For Investors

Opportunity in Private Credit

Yield in a Low-Interest Rate Environment

These days, investors have few options when it comes to generating yield from publically traded credit. However, economic growth, while measured, has been sufficient to keep default rates on privately placed corporate debt in check. Accordingly, investors are discovering the qualities inherent in this relatively undiscovered asset class, such as shorter duration and yield premiums more often in excess of those available from comparable public credit instruments.

Filling the Void

Meanwhile, tighter regulations have made it unfeasible and uneconomical for large financial institutions to lend to small- and medium-sized businesses - precisely the corporate segment that needs growth and expansionary capital the most. Such borrowers are increasingly turning to alternative lenders as a source of financing, which creates an attractive supply-demand dynamic between the companies that need capital and the investors that can provide it. When properly vetted and constructed, these private debt transactions offer risk-adjusted returns well in excess of those available to traditional credit investors.

Understanding the Risk

Structured properly, private debt can provide a much greater safe haven than is typically understood. For instance, Old Hill’s transactions typically carry floating coupon rates and floors in order to protect against rising interest rates, while strong collateral coverage and proper deal structure address a wide variety of other transaction-specific risks. Returns associated with private debt do not typically move in tandem with other assets, such as stocks, private equity or public bonds, in response to changing economic and market conditions. For the portfolio owner, these characteristics can increase portfolio diversification and reduce volatility.

Asset-Based Lending

A properly structured asset-backed loan portfolio has the potential to offer attractive returns with minimal volatility, but the market is not simple. The process of identifying, structuring and underwriting a private debt transaction is complicated, variable and by no means a one-size-fits-all process.

Old Hill’s experience in sourcing and constructing transactions is a signature advantage the company offers to investors and borrowers alike.

Old Hill’s process is anchored on a proprietary full-service platform that includes:

Illiquidity Premium

Turning Illiquidity into an Asset

The persistently low interest rate environment has resulted in a broad hunt for yield, and while conventional wisdom holds that higher yields equal higher risk, not all risk is created equally. Private lending typically yields above traded credit instruments because of the illiquidity of the underlying loan, not because asset-based lenders face materially higher issuer, interest rate or market risk. And importantly, prudent borrower selection and transaction structuring can address these issues, thus turning the illiquidity found in private debt into an asset, not a disadvantage.

Structural Changes Impacting Liquidity

Growing structural changes from financial services consolidation, increased capital requirements, and stricter regulatory oversight on investment banks have significantly altered the normal market-making activities of many traditional fixed-income market participants. The result is that there has been a significant reduction in the liquidity profile for most U.S. debt markets since the financial crisis. Investors should be alert to the fact that in a crisis situation, the liquidity normally available for many fixed income instruments just may not materialize.

Embracing Illiquidity

If investors embrace the notion that traded market liquidity may be illusionary, then the advantages of asset-backed lending become clear. When properly constructed, with deep collateral coverage, disciplined due diligence and other risk mitigation techniques developed by Old Hill, the illiquidity inherent in asset-based lending can provide a yield premium without the typical increase in risk associated with higher-yielding alternatives. In our world, illiquidity is to be embraced, not shunned.