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B. G., Opalesque Geneva:

"We are in the beginning of a secular shift in how credit is provided to businesses, and a shift that I believe will continue to gather speed," declared Marc Rowan, CEO of Apollo Global Management, a private equity group with $617bn in assets, earlier this month. The New York-based firm originated some $23bn in private credit* in Q2.

Before the financial crisis, private credit was a niche pursuit, consisting of distressed debt and "mezzanine" finance, according to The Economist. The market was propelled by two big forces: the retreat of banks, which offloaded risky assets throughout the last 20 years or so, and the ever-present search for yield. Over the past decade, private credit has spread to activities ranging from aircraft leasing to "direct lending", or loans to small and mid-size companies without using a bank or securities firm. PE firms are borrowing from direct lenders, including each other's credit arms, to fund buy-outs.

"As banks tighten credit standards and potentially face more onerous regulations, non-bank lenders will likely capture additional market share with attractive risk-adjusted returns," commented investment manager Barons Funds. Jamie Dimon noted on JPMorgan's recent earnings call that higher bank capital requirements was "great news" for private credit lenders who will be "dancing in the streets" as commercial lending moves out of the banking system.

The private credit market has more than doubled in size since 2015 and is now worth about $1.4trn worldwide, according to Moody's. But the same rating agency warned in June that the industry was facing its "first serious challenge" as tens of billions of dollars of loans underwritten at the top of the market in 2021 were strained by higher interest costs and a slowing economy, reported the FT. Ares, Apollo, Blackstone and Brookfield are some of the several firms dominating the market. Mainstream fund managers such as BlackRock are also gaining a foothold in private credit, as are smaller fund managers.

One of which is Chicago Atlantic, a $1.2bn asset manager that is raising capital for its second secured lending fund. The Chicago Atlantic Credit Opportunities, LLC (Fund II) has returned 18% net IRRs, 12% cash distribution per annum since its inception in May 2021. The Chicago-based private markets asset manager has so far raised more than $430m for this specialised fund.

Chicago Atlantic founding partner Andreas Bodmeier and chief investment strategist William Deuchler will discuss the rise and limits of private credit, the principles of secured lending, and its relevance in niche markets in an Investor Workshop webinar on September 7th (details below).

The opportunities the fund focuses on are primarily senior secured loans to state-licensed cannabis operators in states where the number of licenses is limited.

"We focus on established, profitable businesses, at are taking out debt capital to expand (industrial warehouse for cultivation and production and/or retail)," Bodmeier tells Opalesque. "About 25% of the portfolio is to other industries, always senior secured. Examples are asset-based and to fast-growing B2B or consumer-facing companies."

Fund I, which was incepted in September 2019, closed earlier this year with more than $120m in capital commitments. It was solely making senior secured, real estate-based loans to state-licensed cannabis operators and the manager took it public on Nasdaq. Whereas Fund II is an open-ended private fund that continues to make real estate loans but also makes senior secured loans where there is no real estate.

This is a time to seize the opportunity in the private credit market, Bodmeier says. "Indeed, banks have pulled back due to more deposit competition. Other generalist lenders are seeing more tension in the portfolio as debt service coverage ratios have decreased. We are fortunate that the cannabis industry continues to grow and is not very correlated to macro trends. In addition to cannabis lending, we see attractive low-leverage opportunities with consumer and B2B companies that are continuing to grow but have fewer financing opportunities due to the current environment."

* Private credit covers an array of strategies that span the capital structure and borrower type. These range from senior secured loans for blue-chip corporate borrowers, to junior unsecured credit for financing new building construction, to loans against specialized assets such as railcars and airplanes or contractual revenue streams like royalties and subscription services, to distressed situations.

INVESTOR WORKSHOP: How to Unlock Lucrative Opportunities through Secured Lending in Mispriced Niche Markets

When: Thursday, September 7th at 11am ET

Who:
- Andreas Bodmeier, PhD, MBA. Prior to founding Chicago Atlantic, Andreas co-founded a boutique technology and consulting firm focused on FX and commodity risk management and an SEC-registered online investment adviser for 401(k) or 403(b) retirement accounts.
- William Deuchler, chief investment strategist, who previously was CIO for two family offices and president and COO at Vantage Consulting Group.

Details and free registration: www.opalesque.com/webinar/