Lawrence Golub Sees Mixed Picture in Middle Market Earnings

he joins us here in our New York studio. Lawrence, thanks very much for being here. Much appreciated. Tell people about your focus, and the reason I want to do this quickly is because I want to get to this idea of revenue in the mid market. You've done some surveys. Revenue in the US middle market group eight and a half percent during the first two months of Q one. We're a non bank lending business. We lend to medium sized companies in the United States, typically with revenue between

about fifty million dollars and five hundred million dollars. So these are businesses that are smaller than typical public companies. As a lender. We have loans outstanding to about two hundred companies and we're monitoring receiving their financial information on a monthly basis. The Gallup Capital Middle Market Report focuses on an early look at actual revenue and profit from

the first two months of each calendar quarter. So the growth and revenue of about eight and a half percent that you refer to is what we've seen in the portfolio for January and February, you know, just to sort of give more to flesh that out. Gallob overseas about twenty billion dollars in assets and is one of the

best known names in the middle market area. And I have to say I was looking through report and I was struck not just by the increase in revenues, but by the massive dispersion of avita of earnings UH depending on the sector. I mean, you have consumer UH companies that are seeing negative earnings a decline in earnings, whereas you see technology companies seeing an increase of more than earning. So can you explain, I mean, have you ever seen

such dispersion before in your life? This dispersion is very wide, and it's really a story of an ability to control costs and an ability to have operating leverage as volume goes up or down in the tech sector. In our tech sector is primarily business to business software, There's been tremendous investment for a long time. The business buyers and invest the purchasers of the software are eager to get the efficiency gains that come from it, and that sector

is just really knocking the cover off the ball. Contrast that with say healthcare, where for the third quarter in a row, we've seen recentably good revenue growth, but the typical companies and healthcare have not been able to control their costs. So so, in other words, when you see revenue growth but negative negative earnings, that's the reason why, because of costs. I think that that's the most frequent reason why. And in the case of healthcare, it's typically

labor costs. Uh. You know, we think about labor costs in terms of just manufact during wages, but in fact skilled wages for certain sectors are going up, and we're still seeing some of the impact of the Affordable Care Act increased demand for health care services, which is driving class up. Also, many other healthcare service providers you know, are are really demonstrating they're not as good as some other industries at developing the operating efficiencies so far something

my hope we'll see change over time. I want to just ask you about an issue that we've been talking about having to do with wage increases and productivity, because when we received the payroll report last week, we saw an increase I think it was about two points seven percent year over year in wage in wages and that ends up being tied to productivity and what the question

that I ask is companies choosing people over machines. Because we hear a lot about robots and artificial intelligence in the companies that you deal with, are they looking to replace people? Absolutely, When when we talk about business to business software, you know that that really is about getting more out of the people. You have to delivering more services without adding people and increasing your impact. It's one

of the drivers of that sector. Let's look within the consumer products industry at restaurants, a subsector which has been weak, had been weak for several quarters. This quarter, restaurants have actually come back some and have some margin expansion because

they've had to deal with labor efficiency. It's not necessarily firing people, it's better scheduling or all all aspects of getting more productivity out, but with increasing minimum wages, with the regulatory cost, healthcare costs, high labor content, businesses have to react. That's one of the reasons I think we've seen thirty one thousand lost jobs in the retail sector. Well, talking about retail, I just want to go back to

the consumer decline in earnings. Uh This sort of negative eight point five percent decline in ABITA among consumer companies that you canvassed, I'm wondering, does this signal to you broader weakness among the consumer that might not be reflected in current economic data. Potentially, it's certainly not good news when when you look at projections for SNPPS up nine. There's certainly some sectors that are going to be very strong this quarter, like energy, metals and mining, but the

consumer sector this this number is somewhat worrisome. Have you reduced your consumer exposure in your portfolio? Uh? No, We were very focused in our portfolio on non retail businesses. UH So if you if you looked at a portfolio that included retail, the numbers might even be more significant than this. And you also provide financing for deals that are perhaps done by private equity firms or other non

bank financial companies. Yes, the majority of our borrowers are controlled by private equity firms, and are you seeing that they are getting the exit valuations that they want from their deals? The deal environment has slowed down a lot

in the past several months. The combination of some some headwinds on the consumer side, uncertainty about the deductibility of interest owners holding off on selling because they're hoping capital gains rates will go down, the possible border adjustment tax, which very few people think will pass but everyone worries about, has all led to really a decline in the pace of transactions. The Panera style sales and Panera is a great company, the same source sales as past quarter up

five pc, which is industry leading. But but that sort of multiple is pretty unusual right now. Thank you so much for joining us. Truly fascinating report. Lawrence Gallub is chief executive officer of Gallop Capital, which oversees about twenty billion dollars and is based in Chicago, Illinois. He was highlighting his latest gallob Capital Middle Market report, talking about the broad dispersion in earnings depending on the sector of

smaller companies. Well, this deal was heralded last year as what was going to become the biggest energy infrastructure UH system and distribution provider in North America. Enbridge bought Spectra Energy for thirty seven billion dollars. And here to talk about that deal, which recently was completed, is John wheel In, chief financial officer of en Bridge, which is based in Calgary in Canada. John, congratulations and completing this deal. And can you talk a little bit about what and Bridge

stands to gain from this acquisition. Well, thank you very much, Lisa. Um Really, Enbridge, UH, it really is an opportunity to extend and diversify our growth program. At the end of the day, UH, we have a value proposition that focuses on low risk, reliable income generative from energy infrastructure assets. Buying a platform, the premier gas distribution and transmission platform UH in the US really gives us a big opportunity to extend and diverse offy off of that off of

that platform. So we're now operating in forty states, UH, seven provinces in Canada, so we're truly a continental player. And John, if you could speak to the issue of environmental responsibility, how would you address the concerns that have been brought about not only for end Bridge, but also for the industry of transporting oil and natural gas. Right, Well, I think that is an issue for the industry as a whole, UH, and it's become a bit of a

focal point. But quite frankly, I think there's never been a greater focus on operational reliability operational integrity of our systems going forward. UM operations and safety are the number one priority of our company, as it is many companies in our industry at the end of the day, and we work very hard, UH to ensure that all of our stakeholders are customers, the communities along our rights of way and so on, understand the steps that we take

UH to make the pipes operate reliably and safely. Can you talk a little bit, John about the change in the US administration and how that might affect the US bring in Canadian oil or vice versa. Frankly, yeah, well, I think I think generally the climate for energy would appear to be more positive at the moment in the US if the US exporting it, not the other way around.

Not necessarily, although I think you know, there's a tremendous benefit that both countries get from an integrated energy market, and we find that really huge cross border trade exists in energy, not just self bound from Canada into the US, but also from the US up in Canada electricity, natural gas and so on, and for many, many years, both

countries quite frankly, have benefited hugely from that. So our initial conversations with administration in the US and others would tend to make us think that everybody does understand that, But of course we do have to see how rules around UH across border taxation and so on play out. John, many people are familiar with Keystone XL, they might not be familiar with g x L. Tell us about end bridges g x L, what it plans to do, and maybe you can just allude to some of the challenges

that you've had putting this together. Well, I think you're probably referring to a whole series of low cost capacity expansions that we have been looking to build on our system, and bridges expanded the system very significantly over the last number of years. We're continuing to do that. We have this is all around the Great Lakes area. It also

includes expansion to the network in Minnesota, for example. Yeah, right, We've got a large project or line through replacement project that is currently going through the approval process, so completely approved now in Canada and really completely approved in in the US, with the exception of Minnesota where we are working with the Public Utilities Commission there UH, and that

process is taking us a little longer than we expected. However, our environmental impact statement process is completed, UH, rather not completely I shouldn't say that has been fully scoped and is in the process of being completed. And so we think there's some clarity now with respect to the regulatory UH direction and the regulatory process there, and we're moving that project along. John uh and Bridge also has a big renewable business, including wind farms in Texas and off

the east coast in North Carolina. Have you projected a slower pace of growth in some of those renewable industries given the more favorable climate for fossil fuels UM. It really depends on jurisdictions. I think different jurisdictions have different renewable portfolio standards in terms of what they're trying to achieve.

So there are some places where I know UH. We continue to plot forward UM on a number of different projects, both here in the US and in Canada and also in Europe right now, whether it's a significant focus on the development of renewable and renewable energy, So it really is more of a local consideration primarily for US in

terms of where the activity is. Can you speak to the issue once again, just a pipeline safety, because as you build out this network, there's been a lot of criticism about spills and potential harm to the environment from this pipeline extension. What are you doing differently now than you did, let's say ten or fifteen years ago. Well, we have put a tremendous amount of UH, both time, effort and money into improving and enhancing the integrity of

our overall systems. Old pipe is being replaced by a new pipe. That's what that major project going through Minnesota is really all about. And we've been working to um if you will enhance the operational uh the operational integrity of the overall system. Safety has always been, but never more than now, the number one priority for our our operating leaders. All Right, I want to thank you very much for joining us. John Wheeland is the Chief Financial Office,

Sir of en Bridge. The promise and the potential products from biotechnology investments here to tell us more as Eli has than he's a managing partner of kasid In Capital. He joins us in the studio, Eli, thanks for coming in today. Maybe you could just give people a little quick background of kasid In Capital, how you came to the business, and then the focus that you're taking. Sure, thanks for having me. It's great to be here. UM so I launched the kasid In Capital in where life

science technology investment firm. UM We invest primarily and publicly traded companies, but when we can't find what we want in the public markets, will invest in privates. That said, not a venture capitalist by training or disposition, and so

we hope never to do it. We've done it now twenty one times and the fund is organized all around this broad identity that the cost curves for analyzing and manipulating molecular biology DNA specifically have come down dramatically over the last decade, particularly fast in the last five years. For a reference, the Human Genome Project, which cost about three billion dollars and took thirteen years to do UM can now be done in a day for a thousand dollars. Well,

so just from the thirty views. Still, I'm curious how your firm deals with smoth of volatility that we've seen in biopharmaceutical company shares just based on i mean, tweets and and off the cuff commentary by politicians. I mean, how do you capture value at a time when kind of research could be thrown out the window by by you know, a press release. Yeah, we certainly don't try

to manage volatility. UM. You can't write, you know, if if Hillary can tweet and crush the market, Um, there's no way to sort of manage through that except to know what you own, buy more when it's when it's lower UM, and sort of hold on UM and Uh. The fundamental reality though, is that these companies, those that are successful, build products that change people's lives UM and that has value. And so you just needed time frame

to ride out through that volatility. Eli. Uh. One of the things I note about your process is that you hold information sessions lunches basically in which you invite your investors to come in and meet with the actual chief executives at some of the companies that you're invested in. One example is Sage Therapeutics, and I'm wondering if you could use that example to tell us what does SAGE do, How did you come to find them? And why you do that? Why do you bring the investors literally into

the business and say here, meet directly with the company. Yeah, no, it's UM. I think the reason we do it, and I'll start there is that UM largely our investor based are successful UH investors in their own right, running large private equity funds, hedge funds, not typically in the healthcare space. And and what we find is they think that the

life sciences is sort of pixie ust. You know, that you sort of get lucky, you find some kind of insight in the lab, and and if you're lucky uh, ten percent of the time it turns into something and that's worth it. Um Our belief is that actually, UM, it's all the execution between the lab and commercial product done by human beings, real people that determine success. And so what we try to do is of our effort is find good science and then confirmed that the people

are really good that can actually deliver UM. So and so in that example, we like to bring in these c e o s who we think are very impressive and built impressive firms and let our investors have at them and sort of see, wow, these are really uh,

these are real businessmen, um. And I would just note that the you know, if you take Gilead, Gen's time, gene Tech by Geni Deck uh and cell Gene Uh, their revenue comes from assets they went out and acquired and brought in, which means their internal R and D didn't deliver, but their business acumen UH did. And so that's what we're trying to find businessmen like that for people. I know that you can't wager around policy. It's a very tricky and uh potentially unsatisfying area to go at.

And yet there are some pretty significant changes that could be made, whether it's uh forcing US pharmaceutical companies to sell biosimilar as in the US, you know, other efforts to reduce drug prices. How are you sort of positioned around that, and how do you factor in some of the drug pricing issues? Yeah, and listen, I think, UM,

drug pricing is a really uh challenging issue. You know, Historically, the mechanism of going from a branded product to a generic product, patent lives and the expiration of those those patents has been a really effective way to keep drug prices in check in the last couple of years UM due to due to several factors, some of them actually

regulatory UM. That transmission mechanism has broken down, fewer generic applications being approved UH, fewer manufacturers, and so there's been a lack of competition in the generics market, which has allowed generic pricing to go up and sort of broken that transmission mechanism. So one thing is you've got to fix that. The second thing is we invest in companies that are developing drugs where the alternative is usually death.

And so our belief is that if you can develop a novel therapy that UH has a huge impact on a group of patients, that's worth something UM. And so we don't try to look to invest in marginal products or me to sort of follow ones. We're really looking to invest in true innovation and avoid UH what we call manipulators, people taking advantage of inefficiencies to make margin.

I want to just the tie get back to Sage Therapeutic just as an example, because Jeff Jonas, the chief executive of the company, had many other roles previous to being the chief executive of Sage. This is a company that's working on central nervous system UH drugs. How did you come to connect with Jeff Jonas and Sage? Um. You know, we're looking for great companies, As I said, great managers, pursuing novel biology and then developing it in a process that yields very early results of whether a

go no god decision. The challenge for developing drugs is that historically the the outcome has been all focused on the phase three where it's the most expensive component and

you're sort of playing roulette until you get there. Um. Jeff is has stepped into Sage, has had some amazing science around the CNS particular sort of UH receptor thesis, and then has developed very UH specific UH small molecule US to target it, and then has a very novel way to get early proof of principle so that when you go into a phase one to phase phase two three, you you have a lot of confidence and you get a very definitive result. What are the top picks that

you would say are undervalued right now? Oh? Gosh, UM, I don't know every You know everything in our portfolio, and um, everything everything, and I think everyone should know. Um. Listen, we think about the unit of the healthcare continuum moving from life science tools to applications of those tools and diagnostics, to application of those diagnostics into drug development, ultimately leading into industrial biotech. Are are feeling on the diagnostic spaces.

This is a relatively when we when we start investing in the diagnostic space, reimbursement was terrible. It's now become horrendous. But one company is surviving Foundation Medicine because they have the support of roche Um, and so we think that that company and it's with their diagnostics, has a lot of potential Foundation Medicine found Eli Hasten, thank you so

much for joining us. Eli Hastens, managing partner of Kasdanic Capital, focusing on the biotech sector, drug pricing, everything under the biopharmaceutical son Now let's turn our attention to some business news and bonds and bringing Brian to Patta because Brian has written a story that I think is worth everybody paying attention to. This has to do with foreign investors not necessarily loving US treasuries as much as they have in the past, and that could be a potential problem.

Let's find out more. Brian, thanks very much for coming in and your patients tell us about this idea that you've got negative or you had negative yielding sovereign debt places like Germany, for example, But that's now positive yielding debt, and as a result, the lure of US treasuries might not be so intense, right exactly. Um, there are still negative yielding bonds out there, but the stack has gone

down by about three trillion dollars worth. UM. So all of a sudden, you know, you have these investors that we're looking at negative yielding bonds, which you know, even just a few years ago was borderline absurd. I mean, why would you pay for the privilege of owning a security, um, all of a sudden because the government told you to in one way or another. You gotta hold something very secure if you're a bank, right because of the central banks.

But um, essentially, now what's happening is more of those are turning into positive yields. And so all that money that was flooding into US treasuries because it was basically the only positive yielding option available, all of a sudden, you know, maybe those baskets are full and they say, you know, maybe now is the time to to buy some buns or buy some French debt. For example, Brian,

really fascinating story. You highlight have four owners currently owned of the nearly fourteen trillion dollars of US treasuries outstanding. So this is why, uh, this dynamic is so important. Have we already seen signs of foreigners backing away from

the US market to go into boon's or yet denominated bonds. Yeah, we've definitely seen some of that, especially the latest Japan data showed that there was another month of NETS selling UH in February, So that's now four straight months basically ever since November, when you know, the losses were really severe on on treasuries with the Trump win and the reflation bets UM, So there has been some selling. And the question going forward is going to be is that

going to flip eventually? You know, what's going to be that trigger? Or is the prospect of you know, higher rates everywhere gonna you know, scare them off still well? And what differential people tolerate? I mean, I'm looking at at a thirty year yield that still is relatively low, has not increased substantially this year, so you have to wonder, you know, where are we seeing is uh sort of

around the edges departure by foreign investors. Yeah, I mean definitely, Yields are still very low by by all metrics, and I think the question going forward is going to be, you know, you talk about differentials, I mean, where is you know, our yields really going to increase the most? I mean most people are still calling for higher yields. You look at French bonds for example, and you've seen those really yields climb on you know, geopolitical election risks,

things like that. Um, but I mean people are trying to figure out exactly where to go. I mean I was talking with the Japanese data and they were huge sellers of French bonds lately. Uh, you know, they don't like losses, and you know, no one in bonds do. I mean, I think Cathy Jones from Charles Schwab summed it up greatly that it's the bastion of skepticism and you know they don't like to look at losses. So where we get some positive return is going to be

the big question. In the months I had, well, you still got a lot of bids underneath the U S. Treasury market. Because I'm looking right now with the thirty year it's hands at two point nine, we are up fifteen thirty seconds, so there's a bid throughout the yield curve all the way down to the six month bill. Yep. Then we got the three year auction coming up at one pm Eastern, so that's going to be another sign of whether there's really demand out there for for US

treasuries going forward. Branch Potter, thank you so much for joining us. Truly fascinating story and important topic, UH to look at. Important the foreign dynamic with respect to the US treasury market, how much it has fueled gains in this market, and how much it could end up causing some of the losses if there is some kind of exodus. Branch pot as US Treasury reporter for Bloomberg. Thanks for

listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm out there on Twitter at pim Fox. I'm out there on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio m HM