Breaking down the different private credit strategies

Transcript

I'm Keri Findley. I run an asset manager that we're calling to Tacora, and we are doing asset-based lending to venture-backed businesses as our main product. 

You're either taking more risk in terms of more leverage, or you're taking more risk in terms of less liquidity. So people view that illiquidity adds more risk. I believe illiquidity only adds more risk if you don't have the right asset-liability mismatch. And so, if you have a vehicle where you'd never have to sell, the illiquidity doesn't really hurt you. It actually just allows you to create something bespoke and differentiated and may be very customized that adds to returns. You kind of look at the private markets, and private credit is kind of seeing its day in the sun. 

The biggest one would probably be the levered loan market. Levered loans are when a private equity firm like KKR or Blackstone takes over a company. The first thing they want to do is redo the capital structure, and they offer billions of dollars and it's publicly offered. But it's still a private loan, meaning that the disclosure requirements are lower, the loans have lower ratings than a public bond would, and a public bond fund that you would get if you invested in PIMCO or Ramco, or TCW.

When you go from there, there's kind of bespoke in private situations, a lot in middle-market loans, a lot to smaller companies, maybe some kind of brick and mortar type stores that are looking for debt. They would go to a "quote unquote" middle-market lender, and that middle-market lender would provide them debt. It would be at a higher rate than the levered loan, it would be at a higher rate than the public bond. And then from there, you know, the world kind of scatters. And I'm very focused on this niche of asset-based lending to venture-backed businesses. But there's also structured credit that isn't a venture-backed businesses. It's to kind of more the businesses that you would know off the top of your head. 

So asset-based lending to venture-backed businesses, we are looking for businesses that are trying to really create a new market for themselves, but still have kind of an asset that you would have found on a bank balance sheet many years ago. And so we help the company separate the asset from their corporation, put it into a bankruptcy-remote SPV that we lend against. 

Mezzanine lending is another very popular form of lending. And it can either be for large companies or small companies who have as much debt as they're going to get rated by a rating agency and then they want a little more leverage. And so they go to a mezzanine lender who lends in a second lien position below the debt. They already have. So mezzanine lending, you can definitely generate mid-teens returns, sometimes even higher. But if the company that you're lending to has a problem, you're in first position to get wiped out. It's very high rate of returns. You're only earning an interest rate.

You don't usually have equity upside. And so if I was going to invest in mezzanine, I would just want to make sure that I understood if the company went on the business how I would be protected and what my rights were. There are funds that do it really well. When markets are really hot, it usually makes sense to originate. When markets are not hot, it usually makes sense to buy. 

You know, I think the market thinks of distressed as bonds or loans that have traded down in price substantially. I think special situations are when you actually add value by changing the plan. I view distressed investing as a passive form of debt investing and special situations as an active form of debt investing. I think distressed investing is really interesting. I think the returns can be anywhere from 8% to 20 plus 30%. It's just market cycle and picking the right assets that will rebound in a really short period of time. 

Distressed investing can have great returns over a long period of time, but even greater returns over a short period of time. As the fear comes out of the market, the fear lifts and the good investments start trading at more reasonable prices again. 

I would have as many asset classes that are unique. I look at this market of asset-based lending to venture-backed businesses is something I'm obviously very passionate about and really exciting. On the rest of the private credit spectrum, I would probably buy senior loans with some leverage on it, and then I'd probably have a bucket available for special situations, and I'd try and pick a manager who was doing something that was going to be, let's call it a little slow rolling. So today we know that the market's very hot. There's a lot of liquidity that won't always be the case. And so finding a manager who's going to be patient and going to wait for great opportunities, I think is of extreme value to an RIA trying to build a portfolio. 

And I just think looking for niches in the market that aren't really well exploited and aren't looked at by every fund is the best way to create value.