Q:  How did the COVID-19 pandemic impact mid-market private companies and what does this mean for institutional investors that are looking for yield?  

A: Broadly speaking, the impact was similar to what has been seen in larger public companies. That is, businesses who were highly dependent on face-to-face interaction were affected in a significant way. This challenge was not shared equally but was more pronounced in industries such as travel and entertainment, restaurants, and retail consumer businesses. Other businesses, in industries like technology, healthcare, and logistics performed better, in some cases with fundamentals stronger now than they were going into the pandemic. Overall, the opportunity in lending is very attractive in our view if you can pick the right places to be and execute accordingly.

Q: What are some key considerations that investors should look out for, when structuring covenants with portfolio companies?

A: The point of the deal structure is to give the lender options if something starts to move in the wrong direction with the borrower. It is less about a specific covenant and more about the giving a lender the ability to intervene, which must be accompanied by willingness and experience to understand what is required and how to go about doing it.

Q: What should investors keep in mind while sourcing deals in the current environment?

A: This is a relationship business. As always, people want to work with those they know and trust. Having a wide industry network is helpful in gaining a wide purview into deal opportunities. This allows a lender to be more selective than if they are very limited in what they see. This is far easier said than done, as it takes a very dedicated effort to build and maintain such relationships as well as a reputation that comes from being in the market and executing deals.

Q: If investors look for managers for managing private debt, what questions should investors ask potential candidates in sourcing the best-in-class managers?

A: As with manager diligence in general, it’s about the people and their experience. With private debt it is about managing the process of commercial lending – from sourcing deals to understanding borrowers, structuring deals with meaningful protection, executing diligence and closing effectively, monitoring post-close, and, as necessary, managing difficult deals.

AARON PECK, Managing director and portfolio manager, Monroe capital, Sub-advisor to Ninepoint-Monroe U.S. private debt fund, spoke at Institutional Connect Virtual Forum in October 2020