Why private markets beat “going the way of the dodo”

Invico president explains strategy behind award-winning Diversified Income Fund

Why private markets beat “going the way of the dodo”

The world of private market high-yield lending is not for the faint-hearted, but the president of Invico Capital Corporation admits it’s a world away from being tied to the fortunes of ETFs and stocks.

Calgary-based Jason Brooks’s alternative investment firm won the Private Capital Markets Association of Canada’s 2016 Fund of the Year award for its Diversified Income Fund, which targets a return of between 8-10%, plus profit sharing.

Brooks said: “It’s an area where I feel my contribution leads to performance. Whereas if I was a portfolio manager in the public market, I would feel like I’m going the way of the dodo to the ETF or robo advisor. At least in my lifetime there isn’t going to be a robo advisor in private cap, so I feel personally it’s always better to be lucky than good in that I chose to practice in private instead of public markets 13 years ago."

Invico’s fund focuses on private debt loans between $1-10 million, which are too small for institutional capital markets or have a higher perceived risk than traditional banks are prepared to facilitate.

As well as lending strategies, Invico has strong interest in the energy sector, including oil wells, of which its largest is based in Colorado.

Brooks says the niche-focused fund, which was started five years ago, pays investors monthly and he is bullish about the company’s ability to get some profit-sharing out to investors in 2018. He says a key part of Invico’s strategy is in allocation and successfully assessing a company’s management ability.

He said: “Being in the high-yield space, you have to make some form of compromise on the cash-flow coverage or the asset coverage, otherwise they are going to borrow from the bank at 5% right?

“So the quality of the management team is that intangible that you’re looking for and a lot of the reasons we get the transactions we do is because we move very quickly compared to a traditional bank, so we have a team of people in-house that does the due diligence.”

Brooks says Invico does not touch start-ups and wants to see a visible track record from a company’s management.

He said: “Generally, we are in traditional industry businesses where we have a good understanding and can assess the management team. We believe that is a key strategy where we can move quite quickly and [help] companies that would otherwise be guilty of poor planning, and maybe could have got a bank facility down, but just don’t have the luxury of a 90 or a 120-plus day process that a bank might go through. We can compress that and get them the capital they need.”

This approach means short-term portfolios, higher yields and liquidity, while Invico aims to offset the risks associated with private lending by being diversified and highly active.

Its focus on oil is reaping rewards and Brooks explained how that side of the portfolio has developed.

He said: “We’ve put together a portfolio of direct participation in producing oil wells and our largest property actually is in Colorado. We’re focused on that because for us it’s a cash-flow strategy, so we’re focused in areas that have very low operating costs.

“So although there is some volatility in the commodity cycle, we are getting a very good cash-flow stream out of that. Typically, when people look to a lot of these commodity-based businesses for yield they are in equities and they are behind the banks, so when the commodity price corrects as it did over the past few years, they are in a very vulnerable position. We don’t use any debt in our portfolio, so it’s completely unlaboured. So we’re flowing out basically the free cash flow of the production of oil and gas.”

Brooks added that operating costs in the main areas they are producing from are only about US$5-6 per barrel.

“You can do the math on the oil price and you can see that is a fairly thick cash flow that’s available to us, even if oil is as low as $40 or currently closer to $65. We are flowing that out without any debt service and that’s allowed us to maintain our distributions over the commodity cycle because we are not paying out 100% of our peak cycle cash flow and a lot of people in energy equities get used to dividends that were set in different commodity environments. We just don’t set our distributions, we try to set them on a life of cycle basis so we don’t have the same type of volatility on the distribution that a typical equity might.”

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