Private Credit Investing

Elana Margulies Snyderman:

Hi, Jay. Thank you so much for being with me today.

Jay Rogers:

Hi, Elana. Thanks for having me.

Elana Margulies Snyderman:

Absolutely, Jay. So, to kick off the conversation, tell us a little about ACME and how you got to where you are today.

Jay Rogers:

Sure. So, myself and a partner, Peter Eschmann, launched ACME about a year ago. September 14th, 2023 was our first close. We closed on $90 million from three family offices and a substantial amount of working capital to keep the lights on and pay bills, pay staff. Prior to that, we had worked together at Cerberus Capital Management. I was there for 7+ years. Peter was there for over 16, and we overlapped and over time, as the private credit asset class evolved, Cerberus went from what we do at ACME, we were really just repeating what they did then. It evolved into a much bigger shop, along with the growth in the asset class. And I left Cerberus in '15, went to Canada for a role there as Chief Credit Officer of the lending operations of Catalyst Capital for three years. And in wrapping that up, Peter and I got together and decided that we wanted to go back to what we were doing at Cerberus, which is focusing on lower middle market companies, special sits, stored credits in the middle and lower middle market space. So, that's how we really got to where we are now.

Elana Margulies Snyderman:

Jay, that segues nicely into the follow-up question I have for you. Given your focus on private credit investing, I would love to hear your high-level outlook for the space right now.

Jay Rogers:

Sure. Well, it continues to grow, I mean, it's been on a tear the last 15 years. I want to say, the number is something like a $1.4 trillion raised in the asset class. It appears that it's going to continue to grow. In the last year or two, as far as fundraising is concerned, what we have seen, and I think the market has observed in general, is that the larger checks tend to go to the established players. These are big names we all know, and as banks tend to pull back, or at least the big money center banks tend to pull back from leverage lending, the alternative market has filled the space.

Now that's created an opportunity for where ACME focuses, which is on the lower middle market. I would say, the bottom of the middle market. Let's call it credits from 10 to 75 million in size. So, as our former comps have gotten so big, managing tens of billions of dollars, a lot of cases over a $100 billion, it's just created a bit of an underserved market in that $100 and under space. A lot of those shops don't want to write a check under $200 or even $300 million. It's not to say they won't, but they really don't focus on that. And we think, given what we do, particularly in the non-sponsor sector, it's created a lot of opportunity to get low-risk or high risk-adjusted returns, high returns, low risk.

Elana Margulies Snyderman:

Jay, more specifically, I'd love for you to touch upon some of those greatest opportunities you see and why.

Jay Rogers:

Yeah, so what we tend to see, we don't find ourselves in a lot of competitive situations. So, in many more broadly syndicated sponsor deals, I've heard it described as a knife fight amongst potential lenders. And what tends to happen is, pricing gets cheaper, terms get worse from a creditor's perspective, infrequent reporting, fewer or no covenants. And so, what we see, is lower leverage, higher returns, and we believe, superior terms. We always have monthly reporting, sometimes weekly, and that's required per the credit agreement. Our deals, we've got blended average leverage on our portfolio now of 2.2x. Blended average yield is 13.4. So, we tend to see a much higher return. I mean, typically, Proskauer does a study every year on non-sponsor versus sponsor deals, non-sponsor being roughly 200 to 300 basis points wider. Frankly, I mean, we think ours are maybe 400 to 500 points wider with two turns or more less leverage. And again, all the reporting we want.

So, these are not distressed deals. There's often some kind of a story. Special sits is a term we use, but these are, in fact, sponsor deals. We will do sponsor deals; we just don't target them. And so, we think that the niche that we're in, again, it's these smaller checks, our average check size of about $20 million. We think, in the space that we're in, it's not one that we find a lot of competition in and that shows up in our terms and our rates.

Elana Margulies Snyderman:

Jay, on the other hand, what are some of the greatest challenges you face and why?

Jay Rogers:

A couple of things. Number one, on a Fund I, it's certainly fundraising, no question. It is a very difficult environment. It's always difficult for Fund 1s. And there are a couple, I think, challenges within the current environment, why it's more difficult. Number one, it's a hot asset class, so it's good on the one hand, you get a lot of attention. On the other, I think that direct lending in particular, has become somewhat of a dirty word. It's seen as a lot of people as a proxy for sponsored finance. And there's nothing wrong with sponsored finance, a lot of people do very well in it. I think most people do, but it's just a different risk reward proposition.

So, to distinguish oneself from the broader pack is one challenge. And then the second one is that you've got a lot of allocators who are long private equity and there's not liquidity in that asset class, it's, as you know, a very long horizon and from what we've been told anecdotally, but by a lot of allocators, they are stuck in some of these longer vintage funds, that they've been in there much longer than they thought they would be. So, that's a big challenge there. So, that is on the fundraising side.

On the investing side, we have very little challenge in identifying good deals and seeing good deals. We see more than we can process. We have a good network. I often say that a lot of people know where to get $250 million, nobody knows where to get $20 million. So, just the fact that we'll do these smaller deals, we get a lot of attention that way. But the challenge in non-sponsored lending, and it can be difficult in a workout situation cause there's no junior capital beneath us. So, that's the other side of the coin to non-sponsor finance. Sponsor can always write another check to support the business. Unless the founder has deep pockets, that is a challenge that we face. We're often tasked with stepping up, but given our experience, we know that we can get out of these situations.

Elana Margulies Snyderman:

Jay, to shift gears, ESG has been top of mind for the industry and would highly welcome your thoughts how ACME is addressing this topic.

Jay Rogers:

We are not an ESG focused lender, but we certainly pay attention to it, both to accommodate the investor perspective. But at the end of the day, when it comes to ESG, we do think a lot of those principles just go along with a well-run business. If it comes to social factors, equal opportunity hiring and that kind of thing, we certainly promote that and aren't going to invest in anything that runs counter to those values. When it comes to, what does the industry do? We're not doing firearms or anything like that, but we are open to what would be considered typical non-ESG investments.

Something like coal, if it's thermal coal, not vet, vet coal isn't going anywhere. You need it to make steel and it'll always be necessary. But thermal, while it's a declining component of how we make energy in this country, it's not going away tomorrow, and it does support a lot of jobs. So, we will consider financing opportunities like that, that do have a purpose with the understanding that they are going away. Those aren't growth opportunities and will never be. So, we are mindful of ESG while not necessarily making sure that everything fits into an ESG box.

Elana Margulies Snyderman:

Jay, we've covered a lot of ground today and wanted to see if there are any final thoughts you would like to share with us.

Jay Rogers:

Yeah, the one thing that we really do emphasize here is the importance, frankly in all of lending, but particularly in the types of deals we do and in these private transactions, is the importance of deal structure. We are trained at our prior firms to accept that everybody can be fallible on due diligence. What's going to happen? What's the company do? Are they going to hit their plan? We're all wrong more often than we're right. And what really protects you in those situations is structure. And by structure, I mean reporting, obviously, always being senior secured, first lien if possible, and then covenants. That's what deal structure is.

Now when it comes to covenants, there's financial covenants and then there are negative covenants. All of that is important and we can do a whole other podcast on that, which I might find exciting, although you may not, on how deal structure works to protect the creditor. So, we think that that tends to be underemphasized amongst lenders with business diligence and evaluation of a plan and that kind of thing, to be more paramount. It may be a little more intellectually exciting, but at the end of the day, it's structure that really protects you.

Elana Margulies Snyderman:

Jay, I want to thank you so much for sharing your perspective with our listeners.

Jay Rogers:

You bet. Thanks a lot, Elana. Appreciate you having me.

Elana Margulies Snyderman:

And thank you for listening to the EisnerAmper podcast series. Visit Eisneramper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast, when we get down to business.  

Transcribed by Rev.com