Choosing the Right Manager

Vivek Mathew
Creating alpha in private credit is not only achieving the upside. We’re also all thinking about minimizing damage when the unexpected occurs. What happens when things aren't going well? If the asset doesn't perform well, we potentially don't just lose money in our fund; we lose money for ourselves.

Rebecca Darst
Private credit is not a new asset class, but it has grown rapidly over the past decade. Advisors are thinking more carefully about what defines real long-term strength in a private credit manager. So how do you evaluate managers in a way that aligns with your client's long-term goals? For this, I'm joined by Vivek Mathew, President of Antares Capital Advisers.

Vivek Mathew
Rebecca, thank you. Thanks for that introduction.

Rebecca Darst
Something that comes up a lot is the importance of the middle market. Now for advisors who may already be making an allocation to large cap private credit through well-known managers, how should they think about the middle market as a distinct segment?

Vivek Mathew
Private credit is a big word. It encompasses a lot of things. There's infrastructure, there's real estate, there's direct lending. So, what I would say is if you're an advisor trying to build a portfolio, you want to build diversity in that portfolio. And so, a lot of the best-known players in private credit are actually larger cap players. And so they're upper middle market players, and while they're incredibly successful, their portfolios tend to have a fair amount of overlap. So, I think if you're an advisor, adding some traditional middle market exposure that really avoids doubling down on some of the same risks that you have and some of the other exposures.

Rebecca Darst
Why has the core middle market segment remained attractive?

Vivek Mathew
At a very high level, you have middle market private equity sponsors that have raised a tremendous amount of capital. In fact, they're sitting on record raised but unspent capital upwards of $1.7 trillion. So, there's going to be a heck of a lot of opportunities for middle market lenders like us to lend and finance those private equity opportunities. Ultimately, we want to go where we see value. And so, for example, there are times where the upper part of the middle market looks the most attractive. For example, after Russia invaded Ukraine, we were able to go upmarket and capture a lot of value lending to larger companies because banks and other syndication processes weren't functioning properly. But when the banks come back and the market is more normalized, we tend to find the most value in that core middle market area, but we have the ability to go up market and down market where we see value.

Rebecca Darst
Experience keeps coming up as a theme, not just in underwriting, but in how a manager navigates different market cycles. What should an advisor look for?

Vivek Mathew
A lot of firms and investors have entered the market in the last ten years, and luckily markets have been excellent and so there haven't been a lot of classic cycles or workout scenarios. So, I think an advisor should try to make an assessment of the consistency of a manager's process, consistency in terms of monitoring, what's that process and consistency in terms of how workouts are handled. What about consistency of relationships because those really flourish and develop over time. So, when a market’s really hot and deals are more transactional, I think you're relying on those relationships a little bit less. The markets just kind of going. When things are more difficult, those relationships really come into play. So, what's the consistency of the sponsor relationships? I think that's really important. And then ultimately, what does that spit out in terms of results?

Rebecca Darst
In your view, what does alignment look like in private credit?

Vivek Mathew
Managers I think in all spaces would point to the existence of carried interest to sort of say, look, we're aligned: if I do better, you do better. And I think that's partially true. That sort of alignment works really well to the upside. A manager in that way could be quite incented to take a bit of risk to try to reach that upside, especially if they are not necessarily investing in the assets directly, and if they have management fees to cushion potential impact to not achieving the upside. So, I think that there's an asymmetric alignment to the downside if all you're looking at is carried interest. So, at Antares we have a rule that every single asset or loan that goes into any one of our funds must also go in our portfolio. And the alignment that we're showing is frequently 100 or 200% of the investment in any other fund. So, if the asset actually doesn't perform well and we potentially lose money, we potentially don't just lose money in our fund, we lose money for ourselves.

Rebecca Darst
If an advisor is considering two private credit managers with nearly identical historical performance, what are 2 or 3 big tells that might reveal differences in their approach to long term risk management?

Vivek Mathew
The big tell, if you will, is what happens when things aren't going well. At Antares, we are very overweight our restructuring team since we've been through 2002. We've been through ‘98. We've been through ‘08, ‘09. We've been through ‘15 with an energy crisis. One of the things that that's taught us is those resources are incredibly valuable.

Rebecca Darst
What's one thing you'd like advisors to remember about Antares or the middle market?

Vivek Mathew
Private credit has performed really, really well historically and over the recent several years. Really attractive risk adjusted returns when you take private credit versus other asset classes, not only are you getting excess spread, you're getting excess spread per unit of risk or per unit of volatility. So the bottom line is this: the portfolios that we offer to wealth investors are the exact same as we offer to institutional investors. We deliver the same portfolio, the same diligence, the same governance as for an institutional portfolio and a wealth portfolio. We also deliver the same level of service. And so what do I mean by that? We want to deliver a very high level of communication. We want to provide constant updates about what's happening in the world, in our market, what's happening in our portfolio. We want to give advisors direct access to our investment team. So again, these are all things that we've grown up doing with institutional investors. We're firm believers in the concept of democratization of investment opportunities. So, if we can bring the benefits of alternative investing to a wealth investor's portfolio and that ultimately provides a better outcome for a wide swath of people that we weren't touching in advance of that, I think that's incredibly gratifying for Antares and for me personally. Direct access to experience, alignment, scale – that’s what we think really matters.

Rebecca Darst
Thank you for speaking with me today, Vivek. Your perspectives are incredibly helpful and will be for advisors as they navigate private credit as part of a long-term allocation.

Vivek Mathew
Thank you.

Rebecca Darst
We hope this conversation adds clarity as you evaluate managers and explore opportunities within private credit. Thanks for joining us.