Fund Commentary – October
The Coral Cove Private Credit Fund (the “Fund”) returned 0.83% (Class I Units) in October. Annualized returns since inception (January 2021) are 9.91%.
Fund Insights
The Fund’s underlying portfolio (the “Portfolio”) has exposure to approximately 123 invoice factoring, ABL, equipment finance, real estate, lender finance, specialty finance or similar type loans. Presently, the geographic weighting of the portfolio is approximately 74% to the US and 26% to Canada. Of these positions, the largest portfolio weights are 39% to invoice factoring, 38% to commercial finance (which includes asset-based lending, real estate and equipment financing), and 19% to lender finance.
Notes from Underwriting
Going up against the competition vs. getting it right.
So often, we face opportunities where we believe we have found a potential client that fits our criteria, but what do we do when something critical to our lending criteria doesn’t stack up with the competition? If it’s rate, lending values, or key covenants, how do we review the opportunity in such a way as to decide whether or not it’s worth stretching for?
The answer is pretty simple. We usually don’t.
With an investment team with decades of experience, we’ve been around the block and we have seen what stretching on our policies can do and what a detriment it can sometimes be. We know we’re not the cheapest lender, and our lending values and covenants can be conservative, but we must sell the other side of things and the benefits of what we CAN do. We are about relationships, providing value to our clients, and being there in good times and bad. Going outside of our comfort zone isn’t how we will win good quality business. We win it by sticking to our knitting, doing what we know to be within our credit box, and working with our clients to achieve a solid and profitable relationship for us and them.
Do we lose opportunities sometimes because of this? Absolutely. But when we consider the alternative, which could be higher risk and greater discomfort down the road, we are confident that, holding tight to what we know, the right opportunities will come our way and make for valuable lending relationships.
Notes from Account Management
The Importance of Ongoing Diligence.
We often say we are not “set it and forget it” lenders. We spend a great deal of time through the initial underwriting and deal diligence process, getting to know our borrower, their business, and our collateral.
Included in this diligence process is a “Field Examination.” A field exam is undertaken by an independent professional hired by us at the expense of the prospective borrower (part of the diligence fee). We work within an approved vendor list of examiners; we choose based on industry knowledge and regional location. The examiner is tasked with attending to the prospective business and completing a deep dive into its historical performance, particularly our prospective collateral.
The process of the examination starts with a diligence list provided by the examiner to the prospect (this list is based upon standard criteria as well as any additional specific diligence we desire), the prospect delivers materials to the examiner both ahead of the visit and while the examiner is at the business.
The diligence results are provided to us via a written report, which the Underwriter, the Investment Committee, and the portfolio operations teams consider when evaluating the opportunity and structuring the transaction.
This report is an excellent tool to better understand how collateral has performed to provide insight on how best to set ongoing management guidelines. It is an invaluable tool for the portfolio operations team when beginning their work with the client; it may identify areas of stress or areas that may need additional follow-up.
The field exam is such a useful tool that we continue to send examiners out to update their work periodically throughout the life of the loan. On repeat visits, they will continue to test benchmark items and take instructions from the portfolio operations team to investigate specific items.
The examination reports are then shared further to evaluate ongoing collateral performance by the Investment Committee when considering facility increases or structural changes and the Relationship Manager and the management team when making ongoing funding decisions.
April Fund Commentary