Arif Bhalwani’s Vision with Third Eye Capital

Small Business Canada

In a captivating interview with CanadianSME Small Business Magazine, Arif Bhalwani, the visionary behind Third Eye Capital (TEC), revealed the intricate tapestry of his entrepreneurial journey. Launching TEC in 2005, Bhalwani, alongside co-founder David G. Alexander, sought to address the unmet financial needs of Canada’s “high-risk” mid-market firms, often sidelined by traditional banking norms. Through TEC, they not only provided capital but also became strategic allies, offering wisdom and guidance. Bhalwani’s deep insights into the evolving financial landscape underscore the potential of private debt to reshape Canada’s economic future, highlighting its role in spurring business innovation and growth.

Arif Bhalwani is a successful entrepreneur, investor, and business leader. He is CEO of Third Eye Capital (TEC), a firm he co-founded in 2005 and helped build into Canada’s leading alternative capital provider to companies in transition. Through its unique combination of tailored financing and value-added business expertise, TEC empowers talented management teams to seize opportunities and realize growth potential more quickly and effectively. TEC has made more than $4.5 Billion in investments across a diverse set of industries including technology, sustainability, traditional and alternative energy, mining, construction services, transportation, and healthcare.

As the co-founder of Third Eye Capital in 2005, can you walk us through the entrepreneurial journey that led to the establishment of TEC as one of Canada’s foremost alternative capital providers for businesses in unique situations?

    Co-founding Third Eye Capital in 2005 was the culmination of years of experience and a deep-seated conviction that there was an untapped market niche in Canada’s financial landscape. My journey began as an entrepreneur building businesses and later evolved into a role as a venture capital and private equity investor. I saw first-hand the challenges many businesses faced in obtaining capital through traditional avenues. Banks were often unable or unwilling to accommodate companies without a predictable business model backed by a history of consistent cash flows.

    It became increasingly clear that a void existed in the market – mid-market and smaller firms, which form the backbone of the Canadian economy, were being either overlooked or underserved. These businesses were perceived to be too risky by traditional financial institutions, yet they had considerable growth potential. The realization struck that these “unique situations” were not outliers but represented a significant segment of Canadian businesses in need of specialized, strategic lending solutions.

    Alongside my co-founder, David G. Alexander, a financial innovator in his own right, we launched Third Eye Capital with a mission to bridge this financing gap. We aimed to provide not just capital but also strategic advice, leveraging our expertise in business turnaround, financial and operational restructuring, and managing stress and distress. Our goal was to act as more than just lenders; we aimed to be strategic partners to these undervalued and underserved businesses.

    The journey has been as rewarding as it has been challenging. We’ve had to navigate shifting market perceptions about our risk profile and business model, especially given our focus on companies often deemed “high-risk” by traditional standards. This tightrope act required not just financial acumen but also a nuanced understanding of business mechanics and market dynamics.

    Looking back, what gives me the most satisfaction is the transformative impact we’ve had on businesses that were on the brink of collapse or stagnation. Many of these companies have not only survived but thrived, thanks to our involvement. By providing them with the resources they needed, we’ve played a role in job preservation, innovation, and contributing to the overall economic diversity of Canada.

    The evolution of Third Eye Capital into one of Canada’s foremost alternative capital providers for businesses in unique situations didn’t happen overnight. It has been a journey marked by calculated risks, strategic pivots, and a steadfast commitment to filling a critical gap in the Canadian financial ecosystem.

    Private debt remains an intricate domain for many. How would you demystify this for investors, highlighting its critical role for businesses that might find traditional financing avenues elusive?

      Think of private debt as a tailor in the world of finance. Just like a tailor crafts a suit to fit your unique measurements and style preferences, private debt providers offer customized loans tailored to fit the specific needs and circumstances of a business. In contrast, traditional banks are more like department stores; they offer off-the-rack suits that are designed to fit as many people as possible but may not be a perfect fit for everyone.

      For many businesses, especially those in unique situations or undergoing transition, a one-size-fits-all loan from a traditional bank may not be the right fit. They might need a loan that takes into account their unique revenue streams, sector dynamic, growth potential, or asset base. This is where private debt comes in. It provides a tailored solution that can include flexible payment terms, custom covenants, and even additional strategic advice to help the business succeed.

      If you’re an investor, adding private debt to your portfolio is like adding a bespoke suit to your wardrobe. It’s specially crafted to offer higher yields and lower correlation with traditional asset classes, making it a valuable piece that enhances your overall investment ensemble. It might be more complex than a standard bank loan, just as a tailored suit is more complex than an off-the-rack one, but the fit and the returns make it worth it.

      How does private credit serve as a critical support mechanism for Canadian businesses, and in what ways does it address financial gaps within the broader economic framework?

        Private credit acts as a lifeline for Canadian businesses by stepping in where traditional banks often won’t or can’t. It offers tailored financing solutions to mid-market and smaller firms that don’t fit the conventional risk profile or lending parameters of banks. These could be companies in transition, distressed situations, or those with high growth potential but without a long history of profitability.

        By providing this alternative source of capital, private credit not only enhances the resilience and competitiveness of Canadian businesses but also allows them to invest in innovation, expand operations, or weather challenging periods. This contributes to job creation and economic growth. There is also flexibility inherent in private credit terms, such as longer repayment periods or interest payment structures, that align with a business’s cash flow. This adaptability makes it easier for companies to manage their debt obligations while focusing on growth and operational improvements.

        In industries with seasonal or cyclical cash flows, like resources and retail, private credit can offer specialized loan products that take these fluctuations into account. In essence, private credit serves as a nimble, responsive support mechanism that complements traditional banking services, focusing on the unique, complex, and often riskier aspects of business financing, and thereby contributing to a more diverse and robust Canadian economy.

        What do you believe is fueling the rapid expansion of the private debt industry, especially in light of current concerns regarding the robustness of conventional banking systems?

          The rapid expansion of the private debt industry is being fueled by a combination of market dynamics, investor appetite, and limitations in conventional banking systems.

          Each year Canadian businesses borrow $320 Billion, with 80% of it coming from banks. Contrast that with the U.S. where banks, despite there being over 4,000 of them, account for only 20% of annual business lending volumes. In the U.S., nonbank lenders dominate. Here our bank oligopoly has resulted in greater concentration, tighter regulation, and less competition, so therefore less risk taking. Canadian banks already have higher capital requirements than their US peers and they are increasing. This will further disincentivize risky lending activities. 

          In a bank dominated lending market, there is greater interest rate risk for companies because banks lend on a floating rate basis and, for regulatory capital reasons, make these loans payable on demand. Official statistics show that interest coverage ratios have declined and default risks have increased. 

          Private credit firms specialize in understanding and managing risks in ways that traditional banks often choose not to or cannot engage in, given their risk parameters and regulatory constraints. We are accustomed to navigating complexity and tackling challenges, especially where there is stress or distress. Private debt providers, with their ability to conduct deep due diligence and offer bespoke financing solutions, are seen as more agile and capable of weathering financial storms.

          Secondly, there’s a growing demand from investors for assets that offer reliable returns in all market conditions, particularly when other classes falter. Private debt meets this demand, offering consistent, attractive risk-adjusted returns. The asset class is also gaining favor for its diversification benefits, given its low correlation with equities and traditional bonds, providing investors with a more resilient portfolio.

          Finally, there’s a maturation and professionalization occurring within the industry itself. This is attracting top-tier talent, sophisticated risk-assessment models, and more institutional capital, further fueling its growth and acceptance as a mainstream asset class.

          So, it’s a confluence of these factors – banking limitations, investor demand for reliable returns and diversification, and the perceived robustness and flexibility of the private debt model – that is driving the industry’s rapid expansion.

          Given the evolving financial landscape, how do you envision the future trajectory of private debt in Canada, and its potential impact on the nation’s economic fabric?

            The future trajectory of private debt in Canada is decidedly upward, and its influence on the nation’s economic fabric will likely be transformative.

            As traditional banking institutions continue to face regulatory constraints and risk aversion, private debt is poised to capture an even larger share of the lending market. This will especially benefit mid-market and smaller firms that are the lifeblood of the Canadian economy but often find traditional financing elusive.

            As the market matures, we can expect to see a broader array of private debt products catering to different risk appetites and business needs. Asset-based lending, mezzanine financing, and even special situations funds are likely to become more prevalent, offering tailored solutions to Canadian businesses.

            With institutional investors increasingly recognizing the asset class’s benefits, including yield and diversification, the inflow of capital into private debt will likely accelerate. This will add liquidity and depth to the market, attracting even more participants.

            On the macroeconomic level, increased access to alternative financing will spur innovation, job creation, and economic growth. By providing capital to companies that might otherwise struggle to secure financing, private debt will indirectly contribute to economic resilience and diversification.

            As private debt becomes more integral to the Canadian economy, it’s likely that regulatory frameworks will evolve to provide better oversight and protection for all stakeholders, balancing innovation with risk mitigation.

            In summary, the rise of private debt in Canada is more than just a financial trend; it’s an evolving force with the potential to significantly impact the nation’s economic trajectory. By filling the financing gap left by traditional lenders, it will empower businesses to grow, innovate, and contribute more effectively to Canada’s economic vitality.

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