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Fixed Income Investing While Combating Inflation via Middle Market Corporate Lending

By: Daniel Mafrice, CEO, Remora Capital Partners

 

Investing in privately held, floating rate, U.S. middle market corporate loans is a good way to protect against inflation while gaining access to quarterly, recurring fixed income streams. U.S. middle market corporate lending represents one of the most attractive areas for fixed income investors today. However, for individual investors that want to access these investments privately, without investing in a publicly traded stock, direct, private access to these securities might have seemed previously out of reach. In decades past, this area of lending was dominated by banks. Post the global financial crisis, government regulation and bank consolidation has transitioned this market from banks to privately held investment funds, which now comprise over 90% of the corporate leveraged loan market. Remora Capital Partners is now further enabling individual investors to gain access to investing in these loan securities in a private investment fund structure free from direct exposure to the daily volatility of investing in the public stock markets. Uniquely, Remora enables investors to gain access to a diversified private loan portfolio in weeks via an immediate investment vs. most private debt funds invest over 2 to 3 years in a typical capital commitment and drawdown process.


Over the last 20 years, as banks have consolidated and regulatory scrutiny has been dialed up, private debt funds have emerged as the main source of debt capital for private U.S. corporations. The vast majority of capital for these private debt funds comes from some of the nation’s largest institutional investors, mainly insurance companies like Prudential or public pension funds like CalPERS or NY City Pension Fund. Individual investors largely do not have access to investing in these loan securities or private debt funds except through publicly traded business development companies (“BDCs”) or large public mutual funds. Remora Capital Partners provides access for individual accredited investors to make a privately held investment that drafts alongside some of the largest U.S. institutional investors and invest directly into middle market corporate loans without direct exposure to stock market volatility.


Remora defines the core U.S. middle market as companies with between $7.5 million and $50 million of annual EBITDA, or cash flow. Loans in the core middle market typically demonstrate many important characteristics that reduce risk for investors vs. publicly traded large corporate loans and high yield bonds, and typically demand higher yields at the same time. Middle market loans are floating rate vs. fixed rate high yield bonds, which means as interest rates rise, the yield to investors increases with higher interest rates and resets on a monthly or quarterly basis. This can be an important tool for combating inflation pressure on an investment portfolio. Meanwhile, middle market loans have historically been issued at an average of 1.22% more for investors vs. the large corporate loan market. Additionally, middle market loans typically retain important lender tools like first priority security and financial maintenance covenants where large corporate loans are typically covenant lite in today’s market.


Within this market, Remora Capital Partners primarily targets first lien senior secured loans issued to private equity (“PE”) sponsors for leveraged buyouts (“LBOs”) where on average 50% or more of the purchase price paid for a business is subordinated to the lender. Loans that were underwritten to companies with the backstop of seasoned PE sponsors as the owners of the business stand out as safer and more stable opportunities for investors. PE firms are more capable of infusing additional equity as needed to avoid defaulting on the debt borrowed by their portfolio companies. PE firms that have long-standing track records and multiple funds under management have more resources to bear and greater reputations to protect. Moreover, the portfolio companies that attracted “smart money” from high quality PE firms have already created lengthy paper trails of success long before a buyout deal was even a possibility. After selling to and partnering with their new owners, portfolio companies often benefit from the resources and best practices that PE firms can bring to the table.