Keith Meyers with Keefe, Bruyette and Woods, KBW on Capital Club Radio
Guest: Keith Meyers
On this episode of the Capital Club Radio, Keith Meyers joins chairman and CEO Michael Flock, one of the leading investment bankers in the specialty finance world, to discuss his transition from accounting to investment banking, his work and now management in the debt buying and collection industry and tips to note for those interested in the trends as well as staffing of those in investment banking and debt buying.
Mr. Meyers is a Managing Director based in Atlanta and leads KBW’s new Financial Services Group, which serves clients in the specialty finance, mortgage finance, securities, alternative asset management, and financial technology sectors.
Mr. Meyers brings more than 17 years of relevant experience serving both strategic and private equity investors in the financial services sector. He comes to KBW from Raymond James where he was a Managing Director in the Financial Services Investment Banking Group. Previously, he served as Head of the Financial Services and Transaction Processing Investment Banking Group at Morgan Keegan & Company. Earlier in his career, he worked in the business advisory and assurance practice at Deloitte and Touche (CPA, inactive).
Mr. Meyers has an MBA from the Fuqua School of Business at Duke University and a BSBA from Washington University in Saint Louis.
Michael Flock: How does someone whose working in accounting at Deloitte get into investment banking? How did you make that transition and why?
Keith Meyers: Accounting and audit is a great stepping stone to other things. Accounting is the benchmark of business, being able to understand the financials is critical to what we do in our business. Always thought of it as a place to start my career. Wanted to get into a more proactive role. In accounting, you’re always looking at what you’ve done. You’re not creating value looking forward. I wanted to move into a role to make things happen. Investment banking is very rewarding career because we have changed the position of the companies we work with. As an investment banker, this is a client-service business. We need people who are engaged and care about what our clients think. We’re a cross between consultants, financial advisors, structuring agents and psychologists.
[4:37] Psychologists – that’s a new one. Why psychologists?
Deals meander many different ways. Many time when we work with clients, this is the biggest transaction of their careers and transformative for the companies we work with. A lot can happen in a deal – positive or negative so a lot of what we do is keep our client’s calm. We joke that deals die 3 times before they close. There’s always times where it’s going to get troubled and you have to make sure you keep everyone’s on board.
[5:18] You kind of answered my next question – what are some of the personal traits investment bankers need to be successful?
It’s usually financial or business-related but the psychology and keeping everyone calm is surprising. We hire talented people from MBA programs and many will say that we do a lot less modelling and structuring than they expected. It’s more positioning of companies, understanding companies and being able to articulate it to potential investors, private equity firms, debt providers, strategics than it is about brute force financial modelling. We can teach all of that. These kids are book smart, next level is how you interact, tell stories and build rapport and be their advocate positioning against someone that’s trying to get the best deal for themselves. Tread carefully to make sure that you have a client and investor who want to continue to work with one another for 5+ years.
[6:52] Really about relationship management as much as it is about numbers.
100% your skill set in investment banking changes as you progress. Starting out, you’re involved in a lot more of the day-to-day numbers and my role is really about information flow. We are hired by our clients because of our expertise, knowledge and also being respectful and confidential, which is something we pride ourselves on.
[7:47] I imagine then you have to be a very good listener. You have to listen well as well as to be articulate.
It’s as much about listening. Companies that are owner-operated are passionate about their business. Listening to them discuss their business is very rewarding. To us, listening is a lot more valuable than speaking. We can tell you what’s going on in the industry but hearing about the unique attributes of our clients and companies is very rewarding.
[8:33] When you were at business school at Duke, did you take courses on listening or communications or was it basically finance?
Business school is a great training ground but it’s more about the technical skills. When you’re out there, you should have role models you follow. You can learn a lot from everyone in the business. I learned a lot from many VPs and Managing Directors and take away positive and negative attributes from each director and collectively find out what works for you in our own persona.
[10:05] I imagine in your role as Managing Director here with 26 people on your staff at KBW, you spend a lot of time coaching people about interpersonal communications and relationship skills?
Yes. The way we look at it is, the more we train our team, the better they become and the more work they can take on. In today’s world, people have a lot of opportunities to move elsewhere. We have to make their experience rewarding so they want to stay and continue to progress. We have a training and mentoring program to reinvigorate that.
[11:15] Is it the same team you have now from Raymond James?
A big chunk of the team left at the same time. The core unit of us have been working together for over a decade. There’s a huge value to having a cohesive team that has the knowledge base we do. We made the decision to move to KBW because they had a better platform than what we had prior. Thought it was a better choice because the platform is exclusively focused on financial services, banks and insurance companies. We have 350 employees who exclusively work on this sector. We’re able to bring solutions to our clients and this year, we closed 2017 transactions in my practice, M&A advisory work, debt raising, equity and debt in the public markets. Robust year for the team.
[14:33] 74 transactions in 2017. What was your goal?
It was probably less than half to be candid. We exceeded our quota and 2018 appears to be very strong. We see favorable trends in the debt buying industry. CBB will probably be more rational than it has been and less punitive to our clients and folks in the industry. Uptick in charge-offs and in delinquencies. We expect some of the bigger banks to come back to the marketplace. Consumer credit is at an all-time high. New supply in this market will moderate prices and make it more attractive for the players still remaining.
[15:50] Let’s talk about the outlook for 2018, since the majority of our audience is from the debt buying and credit collection world. Can you comment further on how these markets are changing?
I think a lot of it has to do with regulatory. Banks are scared of their shadow. The regulators have a had in how they do business than other industries. If the regulators are more moderate, more pro-business than it was than the banks are more willing to leverage what they should, third-party collectors and debt buyers to maximize their earnings and further their shareholder values. We believe that the moderate of CBB, the rules that have been in place for a number of years and that they’re not changing, we expect the bigger banks will start to come back to the marketplace. Timing, we don’t know. The environment is more conductive than it has been in years. You still need to be a very compliant debt buyer. You will get very scrutinized as a purchaser of debt. Will be cautious and only work with people with good reputations.
[17:55] With supply growing, do you anticipate the prices are going to decline a little bit?
In credit card, they’re still very high. This isn’t our forte, of predicting prices. If there’s supply and demand, you might be able to see prices decline.
[18:44] You see with the regulatory environment softening up a little bit. Does that mean that there’s more opportunity for mid-market debt buyers who don’t have the same infrastructure as the very large ones who can’t afford some of the regulations that are in place?
It’s hard to jump into being a debt buyer today. You need compliance, you need to adhere to all of the rules, policies and procedures, police collectors, etc. It’s an area that if you’re an existing player, you step ahead because it’s very hard to start from scratch in this marketplace. There’s not a lot of competition from new entries in this market.
[19:55] The market’s improving, supply is up, compliance is moderating, why would a middle market debt buyer want to use an investment bank right now to raise capital? Isn’t it pretty easy for them to go out on their own? What is the value of an investment banking process and how would you describe that?
If you have banking partners that are supporting you then continue to use them. For the most part, we run processes so we get the best rates and terms out there. We put your backing partners in competition with each other for your business. It’s supply and demand. If you have multiple people trying to get your business, you will get better terms. The value that we bring is that we know all of the people in the marketplace, we know what deals have been done and what terms are out there and what we focus on is trying to structure transactions that fit our clients.
[22:06] What are some of the memorable deals that you’ve done?
Sometimes it’s about timing. We were in market with a company before the financial crisis. It was a third-party servicer. The day we were about to launch, Lehman went under. They were their biggest clients. That was an aha moment: do we go forward or not? Another business we were working with was a debt buyer that was about to be sold to a unique bank in New Orleans. The day after Katrina hit, we were going to have a conference call. A week later, we finally got hold of the chairman and he said we’re going to have to pull out because the majority of our businesses are under water. These were market conditions so there was nothing we could do or know. For company-specific reasons, the reason we see most transactions fail is because there’s a surprise. Or projections out there that you don’t hit. With clients, reviewing their financials and making sure they’re comfortable with their projections is what we check. We’re not auditors so we don’t pine upon the accounting, that’s what our clients do.
[26:57] No surprises, hitting your numbers, making sure your numbers are real are common denominators of success and if they’re not there, they’re indicative of failure. If you set expectations and go out with information that is accurate and we take a deal, there’s a very high probability it will get done. What we do is try to set expectations with clients on value and results and if there’s a misalign of interest then we’ll not take the transaction on. You want to collectively believe that you’re taking on a good transaction.
[27:57] Can you comment on the KBW view of valuation methodologies for the debt buying or collection industry? There are 4 common methodologies. How would you look at these different methodologies?
It varies based on the companies. Even companies within the same space might value differently based on their own unique attributes. In general, buyers will look at what the estimating reigning collections are and validate those and go back to find the value in the existing portfolio. There’s also a value to the franchise, if you have a good origination source and good strong flow clients that will add on. Ultimately, we look at those, we look at price to book value metric, price to earnings, adjust to ebitda as a benchmark to see how much cash flow can be used to support operations and to reinvest. Reviewing the overall cash flow to finance the business and to purchase. When you’re looking at collections companies without a balance sheet, it’s more of a straight cash flow metrics. Multiples very according to size and history of company: expected growth, size. Bigger companies have larger stability and more competition. Look at what public comps are trading and will be a gating benchmark for evaluation. Review a lot of different metrics.
[30:40] Cash flow for debt buyers is relatively straightforward. What’s more ambiguous is that multiple that’s attached to the platforms of debt buyers. What else would drive up the valuation of the platform as distinct from the cash flow of the portfolios?
Big question. You could have a lot of different things and it’s really unique, for example having more asset classes are not always better than fewer. Being a specialist might be of more value than a generalist. What we pride ourselves on is that there’s no cookie cutter approach to what we do. We try to look at the value our clients bring and extract that. We work with our client’s to bring that out.
[31:58] Typically what is it? Is it the results of the business? The expertise? The experience in a certain asset class? Leadership Technology?
It’s all of the above. If there’s a technological different that’s sustainable, we will tease it out. We will make sure it shows results but ultimately, we’re looking for results so people will pay for it and believe in the platform.
[32:38] In this industry, there’s so many middle market guys. Why do we really need our investment bank to pay them all this money? It costs so much. Isn’t it better to do it ourselves and save money? What’s your pitch as to why KBW?
When you go into transaction and you align yourself with a financial source. You’re locking yourself up for a number of years, this is your partner so you want to make sure you’re getting the best transaction out there. It doesn’t have to be price or terms, it can be whatever a client thinks is best. Look at us as an insurance policy to make sure you’re not making a mistake and you have an advocate on your side to get the best deal possible. If you’re looking at a bank and they know they’re the only one you’re talking to, they have no incentive to give you the best rate. We also provide a seal of approval. We do our work on companies. If we take a company to market, its because we believe in our clients. Because we’ve been out there for so long, counterparties know and believe we’ve done our work and are more apt to look at the company than if they’re doing it on their own. It’s our seal of approval and it means a lot. We are also their biggest deal source and bring deals to them that they would not see otherwise. It’s a lot easier to take our neatly package information that we know they need to make a quick and informed decision rather than a company going forward alone and having to dig up all of the information they need. Bring credibility and information gathered through due diligence and how it’s neatly packaged and communicated sets this client apart from other clients competing for the same capital. Pride ourselves on our concise packages.
[37:03] The process of KBW it’s a process of due diligence period upfront, put book together then send it out to prospects (M&A or capital) and handle communication than finally the negotiation. Our client’s are always in charge. Nothing goes out of the door without their approval. You have the say. We execute on the agreed upon process and try to get the best deal for our clients and the outcome that was agreed upon up front.
[38:19] If I go back to the top, what surprised me was the importance of psychology. It’s not just the numbers but the psychology of the deal. Does that also affect who the client selects as a partner? As a human, not just the deal?
When we run a process to ensure it’s a rewarding experience for everyone. It’s as big of the piece of the pie as the deal itself.
[41:00] Thank you for joining Michael Flock and Keith Meyers for joining us and thanks for listening about the bright future of the debt buying industry and for KBW.
Links & Resources Mentioned In This Episode:
Keith Meyers: Linkedin
Sponsored by: Flock Specialty Finance
Providing a forum for leaders in the middle market segment which has typically been underserved by traditional banking.
Thanks for listening to Capital Club Radio, a podcast that offers valuable business insights and perspectives to deal with market uncertainty. Topics include: key success factors, both personal and professional, dealing with adversity, outlook for the industry and your business.
Hosted by: Michael Flock
Sponsored by: Flock Specialty Finance
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