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9Questions is our Q&A series featuring key decision-makers in leveraged finance — get in touch if you know who we should be talking to!

Ivan Zinn is a founding partner and chief investment officer at Atalaya Capital Management, an alternative investment advisory firm that makes private credit and special situation investments in three principal asset classes — specialty finance, real estate and corporates.

He spoke to 9fin about opportunities in the asset-based private debt space, launching a second office in Dallas, and his experience participating in the world’s oldest 100-mile trail race.

1) Of all the products in the private credit space, your firm chose to focus on asset-based private debt. What’s the appeal of the product compared to the direct lending unitranches that get all the headlines?

Within the asset-based private debt space, specialty finance is attractive for many reasons — but the simplest explanation is that the risk/return is better than typical corporate direct lending.

Asset-based private debt hasn’t been as broadly adopted, because its more complicated to explain and takes specific expertise to source, service and underwrite. The barrier to entry of expertise means fewer competitors and greater return in a lower-risk asset class, as consumer credit is a more resilient asset than corporate credit based upon many cycles. This last part is somewhat counterintuitive to many people, but that is the opportunity.

When people think of ‘direct lending’ they are primarily thinking about corporate direct lending because of the growth of that sub-sector, and the ease of understanding. However, direct lending is a much broader concept because the essence is sourcing, negotiating and making loans directly (versus banks or investment banks intermediating) to any type of borrower; including, but definitely not limited to, corporate, real estate or asset-based lending. We have been active in asset-based direct lending since the inception of Atalaya, and even pre-dating Atalaya, so this isn’t a new asset class. But it has also dramatically changed since the 2008 Great Financial Crisis.

The two primary drivers for growth in asset-based private debt have been:

The lack of ‘traditional’ competition such as commercial finance companies (think GE Capital, CapitalSource and others) who went away or became banks as a result of the GFC

The growth of specialty finance companies providing capital to consumers and small businesses

Banks were encouraged by regulatory frameworks to retreat, plus the addition of ‘fintech’ delivery of many of these services has grown the market opportunity dramatically.

2) As market conditions worsen, will we see more issuers turning to asset-based financing?

Absolutely — there is a growing number of borrowers showing up at our doorstep. I’ll categorize these into specialty finance companies and other capital solutions.

In the first category, specialty finance, we are a stable alternative to companies that might otherwise utilize public securitization markets. These specialty finance originators need the capital to make their underlying loans; this capital is their inventory, and rule number one is don’t run out of it. So, even in more placid markets, originators are willing to pay a premium for stable capital, at least as one leg of their funding stool.

In volatile periods — like we are experiencing now, where securitization markets were shut for much of 2022 — our capital is even more precious to these originators.  Equity capital, whether it was from venture, growth equity or private equity, was relatively inexpensive for the last several years; that ‘cheap’ equity capital disappeared last year, so these companies need to adapt their capital base to include capital from us. We expect this trend to continue, especially as even seasoned issuers see the instability of public securitization markets.

In the second category, other capital solutions, many borrowers are looking at their assets to determine where they can get liquidity if the leveraged loan markets or real estate lenders are effectively dormant.

For example, we have a number of transactions in our equipment leasing business where companies might have otherwise sought out bank or leveraged loans previously but today, are finding collateral such as mission-critical equipment to generate liquidity. Another example is NAV loans, where private equity sponsors are in need of capital for specific older funds to do M&A, or even return capital to their investors given the slow capital markets. We have been active in both of these capital solutions that are asset based, even if NAV loans are less traditional.

3) In your opinion, which industries are the best fit for asset-based lending, and which are not?

The real answer here is that virtually all companies have assets that could be financed.

Some situations are very obvious, such as specialty finance companies that require capital to finance the assets they originate. Asset-based finance is the primary debt capital for these companies. Equipment leasing is a lesser known (at least in the eyes of institutional investors) form of asset-based financing. Then, increasingly, you have more esoteric forms of asset-based financing ranging from litigation to IP to royalties and many more flavors.

The best fit is where a company’s asset type lines up with duration and availability of capital. For example, a hedge fund with short-dated liabilities (i.e. redemptions) shouldn’t finance railcars, which are really long-lived assets. The most exciting opportunities are those that can unlock capital for companies that have not optimized financing, like an equipment lease, or those where we can be much more stable capital that really benefits the underlying borrowers, such as specialty finance.

4) Atalaya recently opened a second office in Dallas last June. Why did you choose Dallas and what plans do you have for that office?

I have a special place in my heart for Dallas, not just for the Tex-Mex and the easier access to green chile from my home state, New Mexico.

I lived in Dallas when I was with HBK Capital Management, and worked with Mark Schachter who heads up the office there now. It has a high quality of life, gives us geographic reach for sourcing and capital formation, but most importantly, it has a deep pool of financial services talent.

Dallas was always high on our list, and with the addition of Mark and his team, it was very natural next step to plant a flag there. We have plans to grow that office for all parts of our business ranging from investment to business management and capital formation.

5) What is your biggest concern about the private credit market right now and why?

My biggest concern is that the market has been so straightforward for so long that it was very hard to distinguish who was any good at private credit and what seeds were sewn during the placid periods.

Volatile periods shake out those who were actually doing credit selection, stress-testing their underwriting and asset management. Underperformance will cause future questions, and leave some bruises that will take some time to heal — but ultimately will result in a much stronger set of managers and investors.

6) Atalaya’s focus includes commercial real estate, which has been a challenging sector due to consumer pattern shifts caused by Covid. So why invest in these assets now?

Across the platform, we value the ability to wait for certain areas or sub-sectors to provide target-rich investment opportunities. At Atalaya that means looking across specialty finance, corporate and real estate opportunity.

The CRE landscape has changed dramatically over the last several years, driven by Covid demand factors, and, more recently, higher rates. We are often frustrated by the glacial pace at which real estate valuations and capital cost re-rates; in other words, owners want 2021 sale prices or cost of debt capital. While few assets are trading, given that wide bid-ask spread, we are now finding borrowers willing to take capital solutions to buy, build or solve defined capital needs such as maturity dates. These returns are notably attractive because of the lack of traditional real estate debt capital. Banks are cautious, CMBS deals aren’t happening and ‘re-discount loans’ to real estate lenders are essentially unavailable: these are the main drivers required to run the real estate debt-capital engine.

So, we are going to be nimble lenders to a relatively select number of assets that are benefitting from post-Covid themes in markets with tailwinds. For example, we recently closed a first-dollar secured loan at <50% loan-to-value to solve a maturity date problem in Nashville, a market we know and like. While we are pessimistic that there are a lot of forced sellers out there, we are actively providing debt-capital solutions.

7) In July 2019, Atalaya expanded its focus to include tradable credit and middle-market distressed investing with the hire of Matthew Rothfleisch. What’s your outlook on distressed opportunities in 2023?

We have long had the view that too often, private capital managers can miss the bigger picture of relative value and public markets if they are looking exclusively through a private-credit origination lens.

This was very true in 2009, when you couldn’t possibly make a new private loan that was as attractive as those available in the secondary market — either public or private. Sellers were willing to part with any asset in 2009 but often (like in 2022) there is a massive bid-ask spread in the private markets. Therefore, our public market team can be opportunistic when the market presents itself, but not feel the need to be constantly invested. We were public credit buyers in 2Q 2020, for example, but virtually no private assets traded that period. Our view is that distressed is a trade, not a business.

The shape of distressed has changed over the last twenty years, making it much harder. The sellers are smarter — for example, fewer ‘forced sellers’, such as ratings-oriented holders, exist these days. The buyers are better. For example, operationally-focused PE buyers are much more common.

We also think the always-threatened ‘wall of maturities’ is a mirage. Companies find a way, and on average capital markets will be there over time, if a company can buy time. All of these forces make distressed much harder, so we are bullish in theory but bearish on practical application.

8) Do you think super-priority for revolver lenders (e.g this story) risk straining borrower relationships with junior term lenders? Do you think we’ll see more examples of this trend as investors seek extra security?

Yes, anytime there is an alignment problem you’re going to have friction in the capital structure.

You already see that with the creditor-on-creditor ‘violence’ taking place where assets have been stripped. Private equity sponsors and companies are cleverer, and documents are looser — that’s a recipe for complicated relationships.

9) In 2014, you completed the Western States Endurance Run, the world’s oldest 100-mile trail race. What made you choose to embark on this journey — and what advice do you have for aspiring marathon runners?

I started running post college to gain back some fitness that the early years in finance and investing discourage. I started running longer and longer distances to see what was physically and mentally possible for me.

I qualified, and literally won a lottery to get into Western States, the oldest 100-mile trail race in the US. So, I got a coach and trained with purpose to target under 24 hours, where you get a special belt buckle. My biggest fear was having to ‘sprint’ to make the time. It was incredibly memorable because I ultimately ran 23:59:18 and ran an 8:30-minute 100th mile to get in under the wire.

I’m still running a fair amount, and have a 24-hour race on the calendar this year to see how far I can go. My advice for aspiring marathon or even ultra-marathon runners is one of Atalaya’s cultural pillars: relentless forward progress.

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9Questions — Ivan Zinn, Atalaya Capital Management

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