As banks nationwide struggle to process troubled assets off their books, middle market companies have not been able to get the loans they need to grow. Private money is stepping in to fill that gap – and providing yields that planners are seeking for their HNW clients.
“We’ve gotten very good at this,” says Kim Ip, a partner at Luminous Capital in Los Angeles. “This new direct lending fund will produce a 10% yield paid out quarterly. Then there is also the potential for capital appreciation.”
In this instance, Luminous created a feeder fund so that its clients, with average investable assets that range from $20 to $25 million, could meet the minimum required by the fund manager.
The loans in the $350 million fund are being made to companies across the country. All are small enough that they lack name recognition. However, Ip says, the fund company has a track record of $3.4 billion in loans to in this category with a first lien default rate of .09%. Another attractive feature of the fund is that the loans are classed as senior secured private debt. This means they are fully collateralized and will be the first lenders to recover money in a default, ahead of common shareholders.
“We’ve done other things in the past for income,” she added, including sale lease-backs with managers who buy a property from an operating company and then lease it back to them, providing a secure lease stream. The lease-back fund investments, which Luminous made primarily between 2009 and 2010, also are generating a 10% return. The firm is just now getting into the direct lending market.
Ip thinks it will remain profitable until banks are able to move back into this space.
“As they work through their troubled loans and can start making loans to the middle market,” Ip says she would expect to see banks reemerge as competitors to private managers.
“We don’t know when we will see this,” she added, “but we are definitely not seeing it now.”
Ann Marsh writes for Financial Planning.