Private credit and other non-public investment markets have not been easy environments in the past few years as interest rates rose, but an approach adopted by one US house – it says – gives comfort for those seeking regular returns.

Rises in central bank interest rates and gyrations in global equity markets don’t help sensitive nerves. However, a 20-year-old private credit house in the US says its approach gives investors comfort and realism.

Monroe Capital, which serves HNW individuals and institutions across the globe, invests in private credit markets across various strategies, including direct lending, technology finance, venture debt, alternative credit, structured credit, real estate and equity.

Monroe focuses on the small and medium-sized end of the private credit lower middle market space, eschewing the multi-billion end of the spectrum in which the likes of Carlyle, KKR or Blackstone, for example, operate. These are typically companies with long operating histories that have EBITDA below $40 million.

“We are in a more fragmented spot where we can add value,” Dayna Kleinman, head of business development for wealth management solutions, told this publication. “This is why we can bring Alpha to the table.” She spends a lot of her time talking to RIAs and other wealth managers. Kleinman spoke alongside Mick Solimene, a portfolio manager at the business.

Founded in 2004, Monroe’s track record means that it has gone through the sub-prime mortgage crash, and subsequent market trauma of 2008, quantitative easing, the pandemic, inflation, rises in interest rates, and the hits to several banks such as Silicon Valley Bank. Since 2019, its unlisted offering Monroe Capital Income Plus, a private business development company (BDC), has produced a dividend yield of 11.2 per cent and a five-year internal rate of return, after fees, of 10.0 per cent, per public filings.

Wealth advisors are looking for low-correlated assets, and they seek consistency. “They want to be able to sleep at night,” Kleinman continued. “They have the potential to earn income in the form of a dividend quarterly.”

Before the US Federal Reserve started raising interest rates, returns on the BDC were around 8 per cent, per public filing. “Even if rates come down a bit, BDCs can provide [investors] a nice range of income. Investors look to us for experience and security.”

"We believe clients like the fact that Monroe, which oversees almost $20 billion in assets under management, has a powerful network and experience – contrasting with some of the newer players in the market that have entered the private credit space," she said. 

A focus on experience and expertise is important at a time when, for example, the International Monetary Fund, has raised red flags about possible stresses in the private credit system and vulnerabilities to abrupt changes in economic circumstances. Some in the family offices space have told Family Wealth Report that they are uneasy about the hype around private credit, and private market investing more widely. 

“We are part of an asset class that can offer strong risk adjusted returns with low volatility,” Solimene said. “What we do is provide loans to companies. As protections we have all of the assets as collateral including the stock of the company. We are the first dollars that get paid if a company is sold. We typically only provide capital up to 40 per cent of the value of the business. Which means that over half of companies’ value would have to go away before we are impacted.”

“We employ a credit first, zero loss approach to our business which means that protecting client capital against loss is at the heart of our ethos. We are very diligent for the entire lifetime of a loan, from its origination through repayment,” he said. 

Monroe employs a total of about 270 people. It has a substantial team focused on origination of loans, examining transactions and whether they have a place in portfolios. This also involves talking to private equity firms, sponsors, companies and intermediaries. In total, Monroe will look at a total of about 2,000 transactions and will invest in less than 5 per cent.

The firm is strict about diversification – the average position size is less than 1 per cent. In terms of sectors, the firm prefers non-cyclical sectors that can resist economic headwinds, which means that Monroe leans into areas such as healthcare services, technology and software, and “mission-critical business services.”

Monroe believes that the firm’s “bottom-up” philosophy in underwriting and high touch investment management and monitoring, coupled with its differentiated sourcing techniques, creates better and more compelling investment returns over the long term. The business argues that competition continues to heat up between broadly syndicated markets and upper middle market private credit, spurred by a supply/demand imbalance with limited new buyout activity and an increase in collateralized loan obligation issuance.

The lower middle market retains a variety of advantages as it competes with the upper middle market, including greater execution certainty, the firm explains. The lower middle market continues to be mostly insulated from the renewed competition with the syndicated loan market, resulting in higher spreads, lower leverage, and enhanced lender protections, it says.