O’Connell: NXT’s portfolio makeup, active investment style mitigate risk

The mid-market lender, which does mainly senior debt deals with private equity sponsors, also invests its money alongside its committed capital, the firm’s head of asset management said. 

NXT Capital uses the composition of its portfolio as a key strategy in risk management, which involves hunting for a diversified mix of companies, Kelli O’Connell told PDI at its Roundtable event.

O’Connell, who leads NXT’s asset management division, said important characteristics include recurring revenue and “long-standing” customer relationships. The Chicago-based mid-market lending firm stays away from companies that don’t have those characteristics, she explained.

“What we avoid is companies with binary risk – single product companies, high levels of customer concentration… or regulatory change risk,” O’Connell said. “Those are very hard characteristics to mitigate in a company.”

When it comes to avoiding defaults, NXT’s first lines of defence are its thorough underwriting process and ensuring the deal closes with tight documentation to ensure the firm has “a seat at the table if the situation goes sideways”, O’Connell explained. NXT has an “active” portfolio management strategy but also does have in-house staff with restructuring experience.

“We really have a little bit unique approach to our business model, in that we call it a ‘hybrid model’,” O’Connell explained. “We invest both for our balance sheet, as well as [for being] an asset manager. So what that means is that we put our own balance sheet at risk, and then our asset management programs invest alongside our balance-sheet investments.”

She added that this model creates a “unique alignment” and relationship between NXT and its investors.