The BEST Way to Fund Your Business
Hello. My name is Davis Vaitkunas and this is the winter 2023 installment of Bond Capital TV. With the ongoing tricky macro we have a few insights for business loan borrowers and private credit direct landing investors to consider for 2023 and some comments on what’s getting done right now in business credit. Where we at you ask? Well with 2022 in the rear view inflation is projected to ease in 2023. However, this will likely be replaced by ongoing recessionary concerns. And of course, that inflation of publicly posted at 8% is now down at 6% is still quite heightened but I would further observe to shrinkflation and some of my experience as a consumer that that inflation is well under reported. After a 425 basis, point steepest rise ever across 2022, we are not expecting a central bank, monetary policy pivot in 23.
We expect the impact from rising rates to hit the economy in 23, and that central bankers, will most likely use that as a cue to slow ongoing increases and then take a wait and see attitude. The era of cheap money is over. Food and energy will cost more than before. That’s what we’re seeing. You’re probably wondering, where does this leave business owners and what are we seeing here at Bond? A few thoughts for borrowers, when the economy is tricky, prices are lower and others are on the sidelines for a variety of reasons,so it’s often a good time to invest, we often call these people contrarians. We have observed, a shift change in liquidity, pricing and renewed conservatism. Most banks have become more conservative too. Even though leverage is well below four times cash flow, and on the move to below three times cash flow. With debt harder to come by borrowers are seeing more covenants, lower leverage, and higher rates. For private debt, UNITRANCH and private debt mezzanine strategies, we are being shown deals, at 55% loan to value and 12, to 14 percent, cash costs, We haven’t seen this kind of pricing for over a decade. Probably not as good for borrowers but certainly an excellent opportunity for investors. What about investors you ask? Given the tricky, macroeconomic setup, investor allocations should be mindful of concentration risk.
You just can’t be diversified enough. A well-constructed, modern, allocation model should include 50% alternative assets. 30% public equities,and 20%, traditional fixed income for liquidity management. Within those alternative assets, investors should look for non-correlated diversification and alternative assets that provide interest rate and inflation protection. Private credit happens to all of those marks. Are deals getting done? Lots of behavioral psychology on display here as even lower prices are feared by vendors who are selling out before recession while buyers are fearful of the opposite. That is over buying into a recession. And of course the adage is you make your money when you buy, so certainly by well. These fears are compounded into a 10 to 15% price gap, becoming more common than not, as a result of pure deals are getting done right now. The few actual buyers should be able to prefer missed priced assets in their favor and be able to use a higher discount rate when making their calculations.
This higher discount rate is needed to compensate the investor for the recent steep rise in an interest rates and increase cost of capital. So given the higher cost of capital, decelerating growth, ongoing monetary tightening and moderating inflation, private credit will play both an offensive and a defensive role in the business finance community across 2023.
Thank you for listening. I hope you found these insights helpful.
I am Davis Vaitkunas. From Bond Capital, Private Credit.
This has been another installment of Bond Capital TV.