Opportunity in Private Credit
Structured properly, we believe private credit and specifically asset-based loans can provide a much greater safe haven than is typically understood. SR Alternative Credit’s transactions seek to carry floating coupon rates and floors to protect against rising interest rates, while strong collateral coverage and proper deal structure address a wide variety of other transaction-specific risks.
Asset-Based Loans
Yield in a Low-Interest Rate Environment
We believe options for yield in public credit are limited, yet private credit stands out with its compelling alternatives. These options remain beneficial across various interest rates, offering a straightforward path to enhancing financial health through asset-based lending.
Filling the Void
Stricter regulations have made it challenging for big banks to loan to small and medium-sized businesses, which need capital for growth. This situation has pushed these businesses towards alternative lenders, creating a potential opportunity for both the entities seeking funding and those providing it. Our goal is to create risk-adjusted returns that typically outperform traditional lending avenues. Thorough vetting and proper structuring will enhance the potential private debt opportunities.
Understanding the Risk
SR Alternative Credit’s transactions, anchored in collateralized and secured lending practices, are typically structured to protect against rising interest rates, while strong collateral coverage and proper deal structure address a wide variety of other transaction-specific risks. Returns associated with private debt, a cornerstone of our approach to collateralized and secured lending, do not typically move in tandem with other assets, such as public equities, private equity, or public bonds, in response to changing economic and market conditions. These qualities can enhance portfolio diversity and lower volatility.
Asset-Based Lending
Asset-based lending, when effectively structured around the principles of collateralized lending, can yield appealing returns with low volatility. However, the market is complex. The process of identifying, structuring, and underwriting private debt deals, particularly those focused on collateralized lending, involves a nuanced, multifaceted approach. SR Alternative Credit has extensive experience in identifying, crafting, and managing such transactions. Our experience in collateralized lending positions us uniquely to benefit both those seeking financing and those providing it, leveraging our deep understanding to navigate the intricacies of the market.
Turning Illiquidity into an Asset
Conventional wisdom holds that higher yields equal higher risk, however, not all risk is created equally. Private lending typically yields above the traded credit instruments because of the illiquidity of the underlying loan, not because asset-based lenders face materially higher issuer, interest rate or market risk. And importantly, prudent borrower selection and transaction structuring can address these issues, thus turning the illiquidity found in private debt into an asset, not a disadvantage.
Navigating Structural Shifts in Market Liquidity
Growing structural changes from financial services consolidation, increased capital requirements and stricter regulatory oversight on investment banks have significantly altered the normal market-making activities of many traditional fixed-income market participants. The result is a significant reduction in the liquidity profile for most US debt markets since the financial crisis. It’s important to be aware that during a crisis, the usual ability to quickly trade many fixed-income instruments might not be there.
Embracing Illiquidity
If it’s understood that the liquidity of traded markets may be illusionary, the benefits of asset-based lending become clear. With careful planning, including thorough collateral support, disciplined due diligence, and other risk mitigation techniques developed by SR Alternative Credit, the illiquidity inherent in asset-based lending can provide a yield premium without the usual rise in risk seen with other high-yield options. We see the lesser liquidity in asset-based lending as an advantage, not a drawback.
The above represents SRAC’s view of the current market environment. There can be no assurance that any SRAC investment will achieve its objectives or avoid substantial losses.