Lending firm Callidus Capital Corp. is shrinking fast. That’s a problem for founder Newton Glassman.
The company’s decline is a concern to more than just its beleaguered shareholders. Callidus, and more importantly its private-equity parent, Mr. Glassman’s Catalyst Capital Group Inc., are now the latest example of the risks that can arise when pension plans and other institutions shovel cash into higher-risk parts of the private capital markets.
Catalyst raised more than $5-billion over the past decade as part of a larger movement by institutional investors to juice returns, while supposedly lowering risk, by shifting their money out of low-yield bonds and publicly traded equities and into alternative investments. The shift in thinking led those overseeing the retirement savings funds of the University of Toronto and McGill University employees, among other large pension plans, to put money behind Catalyst’s strategy of investing in distressed companies.
Some of Catalyst’s institutional backers are getting impatient with Mr. Glassman’s inability to deliver on those long-promised returns and with the problems at publicly listed Callidus, which invests in the equity and debt of financially troubled or restructuring companies. Catalyst’s funds, like those of other private-equity companies, are meant to be wound up after a preset time, typically 10 to 12 years, with the proceeds returned to investors. Catalyst has extended the life of some funds past normal deadlines. And its funds are big owners of Callidus debt and equity.
So when Callidus revealed a $217-million provision for loan losses on Monday night, in an earnings release that came out at about 10:30 p.m. Eastern time, the resulting pain was felt, indirectly, by university professors. And as Callidus’s stock price slides − Catalyst sold a portion of the company in 2014 for $14 a share and it closed on Tuesday at $4.43 – it’s a headache for a great many current and future retirees, as well as some individual investors.
Investors originally backed Mr. Glassman, the head of both Callidus and Catalyst, on the promise of outsized returns from high-interest loans to troubled companies, plus restructuring expertise if things went wrong.
Tuesday’s results show things are going wrong at Callidus. The company booked a $132-million loss provision on loans to an oil-drilling company that appears to operate in Venezuela, and warned investors of the potential for another $64-million hit on that debt.
Callidus took control of several businesses that borrowed money and couldn’t repay: A gaming company that owed $125-million; an industrial firm with $79-million of debt; a forest products business that owed $104-million; and, early this year, a paving company that owed $16-million. Callidus must now fix these businesses to see the return on its loans.
Callidus has put new management teams in place at some of these companies and on Tuesday, Mr. Glassman said: “We are pleased in particular with the progress to date achieved at C&C Resources, a forestry products company, and at Bluberi Gaming Technologies, a gaming company.”
Catalyst’s funds own 71 per cent of Callidus’s equity, and they also put up a $315-million bridge loan. On Tuesday, Callidus announced that bridge loan was recently extended by up to a year, to April, 2019.
Mr. Glassman continues to talk up Callidus’s prospects, with plans to make the investment a winner through a privatization deal; in 2016, he suggested a takeover could be priced in the $18-to-$22 a share range.
The book value of the company is now below $4 a share. The search for a buyer has been playing out for more than a year, and Callidus had nothing new to say on the subject Tuesday. The market’s new price on Callidus stock reflects an increasingly skeptical view on the prospects of a takeover.
Poor performance from Callidus means Catalyst’s backers need Mr. Glassman to find winners elsewhere in the portfolio to deliver long-promised performance. Catalyst is attempting to cash in a number of long-time investments, including planned IPOs from two of its businesses, Gateway Casinos & Entertainment Inc. and a unit of Therapure Biopharma Inc. But Catalyst has held out the possibility of such deals in the past and failed to deliver.
It’s easy to dismiss problems at Callidus and Catalyst the same way you tune out radio reports of a traffic accident while driving to work: Unless your car is banged up or your trip delayed, you just don’t care. But that’s a misguided view. Billions of dollars have been entrusted to Catalyst. Institutions have committed trillions of dollars to alternative investment strategies. Many of them work fine but sometimes these strategies contain big risks that only emerge with time.
Callidus is a mess. Its woes weigh on the performance at Catalyst, which bills itself as one of Canada’s largest private-equity firms. And these are the institutions that many of us are relying on to fund part of our retirement.
Andrew Willis