Trends Watch: Lower Middle-Market Private Credit

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Brett Hickey, Founder & CEO, Star Mountain Capital.

What is your outlook for lower middle-market private credit?

This is the third downturn our team has invested through. Historically, market downturns have been some of the best opportunities to invest, particularly for more specialized strategies such as ours where we focus on non-private equity owned companies and businesses looking for strategic capital partners to assist with acquisitions and similar high value use of proceeds. We currently see some banks and other lenders retreating and with the aging population and the multiple expansion from companies growing into the middle-market, we believe this will be a great vintage year for investing in private credit.

What is your outlook for lower middle-market secondary and credit fund investing?

In our experience, and what we have seen from third-party market data sources, secondary fund investing has been shown to historically be one of the highest risk-adjusted return strategies among alternative investments. Our specialization focused on credit and the U.S. lower middle-market has resulted in 100% of our secondary fund purchases made to date being non-brokered, which we believe only increases the attractiveness. The strategy is generally counter cyclical with substantial diversification as a further benefit for investors.  

What are the greatest opportunities you see and why?

Providing capital to high quality U.S. private businesses that are not well served by the larger banks or investors with purchasing assets and limited partner positions from investors who need early liquidity and are willing to sell assets at potentially attractive valuations.

What are the greatest challenges you face and why?

While the absolute and risk-adjusted returns are attractive, in our view, nothing comes free in life. In our case, our investment strategies are extremely labor intensive requiring a lot of staff, expertise and relationships to find, analyze and manage smaller private investment opportunities.

What keeps you up at night?

We are always focused on everything from the global macro economy to our individual borrowers and portfolio companies. We believe investors need to think carefully about market trends including the importance of how technology and the changing market environment from COVID-19 can impact businesses. We are also always looking for top quality talent as we continue to expand our roughly 50- person team and $1.2 billion in assets under management. In today’s market, we need to constantly evaluate and develop talent with even more comprehensive use of technology.

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.