The Riches in the Niches: Financing the Long Tail of the Real Economy

First up: Paul Lisiak, who knows a thing or two about building financial infrastructure where none existed. He is a founder and managing partner at Metropolitan Partners, a $1.8 billion private credit firm that finances overlooked niches such as music royalties and video game revenues, before institutional capital discovers them. 

Paul’s view is that any durable, predictable cash stream can be financed. The bottleneck is the underwriting legwork. His team does the hard work of sourcing, underwriting, and aggregating these cash streams, earning a premium, and then selling the finished product to larger players once the niche gets discovered. 

Paul’s playbook maps directly onto our sectors. Food and agriculture, energy, and oceans are full of long-tail, predictable cash streams waiting for someone to build the financial machinery. This conversation was recorded at this year’s S2G Summit and it sharpened our thinking about building new asset classes. We’re excited to share it with you. And please stay tuned for important disclosures at the end of this episode.

Sanjeev Krishnan: Well, thank you for being here. I feel like private credit is in the headlines, but you’ve done lots of different kinds of private credit that have nothing to do with sponsor credit. Maybe just give the audience a little of what who you are, what you’ve done, then we’re gonna talk a lot about royalties. 

Paul Lisiak: Thank you for having me.

Sanjeev: But maybe let’s step back and kind of what you’ve been involved in in private credit and kind of the theme as you know is like there’s an emerging economic reality, but the financing structures and plumbing system are lagged and I think you’ve been involved in sort of fixing a few of those and generating value for you and your shareholders and investors.

Paul: Doing our best. Yeah, look, at Metropolitan, we live below kind of the noise of private credit today. We are a non-sponsored lender, so we’re typically the only institutional investor in the capital stack. And that allows us to actually make fundamental investments into companies against real-world events collateralized by real-world assets. And we’re always trying to look for new niches and new fishing holes to try to apply our creative capital solutions. 

But more often than not, when people come to us, they have a situation where it’d either be the perfect wrong time to raise equity, or they just don’t have access to capital or there’s some type of complexity or even a work premium. So we’re kind of like old school universal bankers as opposed to the financial engineers. I mean, private credit itself has become its own virtue. If you look back to pre-Michael Milken days, you had something like only 15% of all debt that went into businesses not produce marginal revenue.

So 85% of the capital produced marginal revenue productivity with that debt. And the last time we found the stat, which was two years ago, that basically flipped over. Only 15% of capital going into businesses was actually creating marginal revenue. The rest was just refinancing out old debt and basically paying interest. So you know, private credit really has had a lot of inflows to it, and that’s made the middle market even more and more competitive, which has required private credit lenders to take more and more risk, and now you’re starting to see some of the cracks from the last five to fourteen years. 

Sanjeev: I mean that’s a pretty astonishing stat. So pre-Milken, 15 percent went on to lever and then 85 percent was to fund revenue. And then it’s flipped now.

Paul: Create new value. It’s basically flipped over. I mean you could probably even make a case that it’s probably gone negative and that there’s so much deleveraging with private equity funds stepping back in and covering some of the sins and things like that. But the reality is like private credit’s just looking to re-engineer and refinance old private credit deals mostly.

Sanjeev: I think we were gonna focus the conversation a bit on royalties today. I feel like royalties are even coming into energy and perhaps they’ll come into agriculture or other parts of our economy. But you were involved in royalties you know pretty early on. Walk us through sort of the OG of, because we think of royalty, we think of pop music and this Taylor Swift thing, which I don’t know why anyone went to battle with Taylor Swift. But maybe just walk us through what Royalty Finance is from your perspective.

Paul: Sure. Yeah, look, I mean, we don’t like royalties because they’re royalties. We like royalties relative to the underlying attributes of them. You know, royalties over the last few years have actually been productized and financialized, so there’s a lot of securities out there, rating agencies, insurance companies are all buying into the predictable nature of royalties, which can be very attractive. From our standpoint, we actually are looking at those underlying attributes, and we actually got into royalties in a very obscure way. We were actually first involved about 14 years ago in helping finance the future credit card receivables of small businesses.

That industry is now called Merchant Advance and it’s become completely bastardized and weaponized and is now a horrible crutch for a lot of small businesses. But a long time ago, basically, that was a great tool for seasonal businesses to kind of get through cycles. And so there we were effectively factoring three to six months of predictable revenue. We did four or five successful deals, and then other private credit funds came and flooded the fishing holes, we call it. So too many other fishermen showed up, and so we got out. 

And then through that in our operating expert network, we found video games and mobile video games, and tried to then help finance the next six to twelve months of predictable revenue streams off of mobile apps, either in-game purchases and/​or downloads and things like that. So now we kind of pushed out to the 12-month perspective, and we had a platform that was doing it very successfully. So we did four or five deals there, and more money flows in. And so basically we have to keep looking for new niches. 

And then through that, we started looking at more traditional royalties, as we did video game royalties, but then came across other niches, notably literary rights as well as non-vocal music. So not Taylor Swift, but a composer that has 4,000 songs that are six seconds to six minutes long in television and film. And we found that to be a very unique, interesting kind of niche. And so we kind of went out further and further on the spectrum to the point where we could actually help go and aggregate long tail royalties and drive those up to larger aggregators of those cash streams.

Sanjeev: And where are we with royalties today? Is it all played out or are there still niches that the fishing hole is still…

Paul: Yeah, I mean there’s been pretty good beta in mainstream royalties. So overall expansion of streaming platforms as well as the falling cost of communications, notably in the third world, has actually opened up new markets for a lot of mainstream royalties. And so you’ve had some really good beta effects and actually people that have been buying large pools of catalog assets which are typically three plus years old, are actually making really good returns and are actually getting better exploitation.

You know, AI and other algos and things like that are also allowing people to rediscover their old favorite TV shows, their old favorite music, and things like that. So people are repaying for content which they paid for once before. So I think there’s some pretty good beta effects still there for mainstream royalties.

Sanjeev: I think that you know signaling they consider the laziest form of thinking but a lot of underwriting, you and I talked on the phone and I think part of what I think you’re focused on is complexity.

And maybe just talk about both on the origination side and on the underwriting side, how the market is in your opinion. And then how you try to differentiate yourself in the market.

Paul: Well first I have to say I failed asset management 101. We do the hardest part of everything in private investments. We source our own deals through our expert network, we underwrite our own deals, and then we monitor our own deals, and then we actually have an internal workout team for any you know challenge credits. So we have 40 people that are basically applying the work to 53 portfolio companies across 1.8 billion dollars. 

And so I was having a conversation with someone before, like we use all of our management fees to actually run the firm, which is very unique in asset management today. But look, there’s a real big work premium and complexity premium. Again, larger investors have raised so much capital that they’re expecting things to be brought to them on a plate. And there’s right now not a lot of firms that’ll come down into the niches and actually do the hard work and try to figure out where certain asset classes are going, or even like sub asset classes. 

Internally, you know, we view all of our asset classes as sort of well below any GICS or SIC codes and basically are always looking for niches and learn new ideas for new niches through other data points from other ones. But doing smaller size investments, we’re typically in the $10 to $100 million size range per deal allows us to kind of live below the noise and frankly you know build asset pools and/​or build companies because we do a lot of direct corporate lending as well and then drive those into traditional pools of capital. So there’s a big work premium that that that we can achieve through that.

Sanjeev: I love this concept, the riches are in the niches. But there’s some niches that, you know that song, they’re not gonna pay you back. I won’t do the expletive. Maybe after a drink I will. But what’s your pattern recognition? Like what niche is rich and what niche makes you poor?

Paul: Yeah, I mean obviously looking at the durability of assets requires expertise. So we have some ourselves, but we also always access industry insiders to help us best select which parts of these asset classes we’re doing. Maybe a good juxtaposition would be at one point we tried YouTube royalties and we kind of dipped our toe in small and we were playing with it and obviously the platform basically of YouTube itself is worth a lot of money, but it’s worth a lot of money because of a lot of free content comes in and people get paid, but there was just an abundance of content. And so we thought there’d be a fast decay curve on the effective royalties of the YouTube content. It was actually even faster than we thought. 

Sanjeev: YouTube is not good.

Paul: YouTube is not, again, I’m sure you can make a special case for different things here or there, but we’re looking at children’s content and basically people are just… 

Sanjeev: That one guy that sells toys. 

Paul: The Lego guy. Yeah. He made a bunch of money. He’s the exception, but maybe one of the exceptions. But you know that’s something where you have to stop and say, okay, that’s not as predictable, therefore you can’t really finance it from a credit perspective. But then again, if you look at say you know classic literary rights, you know, very popular, famous book from fifty, sixty, seventy years ago, it’s already had its decay curve. It’s now living in the long tail, and while maybe we’re not going out and buying it on a regular basis, it’s still in the curriculums of six to eight thousand universities around the United States. So you know what? It’s never gonna sell more than 20,000 copies, it’s never gonna sell less than 15,000. You know, so you can then like predict that, but then those things are all small tales that you have to go then find the experts to aggregate them and then package it to productize it to the next person.

Sanjeev: So for the allocators, investors, and even company builders, because I feel like part of the reason we wanted to do this sort of theme today is there’s not a lot of capital, the plumbing system is not fully there, even though the emerging reality often is proven. It’s just too complex. They’d rather do the 25^th AI deal than the fourth or third whatever, you know, energy, food and ag, oceans deal. Yep. So these sectors are very complex.

What’s your advice to people that you’re either on the I need capital side or people wanting that alpha relative to a six percent or nine percent, you know, maybe talk first to the allocator investor class in the audience and then maybe the entrepreneur company builder side.

Paul: Look, I mean on the allocator side, obviously, past performance is not indicative of future returns. And I think a lot of traditional underwrite that goes on by larger private credit firms is really going back and reanalyzing the past and then doing some level of prediction, but they’re so tightly wound in their underwriting and they need to price the deal to perfection to win the deal. You know, we like to throw hand grenades versus sharpshooting. We’re an asset based lender, so we always have protections beneath it. But I think the biggest thing that allocators need to stop and think about is what is dynamic change relative to what you’re talking about before. We’ve gone from basically a cyclical economy to a K‑shaped economy. We now are believers in the E‑shape economy.

Sanjeev: What’s E‑shaped?

Paul: Upper class, middle class, working class. So basically we’re now analyzing all of our deals in terms of how they touch different parts of the economy and where is your dynamic change gonna hit you later. So on the upper part of the economy…

Sanjeev: So you believe there will be a middle class?

Paul: We believe there still is a middle class and they’re struggling today. Yeah. Interest rates have not been kind to the middle class. A lot of them are landlocked in their homes that they probably bought pre-COVID, refied it out at 21 – 22. So they have a very cheap mortgage, very low cost of living right now today, but they’re landlocked. Their wages haven’t kept up with inflation. People are seeing white-collar, gray-collar jobs disappear relative to AI and all the things you were talking about. And they’re kind of trapped. 

Working class thesis is that they’ve been in a quasi-permanent recession for the last 30 years, and the dynamics there are still happening relative to AI. But we take each of our deals and actually apply it to how we believe that company or product or service will touch at some point, because B2B companies eventually go to C will eventually touch those parts of the economy.

Sanjeev: I’m just curious, it’s a bit of a tangent, but how do you see, because Don [Wilson] talked about the future of labor and you know there’s a lot of concern around income inequity. Obviously, you know, one of the things that was enabled in the last three years was debt fueled consumption. Where do you see sort of your fit for purpose niche, like do you have a role in how you provide creative capital to the middle class and the working class?

Paul: Yes, we’re microeconomic investors. So we try to find the solutions and work our way back up to the problems. One of our new fishing holes, which is very different from royalties, is housing affordability today. So we are looking at ways to not overcharge the consumer for housing affordability. Traditional, say auto finance, okay, this person can’t afford a car, give them a car and just charge them subprime auto rates and the curves will work out. So that’s sort of like almost like, scraping the working class because they can’t afford a car. 

We’re looking for creative ways, notably targeting the middle class, for them to access the equity in their homes without actually hurting their debt service coverage ratios on a monthly basis. So we have a new emerging deal there. And then we’ve also done a bunch of localized healthcare investments, and we’re looking at how healthcare companies are starting to appreciate the fact that housing insecurity leads to more disease, leads to more illness, leads to more healthcare costs.

Social determinants of care and trying to actually have them chip in and say, okay, we can actually save a lot of money on healthcare if we actually help certain parts of the economy.

Sanjeev: Yeah. No one likes health insurers, I think. Can you fix that or maybe by working with them?

Paul: I will not take on that job but maybe next year.

Sanjeev: You should look at that. It’s not a niche, it’s like big. The opposite of healthcare you’re looking at also, funeral homes.

Paul: So like the whole fishing hole analogy again, l  love the Riches in the niches and I’ll let you trademark it and license it back for royalty streams.

Sanjeev: I’m sublicensing it from someone.

Paul: But internally you know we call the niches fishing holes and people say well that’s a weird analogy. We had an LP ten years ago say before I commit to the fund, I have one question, and you know, door A, are you a better fisherman of a well-fished hole? Or door B, are you a better finder of underfished or unfished fishing holes? No hedging required, door B categorically. So we’re always working basically again at the microeconomic level to try to find data points in certain fishing holes and then lead to new fishing holes. 

And one big theme we’ve been looking at for the last six or seven years has been what’s now being called the silver tsunami. Basically, a lot of small to medium-sized business owners are reaching retirement age. And because private equity has grown so big, there’s not a lot of exit opportunities for these small businesses, medium-sized businesses. And so we’ve done work in IT MSP, so your help desk provider. It’s 30,000 help desk companies in the United States today. And basically most of them have sub five million dollars of EBITDA. No one’s buying those companies that are private equity backed. So we’re kind of looking at all these like long-tail silver tsunami industries. And so through some productive research, we came across funeral homes. The horrible joke is everyone’s dying to get in, which we try not to use, but looking at the the long tail there, there’s 19,000 independent operators that are…

Sanjeev: There’s more people that are gonna die than be born in America by 2030.

Paul: Interesting. We’re we’re peak population for high schoolers in a year or two, right? Yeah. But there’s 19,000 of them, and the average age is like 57 to 58 years old for an owner. And so that just is basically pattern recognition for us to say, let’s go build an ecosystem of experts and go try to tackle it. So we spent six months building an ecosystem of experts and reviewing a bunch of deals, and we eventually actually walked away from the fishing hole because while there’s some private equity backed players with 50 plus homes, a couple of public companies with hundreds of homes, thousands of homes, there’s not an easy bridge to get from two to 30. And so there’s actually diseconomies of scale in a certain way. So the microeconomics didn’t play out despite the fact that from a macro standpoint, you’re about to get into unfortunately a cyclical upswing of deaths in the United States as COVID accelerated a certain portion of the to be sick or should have died population in the last couple of years have brought it forward. And now you’re about to return to historical norms. So you’re actually going to have an uptick.

Sanjeev: I love macro, so you kinda do the opposite, so you do a lot of micro. What is something that you’re doing in these micro sorts of opportunities that is non-obvious to a room like this? Like what are you learning about our economy, our markets, our state of the state, perhaps just leveling up from all the micro sort of work that you do in the fishing hole?

Paul: So I’d love to say the joke, if I understood the macro, I wouldn’t be running around playing with little companies around the country and having a portfolio of fifty-three, you know, long tail investments. No, but in all honesty, look, the US consumer is struggling. 

For last 18 to 24 months, we’ve been seeing it. So we have some investments into non-performing consumer debt and the decay factor there has been pretty massive. And so the US consumer is overlevered. I mean this is nothing new probably, but I think the decay is happening faster than people think. So we’re actually quite concerned about the workforce and middle class, those that are over-levered having very little way to get out of that, and then the social ramifications of that.

So we’re trying to figure out how to get ahead of the social ramification side of how do you actually put these people back into the financial community and/​or basically have some type of retraining. So we’re doing a lot of work in trade schools, for profit education, things like that, which actually will probably get either government funding, state funding, or even private funding to try to retrain and retool you know basically unemployed Americans that would otherwise fall out of the working class.

Sanjeev: Gas cost uplift that’s happening. Because you know, there’s a stat that the top ten percent of American sales represents fifty-five percent consumption. There’s all this money on the sidelines, the markets are not really representative of actually what’s going on. What is your view of are we headed towards a recession in the US based on what’s happening from a cost of living inflation perspective?

Paul: Yeah, like I mean again, I’ll go back to the E‑economy. I think you’re just gonna have very disparate living conditions for different people in each part of the E‑economy. And I think you know we’re seeing unbridled spending at the top of the E‑economy.

I would not be very comfortable going into experiential economy for like say the middle part of the E and bottom part of the E, we’re actually looking for ways for people to spend their time. So we’re actually looking at a bowling alley roll up if you can believe that. 

Sanjeev: I like bowling. 

Paul: I love bowling too. I grew up bowling. And you look at it and it’s like it’s a very inexpensive way for certain parts of the economy. 

Sanjeev: Although bowling is getting expensive too. Private equity is probably in bowling.

Paul:  Private equity’s going to bowling, private credit’s going to bowling, but there’s again there’s some private equity role plays, and then there’s a bunch of long tail economy. But we’re we’re we’re reviewing each niche, each fishing hole against where is it hitting and where is our exposure. So I have no predictions for you other than I think the E will just get longer and maybe taller. I don’t know what the right analogy is, just in terms of the separation between the different parts of the E‑economy.

Sanjeev: On that note, I think we need a break. Thank you so much, Paul, for coming.

Tonya:  To learn more, download our Financing Reality report at the link in the show notes. Thank you for tuning into the S2G podcast. If you enjoyed this episode, please subscribe, leave us a review, or share it with a friend. For more information or to connect with us, check out s2gin​vest​ments​.com.

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