A Selective, First-Lien Approach to Middle-Market Private Credit

By Daniel Mafrice

Chief Executive Officer & Managing Partner, Remora Capital Partners

Investing in privately held, floating rate corporate loans can be a practical way to help outpace inflation while gaining access to quarterly, recurring fixed income streams. U.S. middle market corporate lending—commonly referred to as Private Credit—represents, in our opinion, one of the most compelling areas for fixed income investors today. 

As individual investors have gained greater access to Private Credit, the asset class has played a meaningful role in the broader democratization of private investing. At the same time, expanded access raises an important question: in a newer and less familiar private market, how can investors differentiate opportunities and remain appropriately cautious? 

In middle market private credit, disciplined selectivity is often what differentiates durable performance. Since 2021—before the Federal Reserve began raising rates and before risk premiums widened—some private credit managers, such as Remora, have adopted a more bespoke and conservative loan selection approach. This approach focuses on 100% first priority secured loans to companies owned by well-capitalized private equity firms, with an emphasis on documented maintenance covenants as an added layer of lender protection. 

U.S. middle market borrowers—often businesses with enterprise values between $100 million and $750 million—tend to be established companies with meaningful operating histories. Loans in the core middle market often exhibit characteristics that, in our view, can reduce risk versus publicly traded large corporate loans and high yield bonds. They typically offer higher yields, and they are generally floating rate rather than fixed rate like treasuries or many high yield bonds. As interest rates increase, floating-rate loan income can rise alongside them. Just as important, floating-rate loans generally have no duration risk, meaning their value may not meaningfully decline when interest rates rise because the interest payments adjust with market rates. This combination can help address inflation pressures without materially increasing volatility. However, floating-rate loans can introduce nominal income volatility, since interest payments move with changes in benchmark short-term rates—unlike fixed-rate instruments with stable coupons. And even as the Federal Reserve has begun cutting short-term rates (which can lower the absolute return of floating-rate loans), the risk premium available in Private Credit may still support an attractive relative yield versus “risk free” U.S. government bonds or other fixed income alternatives. 

Within this landscape, this approach primarily targets first lien senior secured loans used by private equity firms to finance leveraged buyouts (“LBOs”). In these transactions, an average of 50–60% (or more) of the purchase price is typically subordinated to the lender. Loans underwritten with the support of experienced private equity firms are often viewed as potentially more stable and resilient for investors. Private equity firms with long-standing track records and multiple funds under management may also be better positioned to inject additional equity when needed, helping their portfolio companies avoid default. Following an acquisition, portfolio companies can also benefit from the operational resources and best practices that experienced private equity firms may bring. 

In addition, one approach is to exclude the highest leveraged loans, which many lenders originate, and to not participate in loans in highly cyclical industries like retailers, restaurants, and energy production. 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 sheet. 

Through this bespoke, selective strategy, investors can enjoy 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. While past performance is not indicative of future results, Remora has invested >$330M since its inception and none of Remora’s loans have resulted in realized losses to date. With the recent conversion of our private funds into a private business development company (“BDC”) called Remora Capital Corporation, we’re furthering our mission. This new private BDC investment structure provides broader access to accredited investors, an evergreen structure with lower investment minimums, and quarterly liquidity via tender offers (subject to Board approval, see further details below). We encourage you to review our public filings on https://www.sec.gov/edgar.shtml 

 for additional details.