Broker Check

Alternative Investments: Middle Market Private Credit

| March 23, 2020
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Cornerstone Financial Services clients benefit from a team constantly looking for the right balance between risk and reward. That’s especially true when seeking yield and income in low interest rate environments, like we have now.

With regulation and consolidation preventing banks from holding leveraged loans, companies seeking this type of financing need to look elsewhere. Well, the void has been filled by private credit managers, finance companies, and other asset management firms.

While the current U.S. private credit industry may seem flooded with participants, new opportunities over the last 10 years haven’t nearly totaled exiting bank capacity. In other words, there is a lot of potential for growth.

That’s why we see opportunities in the private credit market. We’re always scanning the landscape for U.S. credit managers with scaled origination platforms and strong business records who can take advantage of a large market.

When we’re assessing middle market private credit investment opportunities, we strive for three goals during due diligence.

Consistently Higher Yield

We look for the ability to consistently access alternative sources of higher yield. Middle market loans have historically boosted portfolio yields due to several factors. And they do it with credit risk comparable to broadly syndicated, high-yield bank loans.

Diversified Growth

A second goal we seek to achieve is widespread growth. Private credit market investments offer unique opportunities because of the loan structures (more on that below). As such, we believe investing higher in the credit capital structure, using senior credit only, is an effective way to achieve diversified growth.

Stable Returns

Finally, we pursue return stability, as it’s a key factor to achieving our clients’ long-term goals. These private credit middle market loans are typically more conservatively structured than other publicly traded, high-interest debt instruments. And that favors investors.

For instance, tighter loan covenant packages protect investors from loss and default. This helps keeps returns steady and distinguishes private credit middle market investments from larger public assets that are much more correlated to equity market fluctuations.

In summary, private middle market loans offer higher yields with more conservative structures. That’s seemingly illogical, but highly desirable. For investors, this combination means private credit investments can greatly help to diversify a portfolio with upside quality, while still obtaining a higher income yield.

Securities sold through CoreCap Investments, Inc., a registered broker-dealer and member FINRA/SIPC; advisory services offered by CoreCap Advisors, Inc., a registered investment advisor. Cornerstone Financial and CoreCap are separate and unaffiliated entities.

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