Arif Bhalwani is the co-founder and CEO of Third Eye Capital (TEC) in Toronto, Canada. TEC is one of Canada’s largest and most experienced private credit firms, specializing in providing asset-based capital solutions to companies that are underserved or overlooked by traditional sources of financing, primarily banks. The firm has made more than $4.5 Billion in investments across a range of industries, including technology, sustainability, traditional and alternative energy, mining, construction services, transportation, and healthcare.
As the CEO of one of Canada’s largest private credit firms, can you describe the basics of private credit and its increasing importance to budding entrepreneurs?
ARIF BHALWANI: Private credit involves directly negotiating with companies to provide loans tailored to their specific needs, especially in situations where traditional lenders like banks cannot or will not participate. We engage intimately with businesses and their assets, understanding their operations, aspirations, and the hurdles they face. This depth of engagement allows us to offer more than just funds; we create partnerships where strategic advice and bespoke financial structures play pivotal roles. For entrepreneurs, this means not just securing capital, but also gaining a collaborator committed to their growth journey.
The increasing importance of private credit in today’s market cannot be overstated. In an economic landscape marked by rapid change and uncertainty, traditional lending criteria can often be too rigid or narrow, leaving many promising companies without the necessary support. Private credit steps into this gap, offering a more flexible, responsive approach. We’re not only filling a void left by traditional banks, but as a sector, we’re actively shaping a more dynamic, inclusive financial ecosystem, driving growth and innovation across various industries.
What challenges did you face as an early entrepreneur yourself, and how have they informed your approach as an investor?
ARIF BHALWANI: I was forced to be a self-starter from a very young age. The challenges I faced building companies were multifaceted, ranging from securing adequate funding to navigating the labyrinth of market dynamics and building a team that shares a common vision and drive. The most poignant of these challenges was the quest for capital partners, which was not just about securing capital but about finding collaborators who were willing to believe in the vision and commit to the long-term journey. These early trials by fire instilled in me a deep empathy for the entrepreneurial struggle. I understand that behind every business proposal is a dream, a life’s work, and that this work is deserving of respect and meticulous evaluation. This empathy is coupled with a firsthand appreciation of the transformative power of strategic, patient capital – not just as a financial resource but as a catalyst for innovation, growth, and long-term value creation.
As an investor, these experiences have honed my ability to see beyond spreadsheets and valuations, to the core of what makes businesses thrive: the people, the vision, and the relentless pursuit of excellence. They’ve shaped a more nuanced, patient approach to investing, valuing long-term, unrecognized potential and resilience over short-term gains.
What advice would you give to businesses that are struggling to survive amidst the tightening of credit markets in Canada?
ARIF BHALWANI: Companies need to maximize the value of their existing assets and evaluate how each one can be better utilized or monetized. This could involve leasing out unused space, selling off non-core assets, or finding innovative ways to monetize intellectual property or data. Explore asset-based lending options where loans are provided based on the value of specific assets. This can be a viable alternative when traditional credit is less accessible, as it focuses on the strength of your assets rather than your earnings. The goal is to transform dormant or underutilized assets into active capital that supports your business.
It is also the time to take a hard look at your business model. Are there inefficiencies that you can iron out? Are there new revenue streams you can tap into? Sometimes, adversity uncovers latent opportunities, so it’s crucial to be nimble and adapt. Communication is critical, especially with lenders, investors, and key suppliers. Transparently sharing your challenges and how you plan to navigate them can build trust and potentially lead to more supportive terms or new avenues of support.
Some private credit firms have described the asset class as entering a ‘golden age’. Do you agree with that and how is that possible with declining corporate credit fundamentals across so many industries?
ARIF BHALWANI: The notion that we’re in a “Golden Age” for private credit is indicative of the unique position and opportunities that firms like ours are enjoying in the current financial landscape. There are several reasons for this. Firstly, in the face of tightening bank regulations and the retrenchment of traditional lenders from certain sectors, private credit has stepped in to fill the void. This shift isn’t merely about providing capital but about offering flexible, bespoke financing solutions that are often beyond the scope of traditional banking.
Secondly, the declining credit fundamentals in many industries have led to an increase in companies seeking alternative financing solutions. While these conditions might seem unfavorable, they create a fertile ground for private credit firms that excel in rigorous due diligence and crafting structured deals that mitigate risks effectively. The expertise of private credit firms in handling complex situations, restructuring debt, or providing bespoke solutions gives them an edge in navigating these challenging waters.
Moreover, the private credit sector’s growth is fueled by investors recognizing the return and diversification benefits of allocating to the asset class. Private credit has proven resilient through the recent cycle of rising rates, and the ability to structure deals with covenants, collateral, and tailored repayment terms provides a level of protection and potential for value creation, making it a compelling option for investors.
However, it’s crucial to approach this ‘golden age’ with a balanced perspective. The increasing inflow of capital into private credit necessitates rigorous underwriting standards and disciplined risk management. As more players enter the field, the competition for high-quality deals intensifies, potentially leading to pressure on yields and terms.
You’ve called this era of private credit the “Reformation Age.” What do you mean by that?
ARIF BHALWANI:
I call this era of private credit the Reformation Age, because like the Lutheran reformers in the 16th century who reshaped religious and cultural norms, I think we’re going to see a profound shift in the actions and beliefs of private credit managers. Making loans is easy – it’s getting repaid that’s the hard part. With borrowing rates up nearly three-fold since the lows of the pandemic, an increase in the number of companies struggling to meet their debt obligations is inevitable. As more companies face financial distress, the role of private credit funds is poised to evolve beyond lending. They may find themselves in situations where they have to step in and take control of businesses that are unable to meet their debt obligations.
Most private credit firms have yet to experience a significant stress event to test their acumen because economic periods have been so benign. But bankruptcies and restructurings are spiking, and private credit firms have to possess not only financial acumen but also skills in restructuring, workout, and business turnaround. This will test the resilience and adaptability of private credit firms. The good news is that the best loans are made in the worst times. So we see exciting opportunities for growth and innovation of the asset class, resulting in a deeper integration of private credit into the broader financial ecosystem.
Can you share some success stories of working with distressed companies and restructuring them to optimize value?
ARIF BHALWANI: Sure. We recently worked with a retailer who was struggling due to operational inefficiencies, an overly broad and outdated product line, and a burdensome debt structure. The company was facing significant cash flow issues and was on the brink of bankruptcy. After stepping in, our initial focus was on stabilizing the company’s finances through a comprehensive debt restructuring process. Simultaneously, we conducted a thorough operational review to identify inefficiencies and areas for cost reduction. Strategic capital was invested in rationalizing and updating the product line and tapping into new sales channels that aligned with emerging industry trends.
The company not only averted bankruptcy but emerged as a leaner, more competitive player in its industry. The strategic pivot to new market segments opened up additional revenue streams, and the operational overhaul significantly improved profit margins.
Can you address the impression that private credit firms lend only to “bad” or “risky” businesses?
ARIF BHALWANI: Private credit firms lend to a wide variety of businesses, ranging from stable companies looking for flexible financing solutions to those in transitional phases seeking strategic growth capital. The common denominator is not the borrower’s risk profile but the need for customized, non-traditional financing structures that traditional banks may not provide.
Lending decisions in private credit are underpinned by thorough due diligence processes. Firms invest significant resources in understanding the borrower’s business model, market position, and growth potential. This meticulous approach ensures that investments are made in companies with sound fundamentals and a clear path to value creation, even if they don’t fit the conventional lending criteria of traditional banks.
Beyond providing capital, private credit firms often engage in strategic partnerships with their portfolio companies. They offer expertise, industry connections, and operational guidance to foster growth and stability. This hands-on approach is indicative of a vested interest in the success of the business, far removed from the notion of lending to “bad” companies.
