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The Quest for Diversification in Private Credit

Old Hill’s Investment Focus

In the private debt asset class, small balance lending transactions are generally considered deals less than $50mm.  Old Hill Partners manages a niche private credit strategy with a focus on sub $25 million senior secured asset-backed lending opportunities, primarily within the United States.  This small balance lending focus allows us to capture a small deal premium that enhances our overall return results.  Our investment efforts focus on transactions with collateral that falls within one of four types of assets: (1) financial assets with analyzable data series, (2) commercial receivables, (3) equipment/machinery, and (4) inventory transactions. The attractive risk-adjusted returns the strategy is capable of generating is validated by our track-record. The returns are driven in large part by an illiquidity premium, a small-deal premium combined with the senior investment team’s skills and their rigorous approach to underwriting and investing in these asset types.  

A Complete Skillset

The investment team at Old Hill is experienced in all aspects of the investment process, from deal sourcing to due diligence, underwriting, transaction structuring, monitoring, and exiting deals. Our staff is comprised of members with decades of relevant experience, forming a well-balanced team with complementary skills and backgrounds, that provides full coverage in all the asset types covered by our focus.  The ability to allocate capital across these asset types allows us to invest capital where we, as the manager, feel the best risk-adjusted return resides and not invest capital in a specific asset type because it may be the sole focus of a fund (e.g. an aviation finance only fund).  This approach results in a more diversified asset-based lending portfolio for investors.

Hands-on Approach

Old Hill operates an in-house lending platform that encompasses deal origination, structuring, diligence, transaction execution, monitoring, and servicing for small balance lending transactions, focused on four collateral types:

  1. Financial assets with analyzable data series (i.e. charged-off consumer debt, merchant cash advances, auto loans, consumer leases, credit cards, and consumer loans);
  2. Commercial receivables (i.e. distribution rights, tax credits, and insurance claims);
  3. Equipment/machinery (i.e. aviation); and
  4. Inventory transactions (i.e. art and antiquities).

Although we look at a range of assets within the small balance lending focus, transactions will generally have characteristics associated with the four collateral types described above.   While the borrower’s underlying business may differ, the underwriting performed by Old Hill is similar.  Case in point, a merchant cash advance lender versus a sub-prime auto lender. In both cases, Old Hill is lending to a specialty finance company, even though the companies might be operating in different industries. The approach for Old Hill is the same in that both transactions are considered financial assets with analyzable data series. The underwriting approach centers on analyzing historical portfolio performance data for each company, constructing a financial model to project the asset cash flows using that data, stress testing those cash flows, and superimposing a structure that protects us from various combinations of adverse outcomes. This ultimately leads to the derivation of appropriate advance rate/ loan-to-value (LTV). The team members at Old Hill have the data analysis skills to perform these functions that allows us to review a variety of transactions with similar characteristics.  This approach also holds for the other asset types we lend against.

Deal Flow Strategy

Old Hill’s deal flow is underpinned by a robust strategy where deals are sourced on a proprietary and less competitive basis given the fragmented opportunity universe for sub $25 million transactions (deal competition increases significantly above that sweet spot). Our principals have an established network of contacts for sourcing opportunities within the four asset classes discussed above. Approximately one-third of our transactions are sourced from repeat borrowers and referrals from past or existing borrowers, another third are referred to us from brokers and third parties, and the remaining third comes from direct solicitation given Old Hill’s longstanding reputation as a lender in this space.  Old Hill’s ability to customize loans, and more specifically, the willingness and ability to provide revolving lines of credit gives us a competitive edge in the market

Private Debt vs. Private Equity Investing

It is important to emphasize that, unlike private equity investors who take on the “operational responsibilities” such investments entail (i.e. potentially operating the company with the required industry experience to do so), Old Hill generally limits its lending to a senior loan backed by a specific asset or a pool of assets with a focus on the value or cash flow stream of that asset and perfecting our interest in the asset. By lending on a senior and discounted basis relative to the value of the assets being financed our borrowers are required to invest their own capital on a subordinated basis to us which provides for a strong alignment of interest between lender and borrower.

Diversification Goal 

By concentrating on small balance asset-based lending opportunities and assembling a well-balanced team with complementary skills and backgrounds that provides full coverage of our four-tiered asset focus, Old Hill is able to provide investors with a more diversified investment portfolio while generating a risk-adjusted return.