A Differentiated Strategy in Private credit

By Daniel Mafrice, Chief Executive Officer & Managing Partner, Remora Capital Partners 

Investing in privately held, floating rate corporate loans is a logical way to outpace inflation while gaining access to quarterly, recurring fixed income streams. U.S. middle market corporate lending, known as Private Credit, represents, in our opinion, one of the most attractive areas for fixed income investors today.

Increased access for individual investors to Private Credit has been an important driver of the democratization of private investing. But how do investors in a new and unfamiliar private investment market differentiate opportunities and exert caution?

U.S. middle market borrowers with enterprise values between $100 million and $750 million and tend to be tenured businesses with an extensive operating history. Loans in the core middle market typically demonstrate many important characteristics that reduce risk for investors vs. publicly traded large corporate loans and high yield bonds. For example, they typically demand higher yields. The loans are floating rate vs. fixed rate treasuries or high yield bonds. This means as interest rates rise, the yield to investors increases in tandem. Importantly, floating rate loans have no duration risk, meaning their value does not significantly decline when interest rates rise because the interest payments adjust with market rates. This can be an important tool for combating inflation pressure on an investment portfolio, without significantly adding volatility. However, floating-rate loans can introduce nominal income volatility, as interest payments fluctuate with changes in benchmark rates—unlike fixed-rate instruments that provide stable coupon payments. Even as the Federal Reserve has begun cutting short-term interest rates and the absolute return of floating rate loans will decrease, the risk premium in Private Credit loans will continue to drive an attractive relative yield to “risk free” U.S. government bonds or alternative fixed income investments.

Within this market, private credit managers can target first lien senior secured loans issued to PE firms, often in connection with leveraged buyouts (“LBOs”) or other acquisition financing. On average, 50-60% or more of the purchase price paid for these businesses is subordinated to the lender. Loans that were underwritten to companies with the backstop of seasoned, “smart money” PE firms as the owners of the business stand out as more stable and resilient opportunities for investors. PE firms that have long-standing track records and multiple funds under management are more capable of infusing additional equity, if needed, to avoid defaulting on the debt borrowed by their portfolio companies. After selling to, and partnering with, its new owners, portfolio companies often benefit from the resources and best practices that PE firms can bring to the table.

In addition, one approach is to exclude the highest leveraged loans, which many lenders originate, and do not participate in loans in highly cyclical industries like retailers, restaurants, and energy. This additional selectivity is precisely what is needed to remain prudent should markets overheat, whether lenders loosen or remove covenants, subordinate their lien priority or over leverage a borrowers’ balance sheets.

Through bespoke, selective investing, investors can enjoy the attractive risk premiums in Private Credit lending without participating in the fringes of the market. 

Important Risk Disclosure: All investing carries risk. Certain asset classes may come into and fall out of favor over time. Diversification at the portfolio level and adjusting investment risk to individual investor circumstances is essential to achieving long-term objectives. 

About Remora Capital Corporation:

Remora was founded in 2021 with a primary goal of providing individual investors with improved access and a prudent approach to participating in Private Credit. Through its unique loan selectivity, Remora has been providing a truly bespoke and prudent approach to middle market Private Credit since 2021, before the Fed began raising rates and before the risk premium expanded in this attractive asset class. Remora narrows its loan portfolio into 100% first priority secured loans that are made solely to companies owned by well-capitalized Private Equity (“PE”) firms and that have documented maintenance covenants (important lender protections).