Spotlight on Natalie Garcia, Managing Director, Head of Underwriting, Deerpath Capital
Global Thought Leader Spotlight
Natalie Garcia, Managing Director, Head of Underwriting, Deerpath Capital
Inflationary pressures are modifying across much of the western world as higher base rates appear to be having the desired effect. The next question that remains unanswered is whether higher interest rates lead to a slowdown in the underlying economies as the higher funding costs materially impact corporate profitability and household balance sheets.
In the short-term higher reference rates continue to be a relative positive for the direct lending market as loans made are almost exclusively floating rate in nature and therefore the impact on existing loan portfolios rolls through in the form of higher returns to investors, albeit at a lag.
Additionally, new loans are now attracting all in yields at levels not seen in the last decade. With reference rates and credit spreads likely to remain elevated the outlook for direct lending in the near term is a strong one, as investors will receive good compensation for risk taken.
However, over the last decade the core direct lending market has witnessed a material reduction in the scope and quality of traditional structural protections afforded to lenders as large amounts of capital entered the sector via a plethora of new institutionally funded private credit managers increasing the competitions for deals.
This increased competition manifested in acceptance by these new lenders of “cov-lite” loan structures, higher levels of leverage and credit risk for each unit of return.
Should the macroeconomic environment materially worsen then institutional investors that have allocated to the core and upper middle direct loan market, ie loan sizes of US$100 million to US$500+ million, over the last 5 years could well experience outcomes that are not consistent with their expectations of the asset class.
A slowdown in economies, combined with stubborn inflation, could put greater strain on the earnings of those companies in direct lending portfolios. This scenario, combined with the higher rates and leverage carried by larger companies, coupled with weakened lender protections, could combine to see default rates and, recoveries, in the event of default, be materially worse than historical levels.
A less supportive economic environment for companies looking to source debt funding should prompt institutional investors to examine the companies, sectors and structures they are exposed to and focus their attention on making sure they have appropriate diversification, protections and compensation for the risk they are taking on.
At Deerpath our focus has always been in the lower middle market, a part of the direct lending opportunity set that still enjoys full covenant loan terms, other lender protections and lower leverage at the company level.
We have deliberately avoided the temptation to raise larger funds and allocate to larger loans, despite the obvious operational leverage and profitability benefits, preferring to stay in the lower middle market where the returns and protections are highest.
The ultimate question for institutional investors should be, are their interests and those of their direct lending managers aligned?
In my role as the Head of Underwriting and now permanent member of the Investment Committee, at Deerpath Capital my primary responsibilities are to oversee the underwriting component in Deerpath’s broader investment process.
For every deal, a member of my team or I participate as part of “deal teams” assigned to each new opportunity and actively work through the process from initial screening, IC review, term sheet proposal and acceptance.
After a term sheet is signed, the deal team prepares a due diligence work plan. I then oversee the final underwriting, including the final approval memo and legal documentation.
The deal team remain involved through a full business, earnings and legal review and preparation of the final recommendation memo to the investment committee for approval and final closing.
Natalie will be presenting at Global Investment Institute’s upcoming Fixed Income & Alternatives Investment Forum, taking place on Thursday, 7 September 2023 at the Westin Melbourne, Victoria.
To register your interest in attending, click here or for more information email zlatan.kapetanovic@globalii.com.au.
Natalie Garcia, Managing Director, Head of Underwriting, Deerpath Capital
Natalie is a Managing Director of Deerpath Capital and a member of the Investment Team. She joined Deerpath in 2015 and has 18 years of industry experience. She previously worked in private equity and leveraged finance at Palladium Equity Partners, Macquarie Capital Partners and JP Morgan.
Natalie is a graduate of the Wharton School of the University of Pennsylvania (M.B.A., 2011) and Georgetown University (B.A., 2004).
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