IRVINE — Executives at Ghost Tree Partners had a special reason to cheer for the University of Michigan during the recent college football playoffs.
During the pandemic, the Irvine-based private lender made a loan to the M-Den, the official merchandise retailer of Michigan athletics.
“You can imagine that COVID was a difficult time for a retailer when nobody was coming to the games and nobody was buying merchandise,” Ghost Tree Managing Partner Jeff Willardson said.
“This company that had been around for 30 years had a hard time getting extension financing or an inventory line to buy gear from their vendors. We provided them with financing to buy inventory. It was a great loan at a unique moment in time when they were willing to pay a little bit more for a loan in anticipation of something that was coming back in full force. A lot of pent-up demand existed.
“When people hear that story, they understand why a borrower would need money
and a lender like us would be around.
“Go blue!”
Willardson, along with managing partners Scott Warner and Mark Fox, co-founded their firm in 2021, naming it after a famous California surf break (see story, this page). Each has more than 20 years of experience on Wall Street working for firms where they made billions of dollars of loans for sophisticated institutional investors.
“Given the new regulatory framework and cost to capital, it’s much less attractive for banks to compete in our space than it was 30 years ago,” Warner said.
“There’s a whole new generation of lenders who have stepped up.”
Paamco Ties
Willardson and Warner first met each other while at Goldman Sachs where they worked in its investment management division.
Around the mid-2000s, they joined Irvine-based hedge fund advisor Paamco, where Warner became head of research and Willardson became head of investments for Paamco Launchpad, the firm’s early-stage venture seeding platform. Fox, who was a senior vice president in the distressed and restructuring group at Bain Capital Credit, joined Paamco in 2017, becoming head of its Apex Credit unit.
In 2017, Paamco merged with KKR’s Prisma Capital Partners, creating one of the largest alternative asset managers in the country with about $30 billion in assets.
The threesome began a unit investing in private credit lending in 2018; they made 45 deals between 2018 and 2021.
“We started making loans and had a very productive track record,” Willardson said. “We made a lot of money for our clients.”
However, their unit was an odd duck at KKR, which is known for private equity investments.
“Private credit was an asset class that wasn’t familiar to most of our clients,” Willardson said. “It wasn’t getting the oxygen that it needed.”
The threesome decided it was time to form their own venture, saying banks are becoming more reluctant to lend because of onerous capital requirements.
“It was a great moment for us to put the building blocks together,” Warner said.
“Opportunity doesn’t wait.”
Singles and Doubles
The private credit market nowadays is about $1.5 trillion, up from $300 billion or so 15 years ago, Warner said.
Ghost Trees’ investors are registered investment advisers, high-net-worth individuals, foundations, endowments and family offices.
One anchor investor is wealth manager Corient, which has zoomed up to $150 billion in assets.
“Private debt is a great place to be right now with the disintermediation of the banks,” Corient Partner Chris Copps told the Business Journal.
Ghost Tree focuses on smaller borrowers, issuing floating-rate loans at 8% to 12% interest rates in the $10 million to $30 million range. It seeks assets as collateral and may get an equity stake as well.
It targets a variety of industries with traditional cash flow and areas like commercial real estate, medical devices and construction.
“We don’t bet on companies that are high growth or hockey stick into some alternate form of reality,” Willardson said. “We like to say we’re in the stay rich game, not in the get rich game.
“We’re not swinging for the fences. We’re hitting singles or doubles.”
They say banks may be reluctant to lend because they don’t want loans sitting in their balance sheets until maturity or a borrower may have had an unusual loss the year before.
“Our focus is on borrowers who don’t fit nicely into a traditional banking framework,” Warner said.
The company even lends to retailers despite the surge of online shopping.
“There are a million retailers out there that have really interesting niche markets that we’re happy to lend to,” Warner said.
Since its founding, Ghost Tree has made 45 different transactions and said it’s approaching $600 million in assets. It currently has six employees and is looking to hire more in the coming year.
“Every day we think about how we can make good loans,” Willardson said.
