Marcus Maier-Krug is partner and co-head of portfolio management at Arcmont. He has been working in private credit since before the global financial crisis. 

In this episode, recorded in November 2023, we discuss what constitutes alpha in private credit, what it’s attractions are as an asset class, whether it can retain the market share it has taken from the traditional banking world, the different mindset and culture of private credit lenders vis a vis their borrowers, and much more…

Understanding Alpha in Private Credit with Marcus Maier-Krug

Marcus Maier-Krug, Partner and Co-Head of Portfolio Management at Arcmont discusses the evolving landscape of private credit, emphasizing its resilience and adaptability in volatile markets. He outlines the distinctive attributes of private credit, the sector’s growth, and how it competes with traditional banking. He also touches on Arcmont’s strategies and the broader market dynamics.

Key Highlights:

• Private Credit Overview:
  • Bespoke Financing: Private credit offers tailored financing, often handled by a few funds, unlike syndicated bank loans.
  • Range of Products: Includes senior secured deals, unitranche, subordinated debt, and equity co-investments.
• Market Dynamics:
  • Volatility and Adaptation: The last 10-12 months saw significant market volatility, impacting portfolios and origination.
  • New Opportunities: Liquid market substitution deals have emerged, offering new avenues for private credit.
• Deal Size and Structure:
  • Upper Limits: Typically, private credit deals range up to €1.5 billion. Larger deals may require a combination of private credit and syndicated loans.
  • Global vs. Regional Differences: The US market sees more clubbed deals compared to Europe’s preference for smaller clubs or sole deals.
• Deal Flow and Quality:
  • Declining Volumes, Higher Quality: Despite overall deal volumes dropping, the quality of deals has improved.
  • Less Competition: Struggles in fundraising and portfolio management for smaller players have reduced competition for larger funds like Arcmont.
• Process and Terms:
  • Extended Timelines: Deal processes are longer, with more involvement from sponsors and management teams.
  • Due Diligence: Combines vendor information, buyer analysis, and independent verification to ensure deal legitimacy.
• Current Market Environment:
  • Improved Terms: Higher interest rates and economic pressures have led to better pricing and more conservative financial structures.
  • Portfolio Management: Active management and restructuring are crucial to handle economic stresses.
• Alpha in Private Credit:
  • Investment Mindset: Focus on managing downside risks and building strong relationships with borrowers.
  • Cultural Approach: Arcmont emphasizes a deep investment culture, involving the entire team in decision-making processes.
• Attractiveness of Private Credit:
  • Inflation-Hedged: Floating rate investments provide protection against inflation.
  • Better Control: Private credit offers better documentation, covenants, and control over outcomes compared to liquid markets.
• Future of Private Credit:
  • Growth Potential: The sector is expected to grow, with new opportunities arising from market dynamics.
  • Consolidation: Larger funds will likely continue to dominate, benefiting from economies of scale and deeper resources.

Marcus Maier-Krug highlights the strategic advantages of private credit, emphasizing its flexibility, better terms, and deeper market penetration. He underscores the importance of relationship-building and active portfolio management in achieving alpha.

#PrivateCredit #InvestmentStrategies #Arcmont #Alpha #MarketDynamics

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Contact Information: About Fund Shack: Fund Shack is a private equity podcast and global media channel for alternative investment professionals. Fund Shack is produced by Linear B Group.
Contact:
Katie Mitchell
Email: katie@linearb.media
Company: Linear B Group