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Bespoke Fixed Income Investing, Outpacing Inflation And Uncorrelated To Public Markets

By Daniel Mafrice, Chief Executive Office, 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 represents one of the most attractive areas for fixed income investors today. However, for individual investors that want to access these investments privately, without investing in a publicly traded stock, direct, private access to these securities might have seemed previously unavailable. In decades past, this area of lending was dominated by banks and other large institutional investors. Post the global financial crisis, government regulation and bank consolidation has transitioned this market from banks to privately held investment funds, which now comprise over 80% of the corporate loan market. Remora Capital Partners is now further enabling individual investors to gain access to investing in these loan securities in a bespoke private investment fund structure free from direct exposure to the daily volatility of investing in the public stock markets. Uniquely, Remora enables investors to gain access to a diversified private loan portfolio deploying 100% of investor capital commitments immediately upon acceptance into its funds vs. most private debt funds which invest over 2 to 3 years in a typical capital commitment and drawdown process and may never call all of an investor’s capital commitment.


Over the last 20 years, as banks have consolidated and regulatory scrutiny has been dialed up, private debt funds have emerged as the main source of debt capital for private U.S. corporations. This trend is expected to be further exacerbated by the recent regional banking crisis. The vast majority of capital for these private debt funds comes from some of the nation’s largest institutional investors, mainly insurance companies like Prudential or public pension funds like CalPERS or NY City Pension Fund. Individual investors largely do not have access to investing in these loan securities or private debt funds except through publicly traded business development companies (“BDCs”) or large public mutual funds. Remora Capital Partners provides access for individual accredited investors to make a privately held investment that drafts alongside some of the largest U.S. institutional investors and invest directly into middle market corporate loans without direct exposure to stock market volatility.


Middle market borrowers are typically tenured businesses with extensive operating history and enterprise values between $100 million and $750 million. 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, and typically demand higher yields at the same time. Middle market loans are floating rate vs. fixed rate treasuries or high yield bonds, which means as interest rates rise, the yield to investors increases with higher interest rates. This can be an important tool for combating inflation pressure on an investment portfolio. Meanwhile, since 2007, middle market loans have historically been issued at an average of 1.35% higher yield for investors vs. the large corporate loan market. Additionally, middle market loans typically retain important lender tools like first priority security and financial maintenance covenants where large corporate loans are typically covenant lite in today’s market.


Within this market, Remora Capital Partners primarily targets first lien senior secured loans issued to private equity (“PE”) firms for leveraged buyouts (“LBOs”) where on average 50% or more of the purchase price paid for a business 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 opportunities for investors. PE firms that have long-standing track records and multiple funds under management are more capable of infusing additional equity as needed to avoid defaulting on the debt borrowed by their portfolio companies. After selling to and partnering with their new owners, portfolio companies often benefit from the resources and best practices that PE firms can bring to the table.


At the end of 2022, credit markets tightened substantially causing new loans in this market to be issued at an additional 1% - 2% higher premium despite lenders demanding 15% - 30% less debt to be issued to new borrowers. This credit tightening trend continued with the regional banking crisis which began in March 2023. In an April 2023 article, the Blackstone Group stated that the “Golden Moment” for private credit has arrived. We concur!



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