What sort of opportunities do you see providing credit facilities and debt to companies that operate in the private lending sector?
We’re not seeing traditional capital sources provide credit to consumers and small businesses like they once did. There’s still a demand for that type of product and capital and you’ve seen some pretty interesting companies come into the space to provide that capital. It’s no different from what we do – we try to provide private debt solutions to middle market companies that can’t access traditional banks or traditional debt financing like they once could prior to the debt crisis. We’re looking to just fill a void.
Has that void created more opportunities for your firm?
Yes. We’re going to focus specifically on anywhere from a $5 million to a $40-$50 million loan. In our opinion, we think there are fewer providers of capital in that space. We lend to both distressed companies and more traditional, healthy companies across our different products.
You’re just not seeing the flow of lower mid-market debt capital that we saw. I don’t know when that will come back but, in the interim, we’re going to spend our time there. That’s where our relationships are, that’s where our expertise lies.
Will it come back at all? Is this a permanent shift?
I can’t predict the future but we’ve been doing this 2007 and we haven’t seen them come back.
There will be a permanent shift and there always will be a market for private debt. The question then becomes, are there going to be other larger providers who will view this as attractive and want to get involved? I don’t know, but I don’t see a change in the next few years.
Would that then lead to issues of overcrowding?
You are seeing more people try to get into the sector. Without a doubt, it’s an attractive investment – at least in my opinion – from a yield perspective in a market where there aren’t a lot of options for generating yield right now (especially in the US).
The issue is; this is an infrastructure-heavy strategy. Private debt operates very much like a bank; you have to have origination staff, underwriting expertise, back office risk management. It’s not a strategy you can turn on overnight. There are some barriers to entry.
Most importantly, you have to have the relationships to see that dealflow … While I think you will see people go after it, I think a lot of the larger alternative firms or asset management firms focus on your north of $50 million investment size. Because they are very, very large firms, they have a lot of capital to deal with and they’re not spending time looking at a $10 to $20 million loan.
While I think you’ll see growth, I think you’ll see more growth for larger credit opportunities. I don’t think you’ll see as much down where we play, largely because it’s not scalable.
Given the gap between supply and demand, how do you filter out deals you would like to work on?
We won’t look at transactions where we don’t think there’s a liquidation value on tangible collateral. We won’t look at investments that are purely cash flow loans. We won’t look at investments where we can’t get comfort or expertise for known assets.
We see more than 600 deals a year but we execute as a firm on maybe eight to 10. A lot of those will get pushed aside in the first 48 hours because we know immediately that it doesn’t have the right collateral coverage or we don’t have the ability to be senior in the capital structure.
Brendan Carroll is a partner and co-founder of Victory Park Capital