big bank failures, right Silicon Valley Bank and everything that happened, then did that really fundamentally change your opportunity set? Did more companies come to us saying, I can’t get a bank loan, I’m not getting the same love from my banker. So I need to start thinking creatively about where I’m getting my funding. Yeah,

Kyle Brown 15:45
so a couple thoughts. You know, the first one is their model was, I mean, clearly the model, the banking model was broken, but their lending model was not their book of business is strong Silicon Valley Bank is is still just going strong. And their lending business was very successful losses, a lot of gains. And that really goes for bridge bank, and the rest of them as well. So, you know, fundamentally, kind of what they were doing was great. And it worked very well, it was needed, how they did it, and having a bank who’s leveraged, you know, eight to one, right on equity. And then providing these loans to primarily cash burning companies, right? It, it just it’s fundamentally changed, because the whole model depended on companies keeping all their cash reserves sitting in an unsecured account. And companies aren’t doing that anymore, right. They’re using other instruments to diversify that risk. And so banks really cannot perform that same function they did before. And so you know, the, and they’re still gonna provide receivable financing, they’re still gonna do a lot of the things that banks have traditionally done. And they’re doing that now. I think all these banks would say, they’re all still very active, the truth is, they are, but they’re back to being banks, and providing bank services, where the opportunity has significantly increases for debt for these companies, where it was previously provided by the bank. And because they were lending them their own money, essentially, now, it’s, it’s shifted to alternative lenders like us. And so deal flow starting in March of last year is significantly increased, and it’s only continued to increase. And I don’t know that that’s going to change. And the truth is 10 years ago, that’s how it worked. Banks did the receivable financing, we would do the debt, right? Or they would provide all the bank services. And we would do the receivable and, and maybe it’s some term senior term debt. And so it’s kind of going back to how it used to be. And the deal flow has the pipeline is pretty robust right now. And so what’s what’s interesting is, you see two sides of it, though, we see deals that maybe are looking for bailout type capital, which is not what we do. But then you’re seeing other companies where the credit, you know, the credit quality has actually increased in the pipeline, because they could have gotten cheap receive, they could have gotten cheap capital before. And then you also have companies that that probably still could get bank debt, but they don’t, you know, I just don’t think companies understood that, you know, they’re working with a, they’re working with a bank whose leveraged, you know, eight to 10 to one, right. And that cost of capital might be low. But it comes with lots of restrictions. And you don’t know if that money is going to be there at the end of the day. And so working with a permanent capital source, like us and other alternative lenders, where there can’t be a run on the bank really provides a lot of security for the company, and they’re willing to pay 300 400 basis points more for that capital and can afford it. And they’re willing to do that, than work with a bank. And so you’re seeing more more of that. It’s

Eric Chemi 18:46
interesting, I wrote down as you said, he said, The banking model is broken. Do you really believe that the end? Do you feel like it’s, it’s going to Unbreak at some point and come back? I think this is a permanent shift.

Kyle Brown 18:58
I mean, you could have a company would put $20 million in the bank, and then the bank would lend them $20 million. I mean, at that at, you know, at Sofer, and that that really didn’t make a lot of sense before. I think it makes a lot less sense now, because companies are just not going to do that, you know, they’re not going to have all their money sitting in in one account at a bank. And so, I think it is different, I think it has changed, companies are much more folk banks are and they have they also know they have regulations coming things are going to change, right. And as regulations come in, they’re gonna be more restricted in what they can lend out to and and so that just provides more more opportunities for alternative lenders.

Eric Chemi 19:39
How do you when you compete, I think people watching let’s say, they know hey, if you’re trying to get a mortgage, and this is hot times, right, when everyone’s trying to give you one, they’ll compete, give you a better rate. You go from one bank to the next or the lender, they’ll give you a better rate. How do you stay disciplined when you’ve got other alternative lenders out there like yourself? Who might say, Okay, you’re offering I’m making a bit of a 10% loan and someone else can offer nine and three quarters, someone else can offer nine and a half. And there’s always that that bidding game to get a little bit lower a little bit lower. Where do you draw the line? Because we see a lot of these, the herd mentality, right? Whether whether it’s on the equity side or the debt side, people are chasing those obvious winters? how aggressive do you get in terms of just a company philosophy at Trinity, where you just decide we want to be the most aggressive we always want to win these deals, or we’re going to stick to our our numerical fundamentals. And we’re okay, losing deals. So we

Kyle Brown 20:33
are Yeah, that’s a good question that we are, we are first and foremost a relationship lender. And so we win deals. Now because we’re the lowest price generally, we might win because it’s was the lowest price. But that is not the model, the model is build strong relationships with the sponsors. So the private equity and venture capital partners get referred directly owned by board members and run a yes, it’s going to be competitive process, we you want it to be competitive. You don’t want to be the only one lender at the table. But we know typically, because we’re working directly with the CEOs and CFOs referred in by one of their board members, generally, you have a shot at winning the business. And so the combination of having a good relationship, having a great track record, our team is a little bit different. We built our team with technology experts, and then we filled it in with finance people. And so we have the ability to understand technology to real granular level. If it’s a high tech deal, we’ll we’ll we’ll stick one of our engineering partners on it. So that they understand and we understand whether or not we’re taking technology risk, I think there’s a certain level of respect a lender receives and we receive by understanding these businesses at their core and understanding the technology. And so I think we win in that regard, that’s a differentiator for us. And then the the different product sets, we have the ability to finance equipment, we can do term loans, we can go across different sectors, and so our expertise in many different industries, and then having multiple products for companies ends up being a really interesting differentiator for us. And so it should never be a race to the bottom, that’s not our model, we lose, we lose deals, because we won’t do that. And so we’ve stayed really consistent over the years, I think our gross yields, we should have this in front of me, but it’s still you know, it’s mid, its mid mid teens, 15 16%, kind of gross yields. And so it’s a really healthy, you know, return that we’re bringing in. And then for investors, you know, that are always mid to high teens. And so we’re generating the returns, we need to I think that are really interesting for investors.

Eric Chemi 22:39
Is there been a surprise over the past year, right, since those bank failures since people have been coming your direction, in terms of when I say surprise, a marketplace or an industry or a product? That’s really taken off for you guys that you didn’t even expect would have been the case? 12 months ago?

Kyle Brown 22:56
Yeah. So I, I think you’re gonna see more and more of this, but and it gets back to our previous conversation around private equity in the amount of dry powder that’s out there right now. There’s going to continue to be this year, next year consolidation of companies, right. As that money gets deployed, it’s going to be private equity groups, picking them up for a pretty significant discount. And so we’re seeing more and more opportunities for providing that, that slug of debt alongside of that equity coming in for acquisitions, and for buyouts. We saw that start to tick up. I imagine that’s only going to continue over the next 12 plus months.

Eric Chemi 23:35
And what does that what does that mean to you in terms of when you see consolidation, you see that coming? Usually it means corporate layoffs, right? Oh, we don’t need to accountant to accounting departments and to marketing departments, right, we’re going to start to cut costs. Is that a weakness? In the startup ecosystem? Is that a weakness in these growth companies? Is it? Is it a sign of weakness, generally in the economy, that you’re going to see consolidation? Or what’s your perspective on on why that trends happening? And why you think it’ll continue? Like, is it strength or weakness? Well, so

Kyle Brown 24:06
if you’re talking about cash burning companies, or venture backed companies, you know, they made their adjustments, most of them made their adjustments 18 months ago, you know, what’s happening right now, with middle market, and with PE backed companies, this or this happened almost, you know, 18 months ago for venture backed companies, right, where the investors came to and said, You need to extend your runway, and you need to get lean, and you need to do it now. And they did you know, we saw that within our venture backed portfolio. Companies significantly reduced burn or just when EBIT, not positive and said we’re gonna grow later and and we’re going to control you know, these levers, these these these cash burn levers and so, you know, on the on the PE side and on the EBIT, da positive side, you know, there I think you’ve, you’ve seen, companies start to lean up, and you’re gonna see more of it, and certainly as a PE group comes in and looks for efficiencies, that’s one of the first places they’re going to look into So you should see probably some more of that in the coming year. And when you see your experience

Eric Chemi 25:05
like the not being the CEO until this month, and now you are the CEO, what are the things that you think about of? Okay? If I were in charge, I would have done X. But now you are in charge. So you can do whatever you well, what are some changes that you want to see? What are some things that you want to do differently, even though we know it’s a father son relationship, but we know a lot of sons, they want to do a lot of things differently from their fathers. Right? So there’s the like, what’s, what are you excited about that? Maybe you feel like you haven’t been able to do before, but you’re gonna get to do it now?

Kyle Brown 25:33
Well, we’ve so we’ve we’ve done a really good job of succession planning in this. This is a release and a release that goes out, right, that says there’s a title change, but in practice, it’s been it’s been a few years, right, yeah. And so. And we’ve done the same thing with CFO as well. And we’ll continue to do that, we think it’s really important to plan and plan long term for succession planning. So you know, what I’m really excited about for Trinity, you know, and one of the things that makes us different than our other peers out there. And certainly in the Business Development Company Spaces, we’re an internally managed BDC. So there is no management fee, there is no incentive fee. We’re just a one balance sheet company, I have the same shares as our receptionist, as our institutional investors and our retail investors. And so there’s real alignment with our shareholders. And I’m really focused on ROA, return on equity, and building a platform that can really scale that over time. And that’s how we’re gonna set ourselves apart from the other BDCs out there and the other dividend focus companies, we got SEC approval recently to manage an RA. So now our public company, owns and Ria and can raise private money as well, which we’re out there doing, we’ve we’ve message that and we’re kind of honing in on that. So we’ll know how the public company that is continuing to grow, continuing to improve its metrics as it gets to scale, creating new efficiencies to drive up returns on the public side. And now we’re gonna see, Ria start to generate management fees, incentive fees from the soft balance sheet capital we’re raising, which will drive up our earnings per share and drive up the return for our shareholders. And so this is a platform that can really grow and really scale and for our shareholders, that’s something to be really excited about, because we’ve been very consistent 12 Straight dividend increases, haven’t shied away from saying that is our goal, to continue that. And I think we’ve now built a platform that if we can continue to see opportunities to invest and we’re successful raising money off balance sheet continue to be that we can just we can keep growing this thing and so that’s a really exciting I think that’s a really exciting story to tell and I think investors are finally starting to get it in our in our analysts are as well.

Eric Chemi 27:48
Why did you guys set it up that way that this, you know, you have got the same shares as the receptionist’s a lot of other companies are not doing it that way. What was the reasoning behind it? Because you don’t think it’s different? Right?

Kyle Brown 28:00
It is different. Um, we, we struggled with this, we went back and forth on this. This was in 2019, when we were a fund manager managing multiple funds. We sat around as an executive team and said, what, you know, what do we want to do, and we, you know, we want to be the premier growth stage lender in the world. And so to do that, we need access to capital, we need to we need to raise over time, a lot of capital. And we looked at the market, we said, who trades at a premium. And the companies that traded premium, historically are those that are internally managed that have the structure we have, it might have been a little more profitable for myself and our management team had we set up a management company and raise capital. But we that have been in the short term we’re trying to I mean, we’re we have a 10 year goal, I have a longer goal in terms of timeline. And so we’re looking way out in future, we want to build something that’s lasting in long and lives a long time. And we think this is the structure of do that. We and it’s proven out over the last four years is we’ve traded premium to NAV, we have access to the capital markets, we name it, we’ve been able to do exactly what we told investors we’re going to do, and we’ve been rewarded with additional capital. And so that’s why we did it. I think in the long term, it’s going to serve myself in our management team and our executives and our employees really well as we as our shareholders benefit. And so we set it up that way. If so, incentives will be aligned. And I think every I think it works for everybody. When

Eric Chemi 29:24
we think about you know, here at the beginning of 24 all this debate on interest rates, right, what is the Fed going to do Jerome Powell? are they cutting How much are they going to cut? Are we at the top of the market on the on that curve there? Twos 10s, inversions, all of those things? What’s your perspective on it? How much does it even impact your business? I mean, you doing a lot of fixed rate, a lot of floating rate, what’s what’s your view, just generally on that whole macro, fed talk that we always see the front page of the newspaper, right, but but I’m not sure how much of it truly impacts your business and then the businesses that you serve.

Kyle Brown 29:58
So we’ll start with how it is Paksas, we saw it, we saw benefits, our rates are floating to our borrowers. And then our corporate debt is, is half of its fixed, we’re really more than half it’s fixed. And so,

Eric Chemi 30:11
so you’re borrowing it fixed, but you’re lending it floating.

Kyle Brown 30:13
So we saw, and we, you know, we fixed a lot of capital in when rates were very low. And so for us has been a big boom, right of benefit, primarily. And so the one thing we did, which I think is going to separate us from appears here, as rates go down, is we actually set pretty, pretty high floors on all of our deals. And so I think our average floor is, it’s, oh, it’s double digits, and so well over double digits. And so there’s a scenario here where rates either stay flat or go down, and we’ll see our cost of capital go down, but our, our loans won’t, and so there’ll be another little benefit there, if rates trickled down a bit for us. There. The the other thought, though, is it doesn’t significantly impact our companies. I mean, if rates continue to go up, it would, it absolutely would, but we sit at a pretty low loan to value generally, I think we average 15 to 20%. across the portfolio loan to enterprise value, or last 409 valuation. So you know, the incremental cost that we saw over the last couple of years, it was a pain point for companies, but it’s not like a middle market company, where it’s significantly leveraged in this is going to push them to the brink of failure that doesn’t exist. And so rate decreases will be good for them, but it won’t really significantly impact and as well might for the for the cash burning company for the venture backed companies that might provide more runway. And then for the later stage companies, it’ll just provide more cash on the balance sheet and beef up their balance sheet a little bit.

Eric Chemi 31:40
It feels like so much of the news flow is all about these high fliers, or when you open up that front page of the Wall Street Journal, it’s all about the cash burning startups, right? They don’t give enough attention to what’s happening on the lending side, or what’s happening with the middle market companies, the ones that they’re not as rate sensitive, right? We keep hearing the stories of oh, if they move rates by one or 2%, all these companies are gonna go out of business. But but you’re playing in a space where that’s not necessarily true. So what I’m wondering is, what is it that what you read or you see on the internet or social media, like things that you see in the media that that you find are are myths? Or they’re, they’re not true? In your experience? Do you find that you’re running into certain themes or stories that you just feel like, you’re having to explain a different story to others when you’re having a conversation? Well,

Kyle Brown 32:24
yeah, so you know, I think the venture capital market is, is one myth that you know, that it has been steadily increasing gradually, since 2000. Right. And I think just, you know, it’s a mature and stable market, and there is a significant amount of capital, but our country really depends on it. And I think technology is a good place to invest. And I think it’s a good place to invest in the future. And so regardless of you know, what market cycle we’re in, there will continue to be investments in technology companies, just generally. And so, in even, you know, even coming out of 2000, there was a significant amount of investment after that crash, right. And so those are some of the most successful funds, right. And so, you know, we saw, we’ve seen a pretty significant decrease in valuation across the board a crash, you’re gonna see some of the most successful funds and investments come out of this time, and where companies are, where investors are getting in at the right valuation. So I think a lot of people gonna be judged, certainly, by the investments they make over the next 1224 months, and you’re gonna see a pretty, you know, you’re gonna see some really interesting outcomes in the future. And so that’s, you know, I’d say, that’s one, that’s one kind of myth. And then, most of the companies that we focus on these growth stage companies, they have a lot more levers in place to control spend. And so and many have turned towards profitability. And they have the ability to do that, that’s one of the things we underwrite to is, do, they have the ability to turn the corner and use these different levers to get to profitability and pay us off if they need to. And that’s something we focus we focus in on

Eric Chemi 34:01
what’s an example of a lever that a company, some companies might have, but others might not. Let

Kyle Brown 34:06
me the easiest thing is just, if you’re spending to grow and the markets just not absorbing it, you can just turn that off, right? And so you can you can slow your spend, you can slow marketing and sales hiring. Most companies, when we provide capital, it’s going directly into hiring and marketing to sell a product that has found its product market fit. And it’s really scaling now. And so we’re just gasoline for the fire. And so you can always dial that back pretty quick.

Eric Chemi 34:33
And then, you know, before we go, just funny to think about, you’re talking about manufacturing investments and staying away from Ai, which is so so anti the hype right, everyone’s like, Oh, manufacturing, we know it’s coming back here in the States for a lot of reasons. But AI, this AI that software, but it’s interesting to talk to somebody who say, I’m trying to stay away from that because it’s a little too volatile. It’s a little too crazy. And I see a growth opportunity on the manufacturing side, which has traditionally been less of a front page story.

Kyle Brown 35:05
Yeah, I mean, if you look at our portfolio, you dig in the site a little bit, it looks very sexy, we are financing some really interesting companies. But our secret sauce is that we have figured out how to take the venture risk out of out of venture debt and and remove that risk element with a 22 basis point loss rate going back to 2008. We’ve proven that out. And so we get into companies that have a moat around their technology, motor radio, a couple year headstart on their competition, significant institutional dollars that they’ve raised, and a real product market fit and where they’re scaling and growing. And we’re just coming in to help them get to that IPO or that m&a or whatever it is. And so we have figured out something there, and I think we do it really well. But we’re looking for singles and doubles. And whether they whether this company becomes Google, or doesn’t quite make it and we have to help them get across the finish line. It doesn’t matter. We’re just looking for that team’s return on them in in the meantime,

Eric Chemi 36:04
did you say only a 22 basis point loss? Was that right?

Kyle Brown 36:08
22 annual basis point loss is our historic average.

Eric Chemi 36:11
So you’re getting 99.8% back then?

Kyle Brown 36:16
We are Yeah, we sure are. A lot of that comes into, you know, we do see some pretty significant upside in our warrants. I mean, there are years where those warrants I mean, one of our biggest Warren hits was last year, lucid motors, we did a loan back when they were a battery technology. They went public as you know, through this back, and that was a 50 plus million dollar unrealized gain on a on a relatively small loan amount. Our warrants have historically covered our losses and then provided our investors with some interesting upside in different cycles. And so the if you were to factor in all of our realized gains, we would have a negative loss rate. And so that’s how we that’s how we think about our world is our loans end up being what they are, they are rate and fees, current pay monthly payments, and we distribute out quarterly to our investors. And then our big hits, cover some of our losses in the provide a little extra upside. Very

Eric Chemi 37:11
cool image before we go just give us a book that you would recommend people read just a different perspective on understanding your world a little bit better, or someone that you aspire to be more like, what’s what’s a book that you would recommend for us?

Kyle Brown 37:24
Well, I, so I just finished JP Morgan’s house and Morgan and, you know, it’s it’s a history of, of real our country and finance in our country. And the thing that really strikes me is that history just repeats itself. I mean, we are the things we’re talking about now, or things that were being talked about years ago, decades ago, 100 years ago. And so I think there’s lots to glean from from studying history like that I do. I certainly do a lot of it. But that’s what I just finished. So it’s front of mind. And, and I do spend a lot of time fundraising. I’m in New York, I’m in Rockefeller Center pretty often. So I did I did enjoy it. I think it’s I think it’s worth understanding where you came from. kind

Eric Chemi 38:06
of appreciate the time very interesting conversation and into what’s happening on your side of things the industries are looking at the ones are staying away from it, and how the lending model has changed, especially over the last 12 months. So Kelly, thank you so much for the time today.

Kyle Brown 38:18
Thanks, Eric.

Eric Chemi 38:19
Thanks again to my guest, Kyle Brown, CEO of Trinity capital. Very interesting conversation, real eye opening on what’s happening on the debt side of things. It’s not it’s not always about private equity and venture capital, right? There’s a whole other world out there. And of course, look, if you’re thinking about trying to figure this out for yourself, your family’s investments, your own personal future, and all that you go to Wealthion.com got a short form there. If you want to connect to an investment professional that that we endorse that we’ve vetted, it’s a short form, you can just fill that out, put your email address, and we can connect you there’s no fee, there’s no cost. There’s no obligation, there’s no commitment, you can just have a conversation, see if that person is right for you. And of course, check out the Anthony Scaramucci show that’s every Friday. It’s live 11am. Eastern, you can call in, you can submit your questions also at Wealthion.com. And he’ll be talking to whoever wants to call in. So that’s again live Fridays at 11am. Eastern. Thanks again for watching and listening. Of course, if you liked the episode, you actually like it on YouTube and on your podcast app and share it and forward it and subscribe and do all of those things. Because that helps the computer algorithms get it out to more people so even more can enjoy and listen and learn. Thank you so much for watching and listening. I’m Eric Chemi. We’ll see you next time.