Private Credit Investment Approaches

‘Peak’ Private Credit? A prominent bank CEO in the news has stated Private Credit has peaked. With the highest level of conviction, I can assure you that is simply not the case. First, some imply that Direct Lending (DL) defines Private Credit (PC), however, it is just one of the three main pillars that represent private credit. DL is currently the largest segment of PC, it is still growing, and I expect it to grow proportional to PE, a business that will undoubtably be bigger 5-10 years from now than it is today. As corporate earnings grow, the corporate sector at-large will support more debt that allows a company to add operating leverage, a reasonable assumption since corporate earnings grow with GDP and earnings are only temporarily interrupted by an occasional recession that comes along ~1x every 10 years or so. Second, Assrt-Based Lending (ABL) is only getting started. Although Marathon has been in the ABL business for 20 years, having invested $30B+, investor interest in ABL is just ramping up now. A leading consulting firms released its survey of institutional clients with ABL representing the #1 allocation request for the coming year. The TAM for ABL is enormous with some estimates providing a range of $30 to $40 trillion. In the next 5-10 years, I believe the ABL business overall will grow by 30% annually as AUM for ABL becomes as large as DL. The ABL outlook should enable PC to grow 2x on its own. Diversification and low correlation to DL, makes ABL a terrific compliment for PC investors (institutional, insurance, wealth management). The third PC leg to the stool is Opportunistic Credit, which includes capital solutions and special situations. Capital solutions provide tailored financing to meet a company’s strategic needs, ranging from growth capital and debt refinancing to solve for liquidity or restructuring through credit or hybrid structures, structured as debt, often with equity upside. The return objective for Opportunistic Credit should allow managers to generate higher IRRs than observed in DL & ABL. As DL has slowed over the past year, capital solutions have picked up rather significantly. PC also includes infrastructure debt, data centers, and more. Specialty finance such as litigation finance and NAV lending are not sectors that Marathon favors, however, they do represent a growth for PC. So, while, certain skeptics may question the growth of PC, you should have no doubt the direction of travel—the size and scope are huge and getting bigger. As the global economy grows $3 trillion per year (global GDP now exceeds $100 trillion), the amount of credit needed grows proportionally. Private Credit peaking? Not even close; that’s like saying the internet peaked in 2001 à before smartphones, cloud computing, streaming, social media, and more recently AI has helped to re-define the global economy. The Private Credit markets are ~$4T today and I believe it will grow to $10T over the next 7 years.

It’s not delinquencies that drive returns in private credit, it's recoveries. For any given segment/sector of the market, the lending rates are substantially similar between managers. So, what drives marginal performance between managers, is their ability to control the downside. While delinquencies can be a leading indicator of losses, they, by themselves, have very little impact on returns, as mathematically, a constant rate of delinquencies (fully recovered) have very little impact on returns. Meanwhile, late and default fees may actually increase returns. What drives returns then is recoveries. Imagine two managers charging similar interest rates, however one has a 10% default rate with 100% recovery, and another with a 5% default but a 0% recovery.    That’s why manager, industry, and strategy selection within private credit is so important. For example, recoveries are likely to be far higher In a senior lending strategy on hard assets such as real estate than there would be, for example, on a mezz lending strategy on tech companies… yet both are private credit. And within the sector, the manager that’s a local / niche specialist is far more likely, imho, to select the investments more likely to be recoverable, and be able to resolve defaults than a generalist dipping in and out of markets. That’s why I am so focused on senior lending in a single segment (real estate), predominantly (>95%) in a single market with a stable economy (#Boston), where I have a depth of experience and expertise. In a downturn, depth of knowledge and market expertise wins over breadth. As always, my musings, and not investment advice. Interested in hearing alternative viewpoints. #AlternativeInvestments #PrivateCredit #RealEstateInvestment John, JAKE, Dave, Shawn, George, Ian, Leyla , Aleksey 

I met a fintech founder recently, and we got to talking about the booming Private credit market. Here's where I think the alpha lies: 1️⃣ Tech-Enabled Underwriting The best private credit platforms are using AI/ML to underwrite thin-file borrowers (SMEs, startups, freelancers) at scale. Look for lenders with proprietary data moats, and manage to deliver a great user experience with slick UX. 2️⃣ While Banks remain active, the real competition is Venture Debt As VC funding stays tight, growth-stage startups are turning to revenue-based financing and ARR-backed loans. Private credit funds that blend equity upside (warrants, profit-sharing) will win. 3️⃣ Regulation is Coming (And It’s a Good Thing) Smart GPs are preemptively adopting transparency tools (blockchain settlement, real-time reporting) to attract institutional LPs ahead of the curve. We're done with chasing yield blindly. Let's instead do something about structuring tech-driven credit solutions for overlooked markets. Who’s building (or investing in) the winners? #FintechVC #PrivateCredit #AlternativeLending #IncludedVC #IncludedVCMafia Disclaimer: All opinions expressed here are my own and do not represent any firms or employers that I may be associated with.