2nd Sunday - PE OpEds

The inevitable drug analogy ...

Because any time money is involved, drug addiction becomes the default analogy. *sigh* What does that say about us as a society?


Happy Sunday to you! I am coming to you from Texas . . . again. My trek to Korea and Japan for skiing, Cherry Blossoms, and some proper business was cancelled for practical reasons. If you haven’t heard my thoughts on living in China during SARS, here’s the summary: terrifyingly isolating. That said, grad student me enjoyed staying in posher (more posh?) places than I would have otherwise. My hotel room in Beijing overlooked Tiananmen Square! Real Madrid moved in while I was there. Speaking of Posh, yes, David Beckham had just joined the team. Throngs of mostly teenaged girls screamed as I entered and exited the hotel. I developed my queen wave. I wore ridiculously large sunglasses.

It was a little bit epic.

While I have little concern about getting sick, my main concern is getting trapped on the ground unable to leave - there’s nowhere to go legally or illegally if you get wrongfully tagged. Japan and Korea are no China, but they still have much lower respect for individual life and rights. The default is the State. Globalization has thankfully brought the fight for human rights (personal liberties) front and center. This is an opportunity.

Still hugging people with too much exuberance, -Kate


Friday reads may take all month for even the ambitious readers amongst us. These blissfully bite-sized opinion pieces can keep you company through your coffee break. Think I missed some key ideas? Email me: kate@prepwise.com. More data sets and tools on Tuesday.

High Yield Was Oxy, Private Credit is Fentanyl, Rasmussen & Obenshain

Companies forced to borrow at higher yields generally have a higher risk of default. Lending being perhaps the second-oldest profession, these yields tend to be rather efficient at pricing risk. So empirical research into lending markets has typically found that, beyond a certain point, higher-yielding loans tend not to lead to higher returns — in fact, the further lenders step out on the risk spectrum, the less they make as losses increase more than yields. Return is yield minus losses, not the juicy yield posted on the cover of a term sheet. We call this phenomenon “fool’s yield.”

Private credit funds have innovated to create a product that private equity funds cannot resist, the ideal delivery vehicle for the biggest hit of leverage: the unitranche facility, a single loan that can fully fund an acquisition. This kind of structure can be arranged quickly, does not always require multiple lenders, and is cost-competitive. These facilities, unlike collateralized loan obligations, do not require ratings, so lenders face no ratings-based restrictions on their lending. Until recently, this structure had primarily been targeted at smaller acquisitions that were too small to be financed in a first- and second-lien structure in the leveraged loan market — so it filled a gap. But unitranche deals are now rivaling large leveraged loans: Both Apollo’s and Blackstone’s private debt businesses have announced that they see growth in the private credit market and are targeting loans in the billions.

Private Credit Is a Driver, Not a Drug, of the American Economy, Drew Maloney

The private credit market has been mischaracterized by some who do not fully understand it, as well as others who have a financial motivation to raise doubts about these investments. That is why it is important to establish what this market is – and what it isn’t – so investors understand the opportunities and risks and the public more broadly appreciates just how important these funding tools are for the small- and medium-sized businesses that power our economy.

Most businesses lack access to public equity or debt – and most businesses are not “investment grade” – including a number of household names, such as American Airlines, Avis Budget Group, and Wynn Resorts. 

Because the private debt market is comprised of loans to businesses that cannot raise investment-grade debt, some have compared it unfavorably to the borrowing binge and flimsy financial tools that fueled the financial crisis. 

Those comparisons are inaccurate and unfair.


Here’s a reminder of what we’re up to with this Discourse this month: 

I will send three emails each week during the four week cycle starting the first week of the month: Sundays, Tuesdays, and Fridays.

First week is dedicated to introducing the topic of the month - from basic overview to data analysis methods to Big Important Reads. 

Second week is dedicated to what others have said about the topic. This is when you can petition to debate. WE ARE HERE!

Third week is focused on additional research that has come to light because you dear member have shared something I had not already seen or made a better case for something I had previously dismissed.

Fourth week is the debate week. You’ll hear about the live debaters and the official debate resolution. Once we’re up to full steam the debate will be live streamed and open to Q&A at the end. My hope is to have it live streaming with audience participation by May 2020. Debates will be shared (audio only, video and transcript) in the Friday email of the 4th week.