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Opportunities And The Future Of Private Credit

Anthony D. Hoye is a professional investor and seasoned executive with over 30 years of financial services experience, specializing in structuring, underwriting and executing credit transactions, ranging from senior debt, and mezzanine lending to structured loans. He serves as partner and head of private credit for The Copia Group (TCG). 

Russ Alan Prince: Tell us about your role at The Copia Group and where the firm’s focuses are these days.

Anthony Hoye: I am a partner and head of private credit. The Copia Group provides flexible, non-dilutive capital solutions to companies in the lower middle market for growth, equity, and impact. We’re focused on this area as these companies have a harder time accessing capital. In the last decade, lending to the middle market has rapidly moved from banks providing capital to private markets now providing the lion’s share. 

This trend will likely continue with the recent challenges in the banking industry. However, larger private capital players, private equity and private credit firms are focused on the higher end of the market, targeting larger companies and making larger investments. Broadly speaking, they’re moving upmarket, and have been competing with public markets and syndicated loan markets. 

As private capital has moved up, there’s a growing, untapped opportunity to provide capital in the lower middle market. Society’s changing demographics, this has fostered a strong base of businesses among women and ethnically diverse entrepreneurs in the lower middle market with is its fastest-growing sector. This has created an attractive opportunity to lend. Not only have capital markets and private direct lenders done a poor job of providing access to capital to the lower middle market, but these businesses also tend to be under-advised. As such, we see this as a major opportunity to not just provide financial capital, but to provide enhanced access to the essentials required for business growth, including capital, counsel, colleagues and clients (i.e., our 4 Cs approach).

Prince: It’s evident that TCG aims to provide capital solutions to privately held, lower-middle market companies while driving impact at scale. What opportunities are you seeing to make this mission a reality in the current landscape?

Hoye: Our mission of driving impact at scale began with our founder and managing partner, Shundrawn A. Thomas, former president and chief executive of Northern Trust Asset Management, who has been a high-impact leader in the industry for nearly 30 years. His passion for a more inclusive form of capitalism evolved into building The Copia Group, which was founded on the core belief that full inclusion generates the greatest long-term prosperity for colleagues, clients and communities.

Recently, Beata Kirr, former co-head of investment strategies at Bernstein Private Wealth, joined the firm as our chief impact officer and will drive our impact framework and strategy. We’ve also partnered with Morningstar’s Sustainalytics, a global provider of ESG and corporate governance research. With them, we developed a proprietary framework outlining eligible categories for investments with the potential to create a positive social impact. Some target areas include healthcare and wellness, diversity and inclusion, workforce development, equal opportunity, and quality education. As we look at investment opportunities, we will determine if that prospective company could materially impact one or more of those areas.

When we look at our pipeline today, the opportunities are growing. There’s a company in our pipeline now that has a unique opportunity to drive impact in workforce development. Another company in the pipeline is providing certain healthcare services as an alternative to a patient utilizing opioids. For these companies over the life of the investment, with the framework we’ve developed, we can quantify workforce development or health and wellness as the chief performance indicator for a particular investment. 

Our impact thesis is that a wide range of untapped private market entities has the potential to expand opportunities, increase equity ownership and generate wealth across all communities. The Copia Group seeks to provide a path to unleashing potential for delivering market returns while also driving social impact. So, our focus is to build a portfolio of best-in-class investments where they can add the greatest value.

Prince: The world of private credit is an interesting one, especially as we enter the second half of the calendar year. What is TCG looking at when it comes to this space in Q3 and Q4?

Hoye: Because we’ve had near-zero interest rates in the last decade, access to capital expanded exponentially. As a result of this substantial growth, the capital structure and pricing became increasingly issuer friendly as private equity sponsors and their direct lenders competed to be the lead on transactions and deals. But with inflation and the Fed tightening, liquidity has also retreated. So, the lending structures put in place prior to these headwinds are now experiencing shrinking interest coverages and increasing leverage points. 

As a result, private equity sponsors and direct lenders are flushed with LP cash. Naturally, credit-funded investors are also cautious about new allocation thanks to the public market volatilities and the slowing of the economy. Beginning late last year, the velocity of investing has slowed in the middle market, as there’s some belief that market multiples will retreat and improve down the road. 

Our reappraisal of current conditions suggests there may be a lot for investors to cheer about, especially in private credit. In fact, we believe capital scarcity is ultimately beneficial for illiquid loans. We expect private credit providers to utilize dry capital to support existing portfolio companies, but eventually, demand will drive new transaction flows once conditions improve. In the meantime, we expect this current credit vintage to require lower leverage, tighter loan structures, increased pricing and a potential for better returns that are all significantly more beneficial to investors than anything we’ve seen over the last decades. In our view, now is a good time to invest in the private credit sector.

Russ Alan Prince is the executive director of Private Wealth magazine and chief content officer for High-Net-Worth Genius. He consults with family offices, the wealthy, fast-tracking entrepreneurs and select professionals.


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