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RESEARCH, ANALYSIS AND OPINIONS

NEWS

Insights from the Private Debt Forum

Members of the Old Hill team attended the Opal Group 2019 Private Debt Forum on June 3rd in New York City. The speakers, which included Old Hill’s Chief Operating Officer, Jeff Haas, provided firsthand insight into the current conditions and trends in one of the fastest-growing asset classes in the investment management industry– private debt. Henry Owainati, a member of the Old Hill team who attended the forum, reports below on some of the key takeaways from the event.

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Old Hill's Jeff Haas on Private Credit Fund Structures

This month Old Hill’s COO, Jeff Haas, discusses private credit fund structures. The fund structure used to execute private credit investments is a fundamental element that investors should consider when evaluating a private credit fund. The fund structures that are most prevalent and that should be evaluated are the “closed” vs “open” ended fund structures. A fund that is closed-ended will have a finite life and the amount of capital raised is capped by either the passage of time or upon meeting the capital raise target. Under this structure, the life of the fund is generally known and does not continue on indefinitely. Contrast this with an open-ended structure, or what some refer to as an “evergreen” fund, which can raise capital indefinitely.

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Private Credit: Old Hill Lending Outlook 2019

Most of the events we anticipated in last year’s Outlook, including four interest rate hikes, an equity market correction and a partial yield curve inversion, have come to pass. Waning support from tax cuts and concerns about a late-cycle combination of rising inflation, tightening policy, and slower growth have caused significant stock market valuation adjustments and put the U.S. Federal Reserve’s hawkish stance in place since 2015 on the defensive. Consequently, risk of a policy mistake in 2019 is now relatively low; neither normalization of interest rates nor the pace of its balance sheet unwind will continue on autopilot. We expect at most one additional hike in 2019 before the Fed pauses for what could be an extended period. Accordingly, moderate expansion will continue this year, albeit at a slower pace.

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Canceling Out the Noise

Private market investments have distinct advantages during periods of high volatility. In Old Hill's case, asset-based lending transactions can result in greater return consistency over time, as returns are calculated based on the performance of the underlying debt and are not dependent on the whims of public markets.

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Keeping Covenants

Lenders required strong covenants following the 2009 financial crisis, but a tremendous demand for yield and an extraordinary amount of dry powder accumulated within direct lending funds has translated into a willingness to loosen those standards in order to put capital to work. As sponsor-backed, covenant-light loans skyrocket, Old Hill is content to stay in our lane – the prudent generation of attractive, risk-adjusted returns through structured asset-based small balance debt transactions.

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