How new fund offers security and income

Want more than fixed income provides? Scaling back equity exposure? Private debt company explains why US middle market could be the answer

How new fund offers security and income

A new private debt fund is aligned with the defensive trend among investors disillusioned with fixed income and apprehensive about volatility in the equity markets.

That’s the view of Sean Duff, managing director, marketing and investor relations for Chicago-based Monroe Capital, which advises the Ninepoint Monroe US Private Debt Fund.

It is one of the first funds in Canada to provide exposure to private credit investment products in the US middle market, according to the firms, and invests in firms with annual revenues between $10 million and $1 billion. Monroe has $7 billion of committed and managed capital and can boast a 14-year track record.

All sounds rosy, but why should an investor head to private debt and the US, in particular. Duff said the US is “big, deep and gives you the ability to be very selective”, while he stressed how private debt is a secure investment that offers consistent income.

At a time when fixed income is in the doldrums, he believes it’s time to shift some of that exposure over to the private debt arena.

He told WP: “Do you want to own equity? Do you want to own junior debt? Do you want to own venture capital? Venture debt? Or do you want to be top of the capital structure in a loan structure that has covenants and produces a current income to companies that are market leaders.

“Well, I would like to hold senior secure paper and have the ability to get my money back and be able to act on it, and not have so much beta in my portfolio.”

According to Monroe, middle market loans have lower defaults and similar recoveries compared to broadly syndicated transactions because of stronger covenant packages, more frequent financial reporting and higher excess cash flow sweep requirements.

Duff said he has watched investors go from 0% private credit to up to 15% in their portfolio in about five years. While people have entered the private market and divided it into private equity and private debt, he believes the J-curve effect provides debt with the edge.

He said: “In private equity, they take all your money and don’t get anything paid back [initially]; they take the money, lose money and then hopefully at the end you start making it back because you start making returns. In debt, you put the money to work and you instantly start making income.”

Getting high-net-worth clients remains an educational challenge, said Duff, because you are typically dealing with successful entrepreneurs who have rarely had to get debt. He said: “In my experience, it’s about getting them to truly understand the structure we have in place and what the benefits of those are.”

Alex Condrell, managing director, marketing, added: “For many individuals, they’ve not done private funds or private equity. They’ve all heard of private real estate but fewer have actually done it, so [it’s a case] of getting people comfortable that signing a subscription document doesn’t mean they are making a big mistake. It says all these risk factors but you can still have a conservative approach even in a private structure.”