Fund Commentary – December
The Coral Cove Private Credit Fund (the “Fund”) returned 0.94% (Class I Units) in December. Annualized returns since inception (January 2021) are 9.98%.
Fund Insights
The Fund’s underlying portfolio (the “Portfolio”) has exposure to approximately 119 invoice factoring, ABL, equipment finance, real estate, lender finance, specialty finance or similar type loans. Presently, the geographic weighting of the portfolio is approximately 78% to the US and 22% to Canada. Of these positions, the largest portfolio weights are 41% to invoice factoring, 38% to commercial finance (which includes asset-based lending, real estate and equipment financing), and 17% to lender finance.
Notes from Underwriting
Throughout the past year, we’ve talked about challenging opportunities, competition, and creativity, perhaps the 3 C’s of 2023, or any year, for that matter.
As we look toward 2024, we wonder what the year will hold, and it’s safe to say those 3 C’s will likely reign supreme once again. From the vantage point of standing at the beginning of the year, the world looks clear, open, and ready for new opportunities to grow and expand our portfolio and learn from everything we’ve been through. Does this mean there will be a sweeping change? Most probably not. However, there will be tweaking, perfecting, and continuous honing of our skills to improve over the following days, months, and years.
No one is ever truly perfect, no shop without room to grow and improve, and it’s with this in mind, we take the time every year to level-set, create goals, and hold each other to a higher standard than we did the previous year.
We look forward to sharing with you those tales of growth and improvement over the coming year, bringing you interesting stories of where we got creative, where we couldn’t, and how we work to perfect ourselves in a world where perfection is always just out of reach.
Notes from Account Management
Perspective is a funny thing. On several occasions throughout 2023, in discussions with existing and potential new investors, we were asked our thoughts on how the current economic challenges impacted our existing portfolio and our pipeline of opportunities. The answers really focused on the inflationary impacts, rising interest rates, and the resiliency of particular industries or businesses. The prevailing message was that these are challenging times; we are focused on retaining credit standards and remain vigilant in our risk mitigation efforts, with a hint of optimism.
As we progressed through the year, we felt inundated with material on the stress being imposed on businesses and the expected eventual pressure relief valve of bankruptcy cases. We have all been waiting for the levy to break.
Looking back at the year in the rearview, inflation peaked mid-year 2022, granted the trailing effects roll out over time, so it is fair to say the pricing pressures certainly continued to impact businesses throughout 2023, but the year ended at a much more reasonable 3.25%.
Pressures remain; we can look to our personal spending power or our grocery bills to attest to this, but hopefully, there will be a leveling off in 2024 that allows businesses to refocus back to building and growing.
Remarkably, the predicted onslaught of bankruptcy filings has yet to materialize. There was an 18% increase in filings between 2022 and 2023. However, the number of filings continued to be well below pre-pandemic levels by nearly 50%. So, businesses managed to hang in, likely still feeling the positive effects of the increased government spending and support initiatives.
Interestingly, our clients followed this trend.
Our factoring business continues to grow; the small and (small) mid-sized businesses continue to seek access to cash utilizing this simple, straightforward form of lending that allows for flexibility and extreme growth. Frankly, the largest competitor in this space is the online lenders, which are generally more expensive, less flexible, and almost completely devoid of the human experience. When factoring with us, you have access to a dedicated account manager who knows you and your business, answers the phone, and is there to help.
We have seen very little attrition in our asset-based lending portfolio; clients prefer sticking with a partner they know who understands their business. There is still an air of uncertainty, so it makes sense that clients seek out stability where possible. On the growth side, we continue to see deals of better-than-average credit quality; competition in the space remains strong; however, winning deals with flexibility and prospect engagement continues to be our focus.
Certainly, we benefitted in the latter half of 2023 from the failure of three high-profile regional banks in the US. Simply put, there is less competition from smaller regional banks due to liquidity constraints, thus giving us a chance to close more deals with better-than-average credit quality prospects.
So, leaping into 2024, our pipeline of opportunities remains robust. We are keeping our head about us continuing to apply rigorous credit and underwriting standards while balancing creativity and a growth mindset, believe me a demanding balance.
With interest rates still high, we are challenged by existing clients extending facilities and prospective clients to be competitive with rates. We remain committed to extending facilities based on a floating rate. As rates start to fall, possibly in the second half of the year, we may be challenged by the floor rates set over the past couple of years, but we can hedge that somewhat with the declining cost of our borrowing facilities.
The current economic environment continues to hold the door open for us to close transactions with a better credit quality client, maintain returns, and manage risk.
I am excited and looking forward to a prosperous 2024.
April Fund Commentary