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July 20, 2022

Private Credit Investing For Retail Investors Amid A Volatile Market Environment


John Kline, Managing Director, joined New Mountain Capital in 2008. Mr. Kline is primarily dedicated to New Mountain’s credit business and serves as NMFC’s President and co-portfolio manager of the private credit strategies.

Russ Alan Prince: Let’s begin by having you describe New Mountain Finance Corporation, and how it fits into New Mountain Capital.

John Kline: New Mountain Finance Corporation—NMFC—is New Mountain Capital’s $1.3 billion market cap publicly traded business development company—BDC. It’s primarily focused on senior secured lending to financial sponsor-owned middle-market companies in defensive growth industries. NMFC utilizes the full analytical capabilities and industry resources of New Mountain’s private investing platform to pursue its goal of delivering attractive, consistent income to investors. Of note, NFMC currently plays a 30-cent per share dividend, equating to a roughly 9% dividend yield based on our Q1 book value. 

New Mountain founded NMFC in October 2008 as part of its private credit strategy, which complements the firm’s well-established and highly successful private equity business. We deploy the same defensive growth investing strategy across the firm, focusing on secularly advantaged companies in a-cyclical industries that have the potential to deliver strong growth irrespective of the economic environment. In the credit business, this means lending to businesses at attractive yields to deliver steady income for investors. 

Prince: Against the backdrop of an inflationary environment and rising interest rates, how can private credit serve as an alternative to traditional fixed income or yield-oriented investments in a portfolio?

Kline: This year, we have experienced sustained volatility in most areas of the equity and fixed income markets caused by rising interest rates, inflation concerns, supply chain disruptions, and geopolitical instability. However, corporate direct lending has been one of the most resilient asset classes across all financial markets, offering consistency and stability that can’t be found elsewhere. Our market has benefited from continued good credit performance, particularly in defensive industries, floating interest rates, and the senior secured nature of our investments. 

The current mix of rising rates and concerns about slowing growth has led to both equities and traditional fixed income dramatically declining to an extent that we haven’t seen before. This means traditional fixed income may not provide the portfolio stability investors were expecting. 

NMFC has the vast majority of its assets in floating rate investments, offering protection from rising rates, while New Mountain’s overarching philosophy of defensive growth investing and focus on companies with strong pricing power and margins means that our investments are well-positioned to deliver the income and stability investors need in all market environments. 

Prince: Are you seeing an increased demand for the private markets from retail investors? If so, what is driving this demand and how can investors take advantage of the investment opportunities?

Kline: We are absolutely seeing increased demand for exposure to private markets from all types of investors, including retail. The reasons are varied and include higher returns, differentiated return streams, reduced correlation with public markets, and the growing portion of the economy that is financed by the private markets. 

The exact need the investor has will often dictate what area of the private market they allocate towards, but for those seeking high and consistent income, capital protection and upside, transparency, and daily liquidity, BDCs are especially compelling solutions. 

Prince: Why is private credit an attractive investment opportunity for retail investors, and how does a business development company such as NMFC provide exposure to the asset class?

Kline: Private credit is an attractive opportunity for all investors, including retail, because it offers the potential for attractive yields that are less correlated to broader markets with more downside protection than many other yield-oriented investments. 

BDCs make private credit strategies available to retail investors and their advisors with high levels of transparency and daily liquidity through any brokerage platform. At NMFC, all investors can benefit from the same New Mountain investments with dozens of investment professionals who manage $35+ billion across our private equity, credit, and real estate funds. 

While for much of the last decade BDC’s delivered competitive returns and high levels of income but lagged the S&P on a total return basis, they have held up much better than the index year-to-date on a share price basis before even accounting for their strong dividends. 

If an investor is looking to capitalize on the opportunity in private credit, finding the right BDC is critical, and it is important for them to analyze a BDC’s track record, management team and portfolio quality. 

Further, senior NMC executives have more than $125 million invested in NMFC which represents 11% of the total public company float, and Steve Klinsky, our chairman and founder, is the largest investor in NMFC. 

Prince: What are some of the ways NMFC is differentiated from others in the space and what sectors are of interest to NMFC at the moment?

Kline: We utilize the full analytical and investing resources of our private equity business. Access to the firm’s in-house sector-focused executives, senior advisors, dedicated industry consultants, and past and present portfolio company CEOs gives NMFC unique and differentiated insights into our target sectors. Given this, New Mountain’s credit team is able to understand sectors, companies, and the competitive environments they operate in at a deeper level than many other private credit firms.   

While NMFC focuses on middle-market direct lending, we also allocate some of the portfolio to assets including equity in NMC managed leveraged loan funds, net lease real estate, and, very selectively, private equity, all of which allow us to deliver improved risk-adjusted returns for investors. We take an active and thoughtful approach to managing the portfolio, and for example, monetized some of our real estate investments this past quarter after they had appreciated considerably, and we felt that capital might be better deployed into other areas at this point in time. 

Across the firm, the focus is always on our defensive growth strategy, evaluating leading companies in a-cyclical sectors we have done extremely deep research on and view as primed for growth in any market environment. We continue to see opportunities in sectors such as software, life sciences, cyber security, subscription database companies, healthcare services, healthcare technology, and technology-enabled business services.

RUSS ALAN PRINCE is the Executive Director of Private Wealth magazine (pw-mag.com) and Chief Content Officer for High-Net-Worth Genius (hnwgenius.com). He consults with family offices, the wealthy, fast-tracking entrepreneurs, and select professionals.