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On September 20, 2023, the Distinguished Speaker Series (DSS) Advisory Group of the CFA Society of Chicago welcomed Lawrence Golub for a lunchtime discussion at the Union League Club. Jim Mohan, an Investment Consultant at Mercer, interviewed Golub.

Lawrence Golub is the Chief Executive Officer of Golub Capital, a market-leading, award-winning direct lender and experienced credit asset manager. As of April 1, 2023, Golub Capital had over $60 billion of capital under management, a gross measure of invested capital including leverage. Golub Capital partners with institutional investors and family offices offering tailored solutions for investors’ credit asset strategies. The Firm specializes in delivering reliable, creative, and compelling financing solutions tocompanies backed by private equity sponsors. Previously, Golub was Managing Director of Bankers Trust Company. Prior to that, he was a Managing Director of Wasserstein Perella, where he established thefirm’s capital markets group and debt restructuring practice. Golub started his career at Allen & Company Incorporated where he engaged in private equity, leveraged finance and mergers and acquisitions. Golub earned his AB degree magna cum laude in economics from Harvard College. He received an MBA from Harvard Business School, where he was selected as a Baker Scholar, and a JD from Harvard Law School, where he served as an editor of the Harvard Law Review.

The conversation began with Golub outlining the state of play within the private debt market. He noted the unusual confluence of higher base rates and a relatively steady economy, with solid growth and profitability in the industries to which Golub Capital lends. He also noted that returns in the direct lending space have been attractive relative to other asset classes in recent times, as most lenders were not burned by higher rates due to the floating rate nature of their loans. That said, Golub explained that these higher rates have created some pressure on borrowers.

When asked about his views on the trajectory of rates going forward, he expressed a lack of confidence related to whether base rates would be coming down in the near future, noting that “rates will fall, it’s just a question of how far they’re going to go up first.” Golub noted that even if his firm was confident about rates moderating in the coming months, his team would not underwrite with that belief in mind given the conservative approach they take to dealmaking. He did note that certain return assumptions and underwriting standards may need to be adjusted in light of rates that may remain higher for longer. Golub explained that any loan problems that may arise in 2024 will stem from those that have already been made, and the degree to which borrowers will get into trouble will depend on how good a job they did with previous underwriting and monitoring. He did lament the fact that many managers are not expecting 2021, 2022, or 2023 to be “record-setters” from a vintage standpoint.

The discussion then turned to the current dealmaking landscape, which Golub characterized as being somewhat challenged. He noted a widespread lack of agreement between buyers and sellers when it comes to new deals, which has led to a slowing of the pace of new transactions. This new environment stands in stark contrast to 2021, which Golub noted was the fastest year he could remember in terms of completed deals. He noted that, regardless of the dealmaking landscape, Golub Capital has always adhered to a disciplined, conservative approach to portfolio construction given the firm’s emphasis on resiliency and getting paid back. When asked about the firm’s levels of dry powder, he noted that Golub Capital has always had a lot of dry powder and that a lot of their capital is currently in drawdown funds. Golub also stated that he does not anticipate problems deploying capital in the near future but did note that an inherent part of his firm’s process is to have dry powder that is not dilutive to performance.

Golub next explained that the size of private credit borrower has consistently gone up in recent years due to several factors, including an increase in capacity and the fact that banks have pulled back as lenders. When asked to compare traditional fixed income with private credit, Golub noted that investorsshould consider both liquidity and the fixed vs. floating rate nature of the asset classes. While he did state that it is up to each investor to determine how much fixed exposure is prudent within their portfolios, Golub commented that he is not a fan of unsecured fixed rate debt due to a lack of covenants and minimal prepayment protections. Additionally, he stated that he enjoys not having to worry about forward forecasts of fixed rates.

When asked to delve deeper into the current state of the economy, Golub did note that there are signs that the American consumer is being stretched, including higher levels of credit card debt and 401k loans, as well as the resumption of student loan repayments. He explained that a consumer downturn would not improve the outlook for direct lending, but also stated that the current labor market, including low unemployment and healthy wage growth, could serve as a mitigant to consumer-related issues. While on the topic of the labor market, Golub did state that he expects skilled labor shortages to persist into the future, though legitimate supply chain disruptions have largely disappeared. The conversation then turned to widespread investor interest in artificial intelligence. Golub noted that members of his firm are “not bleeding edge technology investors,” but did state that the productivity potential for AI is spectacular. He mentioned that Golub Capital does serve as a leading lender to private equity-backed business-to-business software companies with high recurring revenues but will rarely lend to hardware-oriented companies.

The discussion concluded with Golub highlighting aspects of his life outside the office. He detailed his philanthropic work first, which includes the founding and ongoing support of social impact labs at universities around the country. The missions of these labs are varied and include training individuals on how to be effective directors of charities, as well as helping charities better work with AI and large data sets. Golub also outlined his support of research on Parkinson’s disease, which includes facilitating a partnership between the Michael J. Fox Foundation and the New York Stem Cell Foundation with the objective of identifying markers of progression of the disease. When asked about his hobbies, Golub mentioned boating, exercise, reading “trashy” science fiction novels, and mentoring others.

The event was well attended with audience members remaining engaged throughout the entire discussion. The DSS Advisory Group would like to thank Lawrence Golub and Jim Mohan for an outstanding discussion!