Fund Commentary – January
The Coral Cove Private Credit Fund (the “Fund”) returned 0.90% (Class I Units) in January. Annualized returns since inception (January 2021) are 10.03%.
Fund Insights
The Fund’s underlying portfolio (the “Portfolio”) (as at Jan 31,2024) has exposure to approximately 120 invoice factoring, ABL, equipment finance, real estate, lender finance, specialty finance or similar type loans. Presently, the geographic weighting of the portfolio is approximately 76.3% to the US and 23.7% to Canada. Of these positions, the largest portfolio weights are 40% to commercial finance, (which includes asset-based lending, real estate and equipment financing), 36% to invoice factoring and 21% to lender finance.
Notes from Account Management
Character matters.
Our business is based on relationships. Right from the beginning, we seek to build relationships and wear our integrity on our sleeves. So, we seek partnerships with those who also believe that character matters.
As part of our underwriting process, we complete background and credit checks on the owners and key people we will be working with on any new deal. We generally ask for personal guarantees because we desire to be aligned right from the beginning; we want to know they are as invested as we are in the success of their business.
We understand that nobody is perfect, and we are not here to judge anyone; no one here is looking to cast the first stone. We appreciate honesty from individuals who are transparent about any challenges or issues they may have faced in the past. We believe in giving second chances.
We have said “no” to deals that were otherwise eligible based on character; for some, this moral high ground may be a luxury, but for us, it is embedded in who we are.
As caretakers of investor capital and loans from our banking partners, there are lines that we that we will not cross. Does that mean we have not engaged with people who have had difficult situations in the past? Yes, we have. Those with integrity will be transparent about past mistakes, own them, take on measures to fix their situations, and talk about who they are today. In addition to people and companies that are above board, we are also there to help those who have had to rectified their situations and people we want to work with.
We have all experienced challenges when best-laid plans change, and we must pivot, so we expect the same challenges will occur with our clients; and when they do, we want to work side by side in the trenches with people who care and value integrity.
Many of our clients are run by independent owner-operators with long-term employees who are like family or who are family; when these businesses are in flux, it is personal.
I want to share a current example: our client is a century-old business operating in Chicago; their longest-serving employee has been there for 50+ years. The current owners know their people on the shop floor by name, share stories, and celebrate their kids’ graduations; you get the idea. This company is struggling. Another local Chicago company (the acquirer), focused on growth via international acquisitions, has stepped up to help them. There are synergies that make acquiring our client interesting. The President of the local Chicago company has taken a particular interest in our client; he is, at heart, a production guy who understands this business and its inherent struggles.
The acquirer, armed with only an option to purchase our debt and security, has invested money, time, and human resources in our client to help turn it around. Our client has continued to miss projections, yet the acquirer has stepped up each time and done what they said they would: put more of their own money in, subordinate to our loan, and continue to support the company. They can still walk away and decide not to acquire our debt and security, at which point we will liquidate the company and repay our loan first.
So why do they stay in if deadlines and revenue projections are missed? In part because there is a benefit for their business, but also because they have integrity and appreciate working with others who also share that value. The owners of our client are there at the plant every day, working and executing as best they can, and we, well, we have continued to do what we said we would; we are also there in the trenches working with both groups.
Yes, we have improved our overall collateral position, but when hard decisions had to be made, we did what we said we would. With partnership, this century-old business has a chance to survive and thrive, and with that, everyone involved wins.
April Fund Commentary