Direct Lending’s Evolution: Managing through the current environment

TED

We would just love to get your sense of how you're thinking about the current environment in light of what you've seen in the past.

RON

Yeah. Well, look, so I've lived through credit cycles, market dislocations, great recession. And you know what? I would tell you, every time you have a credit cycle, it's different, right? Every time you have one, nobody predicted it or certainly nobody predicted why it happened. I think today we're living in a really unique environment.

And we have been for the last couple of years. Since 2022, we've been living in this rising interest rate environment where we were worried about inflation, we were worried about recession. We had all these geopolitical conflicts, a lot of things to worry about. And, in fact, it has had a pretty significant impact on M&A volumes and deal flow.

But I think as we sit here today, and I think it suits our strategy, we live with an eye towards the glass is half empty and so on. Every day we run recession scenarios and we're very, very selective about the types of businesses that were going to invest in because you're looking, and you just think about where we are right now.

We've been living in a higher for longer interest rate environment. We're staring in the face of some type of tariffs. I mean, nobody knows where we're going to end up, but ultimately, they're going to have some type of impact on the economy. We are trying to figure out are we going into a recession.

Are we looking at stagflation, are things going to sort of settle out? I think it's really hard to handicap it with try to figure out what's the Fed's going to do, you know, are they going to ease at some point later this year. I think it's very hard. You can look at all these macro dynamics in the market. You can handicap them. But at the end of the day and I think this is perhaps, maybe part of the appeal of this asset class, in all those scenarios, where do you want to be in the cap structure? You know, I think for us, we want to be senior secured. We want to be at the top of the capital structure.

We want to have lots of capital beneath us. We want to be secured. We want to have full collateral and all the assets of the businesses we lend to you. And that's an end. We're going to be really selective about the types of businesses we lend to. So, if we think we're going to recession, we're going to stay away from highly cyclical businesses.

We focus a lot on the health of the consumer. We're not leaning in on discretionary consumer products these days. We're thinking about all the things that could possibly go wrong. We're doing our best to either mitigate those and make the investment or not make the investment.

I don't mean to sound, you know, draconian here because I do believe at some point, we're going to find our way to the other side of this. The markets at some point will stabilize. And what's going to be really unique about this opportunity is because of all the uncertainty we've been living in for the last 2 to 3 years, M&A volumes have been materially below where you were.

We'd like them to see where we've seen them historically. And the consequence of that is, you've got private equity investors that are really long assets, need to sell them but haven't been able to because in the environment we're in, buyers and sellers just haven't been able to acquiesce around valuation. But when we get to that point where markets start to stabilize, there's going to be a huge backlog of opportunities that are going to come to market.

And so, for us today, we're being really selective. We're keeping our powder dry. We're watching. We're all over the portfolio, but we're also waiting. We're waiting because we do believe there's going to be a pretty significant opportunity coming down the pike.