Private Credit Market: A Comprehensive Look
Introduction
In this episode of the Odd Lots podcast, hosts Tracy Alay and Joe Wisenthal discuss the private credit market with Laura Holson, a managing director at New Mountain Capital. The conversation covers various aspects of the private credit market, including its growth, the types of deals, the impact of interest rates, and the potential influence on the broader economy. Notably, the discussion provides insights into the structure and dynamics of this growing market.
Private Credit: What Counts as Private Credit?
Laura Holson defines private credit as debt that is privately originated and not traded on any public market. She explains that the term encompasses everything from direct lending to opportunistic debt, distressed debt, and real estate financing. Private credit can vary in its position in the capital structure and is typically unrated, allowing for more flexibility and customization compared to broadly syndicated debt.
New Mountain Capital: Defensive Growth Sectors
Holson provides an overview of New Mountain Capital, describing it as an alternative asset management firm with a focus on "defensive growth sectors." The firm's strategies span across private equity, credit, and net lease investments, aiming to invest in resilient, non-cyclical sectors regardless of macroeconomic conditions. Holson emphasizes the importance of using the firm's industry knowledge and underwriting capabilities across all its products.
Expertise and Due Diligence
The interview delves into the due diligence process and the expertise required to evaluate credit quality in various industries. Holson explains that New Mountain Capital proactively focuses on specific sectors of the economy, such as enterprise software and tech-enabled healthcare, to gain a deep understanding of these niches. The firm utilizes a substantial team of investment professionals with a dedicated focus on industry-specific analysis.
Macroeconomic Environment and Resilience
The hosts and Holson explore the impact of the macroeconomic environment on private credit, particularly in light of increasing interest rates. Holson notes that the majority of the capital structures backed by private equity firms consist of more equity than debt, providing inherent protection against interest rate fluctuations. Additionally, the relationship between lenders and sponsors in private credit deals allows for more effective work through financial distress, contributing to the market's resilience.
Dry Powder and Regulatory Considerations
The conversation also touches on the significant dry powder in the private credit market, with approximately $580 billion in funds raised and waiting to be deployed by private equity firms. Holson discusses the competitive landscape and the potential impact of regulatory changes on the private credit market. Despite potential regulatory scrutiny, she highlights the lower leverage and matched asset-liability structure in private credit deals as factors that provide an inherent safety net.
Conclusion
The episode provides a comprehensive and insightful overview of the private credit market, shedding light on its growth, structure, and resilience. The nuanced discussion with Laura Holson offers valuable perspectives on the appeal of private credit to investors, the dynamics of deal sourcing and due diligence, and the market's potential for further expansion.
In summary, this episode of the Odd Lots podcast serves as an educational and in-depth exploration of the private credit market, offering valuable insights for listeners seeking to understand this rapidly evolving segment of the financial industry.