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In sharp contrast to the geographic-centric coverage model of banks and
financing companies of the mid-2000s,
private credit funds often operate from
one or two offices, typically employing
business development officers to source
investments across the country while
underwriting and executing new
investments out of a central office.
The unregulated nature of private
credit funds also manifests itself in a
number of differentiating factors when
it comes to portfolio management.
Perhaps most impactful is the fact that
the nonregulated private credit funds
are not subject to the same pressures
as a traditional bank when it comes to
problem credits. Free from regulatory
pressure on nonperforming loans,
private credit funds have the flexibility
to work through problem credits and
wait out macroeconomic cycles. The
formal workout function is noticeably
absent from many private credit funds,
and many funds employ a lifecycle
approach to sourcing, underwriting,
servicing, and, if necessary, working
out a loan wherein the individual
who sourced the deal continues
to track it through its lifecycle.
Implications for Workouts
There are a number of implications for
workouts involving private credit funds.
Individual Motivation. Unique
compensation structures and
models leave individuals managing
credits with different motivations
than workout officers at bank
lenders or syndicated agents.
Here Today, Gone Tomorrow. Though
more heavily fragmented than in
the mid-2000s, consolidation and
acquisition trends imply that credit
portfolios (and the management
of them) can change abruptly. The
workout posture toward newly acquired
credits can change as a result of the
relative lack of historical relationships
between borrower and lender, disparate
motivations of a par versus non-par
holder, and the ability of larger credit
managers to absorb write-downs
and/or convert and properly manage
equity positions if necessary.
The Unitranche Role Reversal.
In traditional first lien/second lien
ANNUAL PRIVATE CREDIT FUNDRAISING Figure 3
2012 2013 2014 2015
Source: The 2016 Preqin Global Private Debt Report
of Funds Closed
Aggregate Capital Raised ($bn)
We unlock existing equity and
convert it into working capital.
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