Episode 137: Jonathon Ferguson of AshGrove Capital on Bespoke Financing and Underwriting B2B Software

Episode Transcript   

 

00:03:02.060 — 00:03:05.060 · Shiv

All right, Jonathan, welcome to the show. How's it going? Good.

00:03:05.060 — 00:03:06.580 · Jonathon

Thank you. Thank you for having me.

00:03:06.660 — 00:03:11.620 · Shiv

Yeah. Excited to have you on. So why don't we start with your background in Ashgrove and then let's go from there?

00:03:12.060 — 00:03:38.140 · Jonathon

Yep. Sounds good. So, uh, John Ferguson and what are the co-founders and managing partner at Ashgrove and spent almost 25 years in credit. So I started my career in a very traditional leveraged finance role in the early 2000 and then was part of the founding team, which was a Berkeley spinout in 2007 of the area's management business in Europe.

00:03:39.180 — 00:04:35.950 · Jonathon

Uh, after a number of years there, I also went to help Goldman start a private capital business in their specialist group, um, in London. But investing across Europe, uh, in 2014. And after five years there decided to start Ashgrove along with my co-founders Sean Fretwell and Ilkka Rantanen. Well, I guess pivoting to the second part of your question, the origins of Bachelor.

 

And what do we do? Yeah. In the nutshell, we are a specialist, uh, like capital solutions and credit provider, uh, that focuses on B2B software and B2B services businesses, where we typically provide them 10 to €50 million to capital. We back sponsor less businesses. We back sponsor backed businesses, uh, all across the European landscape.

00:04:36.950 — 00:05:00.570 · Shiv

Um, yeah, I guess with that, like, what are you what are you looking for when you're deploying credit in this way? Because I guess it's a little bit different than just investing or buying out companies. So. And what's the difference between, let's say, working directly with founders or with funds where you're supporting portfolio companies versus working directly with with the owner or the founder of the business.

 

Yeah.

00:05:01.410 — 00:05:07.410 · Jonathon

What we're looking for is really high value, good businesses that offer

00:05:08.570 — 00:06:10.190 · Jonathon

a strong, um, value proposition. So product, if you will, to their end customers. That is highly embedded in their customers tech stack that drives good retention metrics, good unit economics and businesses that have in-built momentum in their go to market. So things we will often see is your ability to land and expand, upsell existing customers and have a level of sustainable growth which underpins both, obviously in value.

 

He is a lender, but also just underpins this high value product. And if you think through what that means, typically for us that means really granular great retention metrics on recurring revenue. High gross margins, always indicative of high value added product and pricing power, defensive growth characteristics, and the ability to really segment their their cost bases.

 

So you understand where they're investing for growth and where you can really call this to drive high speed cash flow conversion.

00:06:11.270 — 00:06:30.750 · Jonathon

The the difference really in our perspective, working with founders and, and um, founders or founder led businesses and those that are sponsor Baptist, the biggest difference is really around the speed at which those opportunities move through our pipeline or our funnel, if you will.

00:06:31.950 — 00:07:00.570 · Jonathon

As you can imagine, a lot of the sponsor backed opportunities, we look at relatively high cadence, high velocity being prescreened. There's normally some sort of advisor on the M&A side around the of 20 probably being some sort of due diligence provided by the vendor or commissioned by the buyer side.

 

And so, you know, these, these deals tend to, to come to fruition or not.

00:07:01.770 — 00:07:28.850 · Jonathon

I have 2 or 3 month period. Relatively quickly sponsors transactions can take a while. We've been around some businesses for 3 or 4 years tracking them, speaking to the founder, you know, sharing ideas, as I said, tracking how they're getting on, waiting for and perhaps perhaps to get larger, perhaps waiting for there to be a catalyst for a, um, either a financing from ourselves or a structured capital investment.

 

And so

00:07:29.890 — 00:07:57.230 · Jonathon

those that gestation period takes that much longer. It's very much about building a kind of a longer term partnership with a, with a founder, which happens much, much quicker with, with sponsor. Uh, yeah. Frankly more um, familiar with with the a deal process. In many cases, not all, but in many cases I never look.

 

The final thing I would say is we sit on the board of two thirds of our portfolio companies, typically as a board observer.

00:07:58.710 — 00:08:43.710 · Jonathon

Not every single one of those is sponsor less. But the majority. Yeah, all of them that are sponsors. We sit on the board and some of them that are sponsored back, we sit on the board again. And so the interaction with a lot of the founders is very much around. They want to see and understand what's happening in our portfolio and know names basis.

 

You know, as a B2B software, B2B recurring service services specialist, they'll often quiz us on what are we seeing around how people price product, how do they think around, you know, packaging up value? How do they think about, you know, in the world of AI, which I'm sure we'll talk about later? How do you think about pricing, seat based pricing, modular pricing?

00:08:44.850 — 00:08:57.690 · Jonathon

How do you think about financial KPIs and making sure you're exit ready? Yeah, relatively relatively normal things, which we can obviously provide a lens on given the size of our portfolio and that we're a sector specialist.

00:08:58.450 — 00:09:45.110 · Shiv

Yeah. I guess the interesting thing that jumps out as you're, you're walking us through that is that you're looking for a lot of similar characteristics as a buyout fund would, you know. Healthy growth good. Good gross margins. There's net revenue retention that's over 100%. Or in a vertical where there's stickiness or mission critical and maybe can't be disrupted by AI.

 

But but you guys are actually doing it on the credit side and actually supporting these companies. So help us understand that a little bit more like the type of what does the deal structure look like for the business, and how is it different from, let's say, direct lending or venture debt or, or other types of financing available to these companies or other avenues that they can potentially take.

 

Yeah.

00:09:45.150 — 00:10:58.400 · Jonathon

Yeah. Yeah. Yeah. So you're absolutely right. Yeah. A lot of the work we do is fundamentally very, very similar to that of an equity investor. You would just write a different product. And actually it's very similar on the origination side. The way we originally. Is is incredibly similar. The key difference is there are really around.

 

I'd say the starting point again being thematic. Our starting point is always what is the value of this given business? What is the value? What is what is there for my attachment point? The detachment point that the financier putting in place? We asked the lending side always provide a serious, secure product.

 

So it's a senior secured loan against that business. The use of proceeds in two thirds of the instances is driving some sort of growth, or both, organic or inorganic, in that business. We do also finance changes control. We have a heavy, heavy weighting towards growth. And so ultimately your starting position is what is the value.

 

But also how do I really underwrite that momentum. As I talked about earlier the ability to grow.

00:10:59.560 — 00:11:30.720 · Jonathon

The interesting thing from from our perspective is because we write tickets of 10 to €50 million across Europe. When you think about the direct lending world, typically what you will see is very large lenders doing bigger and bigger deals every year, raising larger and larger sounds, and very, very successful business model.

 

However, they will not spend time typically on a 1520 million deal, which ultimately there wants to go to 35.

00:11:31.920 — 00:11:56.700 · Jonathon

And conversely, the smaller lenders may be the regional direct lenders will not be a B2B software specialist and have that kind of structuring toolkit or the toolkit we do to provide perhaps thereof, or an even financing. And so when you marry up those two matrices, there really isn't an awful lot of capital to support this ecosystem, particularly around growth.

00:11:57.820 — 00:12:44.280 · Jonathon

I think if you were looking at this market 20 years ago, you would also probably set the banks were more active, and I think we're all familiar with that structural trend. The impact of the risk weighted asset treatment for buyouts has really driven them out of this market, with only a handful of very small exceptions.

 

And so actually, that difference between the direct lending community, if you will, and the traditional banking community, size, complexity, structuring and being a specialist. Then the other side of the fence, the venture debt and the venture debt, Guys and girls. That community is really the way in which they underwrite is really focused on, in our view,

00:12:46.160 — 00:12:53.040 · Jonathon

bridging to the next equity round and taking a top down view on this is a good business. Yes, it's growing well.

00:12:54.360 — 00:13:47.699 · Jonathon

There's a really good late stage VC in here or maybe early growth equity house. We by the fact they're going to raise, you know another series another round that's very very different to the way we think about at Ashgrove being a growth financier of software businesses. We will start by effectively looking at KPIs like business retention metrics, unit economics, building our own model, but our own set of forecasts that we believe is a sensible kind of case going forward that will determine one, as I talked about earlier, the value, the detachment, the attachment of our instrument.

 

But it would also tell us pretty quickly whether we think that business is profitable today or not. And there's the key difference. We're not relying on

00:13:49.300 — 00:14:38.959 · Jonathon

another series being raised, equity being raised by a minority on ABC. We're basically saying that our analysis tells us this business, it could be breakeven, could be suppressing its EBITDA because it's growing so quickly. But we have to be able to prove that we believe that business has sustainable franchise value.

 

Because as a lender, what we cannot live with is volatility or severity and value. And therefore we are ultimately underwriting on a conviction basis what we think that business is worth over time, irrespective of whether they can or cannot raise another round. So it's a it's a it's a different approach.

 

It's more bottoms up than top down and far less reliant on whether or not

00:14:40.160 — 00:15:27.760 · Jonathon

another VC rule can be raised, or both can be raised. That's it. Now more than ever, seeing the venture debt and the growth financing that we do. And so when you then take a massive step back and look at Europe, there is a real undersupply of credit capital to the space. A lot of people have a lot of published articles.

 

There's a lot of academic articles on this topic. The ecosystem isn't that well funded. And yet the demand for capital from pretty deep, frankly opportunity set. Um, or potential borrowers. Um, it's very real, right. And it's pretty robust. And so that's the kind of area in which we play. And that's the differences in the, I guess, the participants depending on which size and area you're in.

00:15:28.680 — 00:15:36.300 · Shiv

And so as you're underwriting these deals like you're less concerned about if there's an entry and exit. You're just looking at strong business fundamentals.

00:15:37.460 — 00:16:24.020 · Jonathon

Yeah, because ultimately there are things we can control. Right. And so as a lender, it's a pretty uncomfortable situation. If I'm trying to underwrite what's the market outcome going to be in three, 4 or 5 years time? I want to be in a position where I'm underwriting. Yes. My conviction today. And hey, that's got to be right.

 

Um, within certain parameters. But but ultimately we are we are taking at a view and running analysis to understand what we think that value is over time, rather than saying we think there will be an exit event and and so on. And that that feeds into everything we do, how we think about structuring, how we think about risk, how we think about controls.

00:16:24.860 — 00:16:49.240 · Shiv

How frequently are you coming in, um, with a credit facility, along with a sponsor that is engaged in a buyout or making a major investment, like, does it happen at the same time, or are you finding yourselves getting pulled into deals, even post investment or post acquisition where a year out or a couple of years out, maybe the fund or the firm rather has other objectives, or they need debt on the business and now they're looking for.

00:16:50.440 — 00:18:13.890 · Jonathon

Yeah, I think it's a really good point. It it varies for us. So the easiest way to describe it is sponsor for us covers late stage VC growth equity and only small to mid-cap firms. Do you think across those three buckets. It varies. So on the VC guys, it's pretty rare for us to finance a business or invest at the same time as the VC.

 

It tends to be an asset that's already in their portfolio for a number of years, and the use of proceeds of our facility is normally helping to accelerate some sort of growth. It can be cash, the balance sheet. It could be cash balance sheet plus cleaning up some elements. Um, of of, you know, previous debt on the balance sheet or maybe an overdraft facility or something else that the business has, has, has got along the way.

 

But fundamentally, we are very rarely on a venture deal, um, or venture capital that I should say, coming in at the change of control we're effects is a bit of a mix. You know, slightly later on, slightly more mature businesses. It's a bit of a mix, um, as we see both and particularly in this environment where it is taking longer, it costs more on average assets, I think we all would agree being held longer by equity investors.

00:18:15.170 — 00:18:57.070 · Jonathon

Our capital as a non dilutive solution is particularly interesting because it can help to accelerate whether that's inorganic making bolt on acquisitions that maybe depress valuations which are pretty attractive. Or investing maybe in go to market entry in a new geography and so on. P is probably the one where, typically speaking, we are probably more likely to come with a change of control.

 

But when I think about our overall portfolio, it's probably only 2,530% of the time that we are doing so. And so that just kind of shows the mix across the the those three sponsor buckets.

00:18:57.590 — 00:20:34.990 · Shiv

We'll get back to the show in just a moment. But before we do, one of the most common and important value creation levers that we hear about on the show, from private equity investors and our own PE partners, is go to market. Yet when these same PE partners bring us into their portfolio companies or new target investments that they're exploring, we find that the marketing function is quite immature under utilized and under optimized.

 

And so that's a huge opportunity that we see inside these companies. And if you have a portfolio company that you feel like it scale a lot faster to drive more pipeline and revenue, or you're looking at a new investment where you feel like that could be core to your investment thesis. But we'd love to explore that with you and figure out how we can partner with you to drive more enterprise value creation on the marketing side, similar to the way that we've done with major PE firms like to OP data, HG, SDG, and many more.

 

At this point, we've done hundreds of engagements across hundreds of industries and verticals, and we have a ton of benchmarks and frameworks that we bring to these engagements to help you drive as much enterprise value as quickly as possible. So if that sounds like something that you might be interested in, you can just email me directly at Shiv at Hadassah, or go to our website and schedule a demo, and we'd love to speak with you about it further.

 

And now with that said, let's get back to the show. Yeah. And you mentioned earlier, one of the things that jumped out to me is that you're involved at the board level inside these companies even though you're providing credit. So can you talk us about through that? Like just how involved are you getting with these companies.

 

And obviously you don't have control over the the assets. So how do you get involved and support the businesses?

00:20:35.550 — 00:21:35.489 · Jonathon

Yeah. Again, it varies hugely by asset. Um, you know we we obviously have a lens, have a perspective, given the size of our portfolio across B2B software and services in Europe. Um, we obviously have a view of certain services. Yeah. Some subsegments within software. We look at roughly 400 plus deals a year and do 8 to 10, um, across our teams in London and Copenhagen.

 

So you know, ultimately that gives us that gives us insights. But you're right to you're right to call it out. You know, some management teams, shareholders very much want to hear what we think on specific issues. Maybe not all, but all the specific issues. And you're able to provide more than just capital in that instance, right?

 

You're adding value. We're not trying to be empty, guys. We are adding value beyond just the tool that we provide. There are

00:21:37.090 — 00:22:50.550 · Jonathon

other instances. It's far less involved. Other instances, you know, there's far less, um, engagement at the board level. Um, and so it really does vary quite considerably. You know, we will sometimes be attending those boards on a quarterly basis, subtypes on a monthly basis. Um, one of the very obvious areas that we do get heavily involved, and probably the most frequent area is about financial reporting KPIs.

 

Um, you know, how should we, for example, be thinking about allocating capital and measuring measuring attribution across go to market. But I think you're very, very familiar with, you know, try to understand the efficiency of marketing spend. Right. And where to allocate euros or dollars to, to really maximize that return.

 

You know, that that can be a pretty interesting debate depending on which subsegment you're in with a cell site like Who, your ICP, etc.. And so, you know, these are all these are all areas that we we can get involved with. But you're right, it really varies on the shareholders, the management team and what segment they're in.

00:22:51.430 — 00:22:52.510 · Speaker 3

Mhm. Mhm.

00:22:52.550 — 00:23:12.830 · Shiv

Yeah I think I think that's that's an interesting one. Right. Because you're, you're not able to influence it directly. But you have to get involved to some degree. How much expertise or resources or um like your own perspective are you bringing to the table. Right. Do you have like a value creation approach that you're bringing into these companies?

00:23:14.430 — 00:23:17.010 · Speaker 4

Not not so much that it's a

00:23:18.370 — 00:23:19.970 · Speaker 4

standardized playbook.

00:23:20.010 — 00:23:21.930 · Jonathon

So so we don't have, you know,

00:23:23.370 — 00:24:01.730 · Jonathon

probably as of a third of certain houses will have a certain approach or a certain, um, you know, key 67 levers that they go to immediately. Um, that is their kind of their recognizable playbook. I think what we've seen over years is a lot of pattern recognition. And when you play in the kind of the area of the market that we do, what you will often find is, you know, there will be a lot of professionalization and thought you can put into, for example, go to market.

 

Um, you know, it is it is an area that tends to,

00:24:02.930 — 00:26:07.320 · Jonathon

I think, get the less attention earlier in the life of, of businesses, particularly within B2B software. And I think when you move from that really Successful. Call it 15, 16, 17 millionaire or business? You're trying to turn that into a 50 millionaire. Our business, that's quite a different journey.

 

Right. And so actually trying to be thoughtful around that, helpful around that, that would be a lever that I would identify as we see this a lot. Right. This is kind of muscle memory for us. We're used to this. This would be something that we would recommend to look at is if we have that engagement board. Similarly you know, just sophistication around reporting board packs.

 

How do they think about, um, you know, some of the strategic things they can change and or analyze to give themselves a good view at the boardroom table of what's going on within the business? Um, another really, really obvious one would be, um, you will hear, you know, actually software investors also talking about, you know, doing pretty Extensive diligence post deal, whether it's already in the asset around customers, how customer views changing.

 

Why do they want to know that? While they frankly inform their own R&D roadmap? Understand actually what are we doing? Well, how can I change customer success? Maybe account management? Maybe I can launch a kind of a light product for some of my smaller customers. Self-service, you know, reducing cost to serve.

 

You know, again, levers that I think when you traffic in this space are fairly intuitive. But we don't have a kind of should we go to this is our playbook as Ashgrove, but we will cut our cloth to suit the situation and the particular asset at that time, particularly, as I say, where you're investing in businesses that are going from roughly 20, 25 million of IRR to to 50.

00:26:07.800 — 00:26:08.440 · Speaker 3

Mhm.

00:26:09.320 — 00:26:30.820 · Shiv

Are you getting involved, because I'm assuming when you're lending this money, you have a perspective on what that capital should be used for. How are you kind of staying on top of that and making sure that the capital is being used for ways to kind of maybe grow the business or make it more efficient or drive more EBITDA margins.

 

Like, just just help us understand that.

00:26:31.580 — 00:26:32.460 · Speaker 4

Yeah.

00:26:32.820 — 00:27:14.640 · Jonathon

Again, without avoiding the question, it does. It does vary. I mean, we can put some limits in. We've done that before. You can put sub limits of of drawings in and and delayed draw um facilities. So maybe only a third of the capital can be drawn until such time as a certain performance milestone is reached, certain period of time.

 

Could be we've done that in the past. We've also turned around and funded different separate accounts and said, look, this will have to be funded into here for this specific purpose. Um, you can do so through the sources of users as well. Particularly if you're, you know, say,

00:27:15.880 — 00:28:45.500 · Jonathon

repaying some some net debt on the balance sheet or perhaps taking out some older shareholders, angel investors. That's that's much more straightforward. But you're right. We we again that comes back to board frankly access and being close to your businesses rather like an equity house. We want to really be close to our portfolio companies.

 

We're not trying to, uh, we're not trying to run the businesses. But at the same token, we are trying to protect our investment. And make sure to your point, if it's important to us, and we have to therefore have oversight where that capital is going. It's both, you know, the softer side of that, but also, frankly, the legal structuring, the mechanisms within the document delayed or facilities.

 

And we do put a lot of performance metrics into our loan facilities, which unlocks further capacity. So in some ways, you know what what we say to a lot of teams is this facility can organically grow without any interaction with us, potentially over the next 2 or 3 years. It can it can double. But to unlock that, it's all performance driven.

 

And if you are not able to hit those metrics, then we have to have a conversation. And so you can set up some of these facilities in such a way. It gives people very clear line of sight on if you hit your cloud or within 5% of that player.

00:28:46.780 — 00:28:50.140 · Jonathon

Then then the capital is there and if not, then then let's chat.

00:28:50.700 — 00:29:10.320 · Shiv

Right? How are you factoring in AI into your decision making, and how is it affecting how you're looking at these companies? Because obviously software valuations have taken a hit and companies revenue metrics have slowed down. So how are you factoring that into your underwriting and how you look at these investments, if you will?

00:29:10.720 — 00:29:11.480 · Speaker 3

Yeah.

00:29:11.560 — 00:29:47.680 · Jonathon

So it probably wouldn't surprise you to hear that. Ever since we've been doing this, when we assess potential opportunities and we come to our own view of value, that value is pretty heavily discounted versus what empty masses tend to pay for those businesses. And it will vary again by asset. But roughly roughly it's about half.

 

So if over the last seven years, the average buyer multiple has been six times RR in B2B software, we would have maybe on average valued those businesses at three times that one.

00:29:48.920 — 00:30:08.460 · Jonathon

That creates a natural buffer. It isn't as simple as, say, a 50 cent haircut, but that's just what the math tells us on average across our board changes. But that also does mean that when there are ratings to your point, we have a greater buffer in terms of the value protection that we have less assets,

00:30:09.660 — 00:30:39.820 · Jonathon

everything to AI. You know, again, when we started the business, unlike a lot of investors, you mentioned it yourself. Our focus was firstly on value values in our mind, inherently connected to the quality of business models. So we're looking at a set of granular subscription order revenue, annual contracts.

 

You have no code of termination for convenience type clauses. Really nice subscription granular books.

00:30:41.220 — 00:32:10.930 · Jonathon

And ultimately, as part of those business models that we're looking for within software will appeal to retention metrics, all the things you would expect. But the second thing on our list has always been and the reason this relates to AI is product. The product for us is kind of the the the current North Star, right.

 

You have to have a good product. And fundamentally, you know, we were therefore going deep into product use case. Why is it mission critical? How is it embedded into your stack? How is how do you put your product into the customer's stack? What other products are in the stack that are adjacent? Because we'll come back to it.

 

But in the new kind of AI world, the lines have been blurred. So an adjacent product using the same kind of data set within your customer, could very easily come and move sideways into where what used to be perhaps a more, um, more insulated area. So product was always important for us. It always has been.

 

And then tech stack. Agility of tech stack. Level of tech. Their ability to develop and cost to serve all critical and then finally market. So these these are areas that, you know I don't think there's anything massively controversial in that. But there are areas we've always been focused on. What I would say is AI has simply amplified the speed with which things change across these areas.

 

And so I look at our portfolios.

00:32:11.970 — 00:32:34.290 · Jonathon

We, in effect, have invested only in vertical software with proprietary datasets or systems of record. And that is because seven, eight years ago when we started the business, we had a crystal ball and understood, you know, the developments in AI. It was simply because that was, in our view,

00:32:35.370 — 00:35:21.430 · Jonathon

the hardest models to really disintermediation. And again, coming back to the example, I just gave a product. If you're embedded in the stat of your customer using proprietary data, actually monetizing and leveraging some of that insight from that data over time and that time series becomes valuable.

 

that just become really hard to switch out, even if even as economically as possible. The risk of doing so becomes difficult. And so all of these factors in our mind were just kind of good investing practice within B2B software. And you know, obviously when you overlay on, on top of that AI risk to your question, yeah, things have really sped up.

 

And the ability to be just intimidated see margin pressure increase. Increased cost to serve. You know, stress on the tech stack is a very real risk that we take incredibly seriously. We spend a lot of time digesting the tech stack of our potential investments. That's never been so important as to this environment, right?

 

Because there is a bit of an R&D at arms race going on, particularly in certain soft software subsegments. And then finally market, you've got to understand what's the pace of change within a given market. AI has really accelerated the pace of change, not just at the product level, but also just markets now evolving that much quicker, consolidating that much quicker, price changes, price pressure coming much quicker because of AI.

 

So overall, for us, it's both a risk and opportunity for our portfolio companies. The adoption of AI, the way in which we underwrite is basically the same. But I would say the the lens through which we underwrite AI is across all of those areas I mentioned. So value driven by business model, product, automotive, tech stack and market, it is a one work stream.

 

When we think about AI as it's holistic, it's overarching across all of those. And that's why their view, it's very valuable to be a specialist. It's very valuable to have deep insights into your portfolios, companies customers, it's valuable to have, you know, again, a big portfolio where you can see what good looks like in the world of a rapidly changing Atlantic, you know, AI environment and understanding where adoption is happening quickest in your existing portfolio.

 

So these are all things that we're doing. I don't think it's wholesale change. It's refining of our old underwriting look.

00:35:22.270 — 00:35:40.350 · Shiv

Has the has have all these changes like made you reconsider investing or giving more credit to SaaS companies with the fear that's out there that SaaS can potentially be replaced, or AI is going to lead to a different generation of companies that might leave SaaS companies behind.

00:35:40.910 — 00:38:13.960 · Jonathon

Right. Yeah. Look, I think it definitely makes us think there's a polarized valuation environment. Absolutely. I think certain companies attract a very different valuation in this world. Now, I think also it does make you think quite rightly, it should make you think about duration, risk. And as a credit investor, you know, duration, risk and value of a business in the next three, 4 or 5 years.

 

In our mind, that's not credit risk, that's equity risk. And so making sure that we're finding a way to de-risk, deliver through the next 2 or 3 years, making sure we are not taking outside outsized value risk on what is the future discount rate in 4 or 5 years on software businesses in certain subsegments?

 

I don't think any of us know that clearly. That was one of the big, big drivers for the rerating earlier this year on public equity software, right. Because people said, well, hey, fundamentally nothing's changed, but there's uncertainty. Therefore the discount rates have changed. And so we don't take that risk.

 

And we have. Structures that are pretty conservative, that de-risk quickly and maintain that de-risking over time. So I would I would be the first to acknowledge that AI has changed the valuation environment pretty, pretty rapidly. It also means in, in our experience, that there are some businesses that are finding incredibly difficult to grow and that the economics of those businesses are changing very quickly, and it gets lender rather than another investor across the capital structure.

 

We deliberately put in tests to ensure we understand changes in unit economics. So what is return on capital internally within that business? What is the growth rate? So to to mix both your questions, if we put cash to balance sheet. Yes I want to know what it's for. If it's going to accelerate sales and marketing will be used to go into entering a new market.

 

Then I'm going to have to make sure that the top line is growing, and if it's not growing within a certain tolerance, that tells me the unit economics on that spend has been poor. I want to capture that. Right. And so that's linked to value. It's linked to perception. So that's that's the way we think about making sure that we're covering the bases.

 

And we're not taking onto

00:38:15.320 — 00:38:21.200 · Jonathon

non credit risk around duration performance quite rightly in the changing environment.

00:38:22.120 — 00:38:30.160 · Shiv

That's fantastic. I know we're coming up on time here Jonathan. But if people want to get in touch with you or work potentially with Oscar, what's the best way to do that.

00:38:30.600 — 00:39:19.140 · Jonathon

Yeah, please do feel free to to reach out. We're all linked in Ashgrove capsule. We also, um, you know, have a website with all the team and contact details there, both in London and our Nordic hub, which is in Copenhagen. As I mentioned, we we provide both the specialty lending, senior secured financing, but also structured capital solutions as well in the preferred equity format.

 

Um, they're the two easiest ways to reach out, either via the website or all linked data. Um, and I'm always happy to have a chat. As I said, we, uh, we spend a lot of time tracking these businesses over many, many years. And you'll probably bump into some of our team at the various industry proxies, um, as well.

00:39:19.900 — 00:39:41.860 · Shiv

Awesome. We'll be sure to include all of that and the links in the show notes. And with that said, Jonathan, thanks for coming on and sharing your wisdom. It's we haven't actually had a growth credit firm on the podcast, so it was interesting to kind of see how you guys are evaluating these deals and underwriting them, and how you look at value creation and how you ultimately try to get capital back to your to your own investors.

 

So this is great, and thanks for coming on and sharing all that.

00:39:42.220 — 00:39:48.320 · Jonathon

I really appreciate it. Enjoyed it. And Yeah. Good to see you. And, uh. Yeah. Hopefully catch up again soon.

00:39:48.560 — 00:39:49.440 · Shiv

Yeah, we'll chat soon.