1. You joined Beach Point right around the time of the 2008 financial crisis. Many people pinpoint that time as the birth of private credit — do you think that is a correct reading of credit market history?

I think it took a few years for the ramifications of the Great Financial Crisis to proliferate — for the markets to adjust to less bank risk-taking and for private credit investors to take visible share from the syndicated loan market.

Equally, it took a decade of low interest rates to cause institutional investors to properly value private credit as an alternative to liquid markets. Non-bank commitments have grown over 100% since 2012-2013, so I think that’s when we perceive the start of the transition.

2. Secondary market activity in private credit has ramped up recently. Why is that happening, and what impact is it having on the way deals are done?

Secondary market activity in private credit is pretty similar to public markets, in that lenders want diversification of risk and at times require liquidity. And so private credit lenders are playing the same role as middle-market loan syndicators and trading desks, just without the institutional term loan plumbing.

I think this dynamic is leading to a market where larger deals are getting done two-handed and three-handed, and from my point of view that’s a good thing. We are typically happy to manage exposure and concentration risk by working with partners, particularly if we view them to be like-minded.

3. You teamed up with KeyBank last year to start a direct lending program. What does this partnership offer that your existing business didn’t have?

Beach Point has been in the opportunistic private credit business for a decade, and this joint venture represents an expansion of our private credit activities into unitranche middle-market direct lending. Our joint venture benefits with respect to origination from KeyBank’s nationwide platform of capital markets and lending resources, as well as its thousands of corporate relationships embedded in the bank, and also benefits from Beach Point’s detailed underwriting and legal credit expertise. Together, I think we offer a pretty compelling product to borrowers. It’s a great opportunity for us.

4. You’ve previously highlighted Beach Point’s expertise in the gaming sector; recently, the firm helped finance a divestment by 888 Holdings. What do you look for in gaming credits, and what do you avoid?

A core element of our approach is looking for opportunities where we believe our industry experience and long-standing relationships can provide a perceived advantage. Historically, across the broader firm, gaming has been a sector where we’ve been able to do that successfully, and where the market failed to appreciate the resiliency of the business across different economic environments.

In recent years, capital in the sector has become relatively cheap, making it more difficult to find the same type of asymmetric returns. Nevertheless, we continue to deploy capital in the space and have focused more on unique opportunities that are not a fit for broadly syndicated markets, such as financing underserved physical locations, identifying and backing emerging technologies, and supporting robust systems with substantial barriers to entry (such as lotteries).

5. One factor that helped private credit grow in recent years was low interest rates. With that gone, how have your LPs changed in terms of their return expectations?

Like all asset classes, I think future returns expectations going forward are higher, reflecting, if nothing else, higher risk-free rates. This holds true in our opportunistic business, where our clients expect us to harness dislocated credit cycles. 

Senior direct lending is a different creature — those allocations today are viewed as havens of safety and as a more straightforward way to invest in the share-shift from public to private markets, and investors allocating to directing lending have been measured and conservative in returns expectations.

6. Private equity exits were down last year, as the M&A market contracted. How has this impacted deal origination in private credit?

I think the next twelve months are going to see private credit providers step in to fill gaps created by dislocations in public markets. So I think for the higher-yielding part of the market, it’s going to be more about refinancing — and in some cases rescue financing — and less about sponsor acquisitions.

In senior direct lending, I think rationalization and acknowledgement of the decline in valuations of companies will cause some private equity sellers to get off the sidelines, and so I’d expect activity to pick up. Private asset pricing moves more slowly than its public market equivalent, and I think this is an ongoing process.

7. We saw many BSL deals fall into the private credit space last year, but recently some smaller deals (in sizes that could maybe go to private credit) have come to the BSL market. What do you make of that?

I think it’s tough to generalize in small sample sets, but I think the trend will continue — private capital is going to take share in the market with a more flexible approach and easier execution for borrowers.

8. If you had to name one trend in private credit that investors should be cautious of right now, what would it be?

Beach Point has spent decades honing its skill set in working through troubled credit and we view it as a core competency of the firm. Going back to your question about when private credit took off: over the last ten years private credit markets have not really experienced a credit cycle.

When such a cycle occurs, a manager’s ability to work through issues, to be comfortable with restructurings, to understand how to manage complex legal process, and oftentimes how to optimize them — those are all skillsets that we believe much of the private credit landscape just doesn’t have a lot of repetition in, and we believe we do. Going into what will be the first real credit cycle, we feel very well positioned.

9. Beach Point’s website features lots of nautical imagery. What is your favorite beach in the entire world?

Well, that particular beach happens to be in Westchester, but I’m not sure many people would say Westchester, New York, is their favorite beach community. Mine happens to be Long Beach Island — there are lots of exotic beaches but sometimes the ones closest to home are the most inspiring.