Private credit investors looking to leverage the high-interest rate environment should consider partnering with established credit managers experienced in navigating diverse market conditions. While a strong track record is valuable, it is not always sufficient given the recent market tumult. Many credit managers now face repricing and restructuring challenges with legacy portfolios underwritten in lower interest rate environments.

The Opportunity:

▶ Private credit returns are at recent or historical highs.

▶ Cash flows from borrowing companies prioritize first-lien lenders.

▶ Direct lenders benefit from higher base rates, with senior secured loans yielding 11-13%+.

The Risk:

▶ Some portfolios see increased default risk as borrowing companies are squeezed.

▶ Direct lenders dedicate more resources to defend prior vintage deals against repricing and restructuring.

▶ Underwriting standards may suffer as managers compete with banks for incremental yield.

The Solution:

Private credit investors may want to align with experienced management teams who:

▶ Launch clean-slate funds underwritten in high-rate environments.

▶ Focus on quality lower middle market companies, avoiding capital market competition. This can enable managers to maintain disciplined underwriting standards.

▶ Utilize efficient credit facilities for strategic growth like available lines based on different capital bases (e.g. uncalled capital, asset-based).

▶ Note: under-levered structures may be a sign of insufficient investment opportunities, and some managers may proactively offer to reprice their own deals to keep them on the books.

La Hoja Capital Partners is here to provide access to this growing sector. If you are a financial/wealth advisor or family office, please reach out to discuss how we can help you navigate this landscape.