BACK TO THE BEGINNING – THE GARRINGTON PRIVATE CREDIT STRATEGY AS COMPARED TO CORPORATE BOND FUNDS
It’s 2022—the markets are a rollercoaster investors don’t want to ride. In the US, both bonds and equities are down double digits.
Having been in the private credit space for almost 10 years with the Garrington Private Credit Strategy, I wanted to shout from the rooftops: there is a better way to diversify!
We had been quietly delivering consistent returns that don’t have you glued to market headlines because the risk management attributes of our uncorrelated Strategy offer more protection than many Corporate Bond strategies.
The Garrington Private Credit Strategy and Corporate Bond funds are both valuable tools in an investment portfolio, but each serves different objectives. Here’s a comparison highlighting why this Strategy can offer distinct advantages over Corporate Bond funds in North America.
Return Potential
- Our Strategy: Generally, targets higher returns. Since private loans are more specialized and less liquid, we can command a higher yield in exchange for that illiquidity. The premium received on our credit facilities tends to be attractive.
- Corporate Bond Funds: Typically, yields are lower, reflecting the relative liquidity of the bonds.
Direct Security on the Borrower’s Assets
- Our Strategy: Allows us to take perfected liens (typically first position) on the Borrower’s Tangible Assets, which offers great protection if the company defaults or faces financial troubles. We evaluate our loan by focusing on these assets and setting an advance rate relative to the expected liquidation value.
- Corporate Bond Funds: As a buyer of corporate bonds in public markets, debtholders are typically not able to access direct controls of the Borrower’s Tangible Assets, have many other parties as co-lenders, and usually have much less stringent mechanisms and ability to seize and sell assets (particularly in a timely manner).
Risk Mitigation and Structural Protection
- Our Strategy: includes further structural protections such as covenants and corporate liens (in addition to the main liens on the Tangible Assets), offering a safety net for investors. These agreements allow us more control over the Borrower’s financial behavior, often triggering early intervention if problems arise.
- Corporate Bond Funds: Corporate bonds are often unsecured debt, and the bondholder’s rights are limited to a fixed coupon payment and the promise of repayment upon maturity. This standardization limits protective measures compared to the tailored arrangements in asset-based lending.
Diversification and Access to Niche Markets
- Our Strategy: Offers exposure to niche market segments often untapped by traditional bond markets. Furthermore, we gain access to mid-market companies and areas where banks may be restricted from lending due to regulatory reasons. Moreover, our investment team can engage in bespoke transactions, providing us greater flexibility.
- Corporate Bond Funds: They generally focus on traditional industries and loan types. Although diversified within the corporate bond space, they are more tied to interest rate risks and broader economic trends.
Smaller Company Effect on Creditor Terms
- Our Strategy: Focuses on loan sizes of under $20 Million. Contrary to the perception that larger borrowers are safer, significant data suggests that credit documentation and loan covenants tend to become stricter as the borrower size decreases. There are also many market inefficiencies in lending to smaller companies.
- Corporate Bond Funds: They generally focus on investing in larger, publicly traded companies that don’t benefit from the same esoteric inefficiencies.
Frequent Monitoring
- Our Strategy: Allows for frequent monitoring of the Borrower, its underlying Tangible Assets, and its financial position (typically weekly, bi-weekly, or monthly). Controls are often placed on corporate bank accounts allowing us dominion of cash. As a result, we have the opportunity to engage proactively with Borrowers to get ahead of potential credit issues.
- Corporate Bond Funds: Financial reporting is typically quarterly, subject to listing and regulatory requirements. Shared information is often company-controlled rather than determined by investors.
Stability of Pricing
- Our Strategy: Most of our portfolio involves floating rate loans, which adjust to changes in interest rates (but are typically structured with minimum floor rates). This feature provides a hedge against rising interest rates. Furthermore, because our loans are not publicly traded and we are lending an advance rate that is less than the liquidation value of assets, the values of our loans do not swing often, which allows for a much smoother journey for investors.
- Corporate Bond Funds: Corporate bonds are more vulnerable to interest rate and market fluctuations. When interest rates increase, the value of existing fixed-rate bonds typically declines, affecting portfolio returns, especially if the bonds are long-term.
Global Investors, This is for You
Whether you’re in Zurich, Cape Town, or São Paulo, the challenges of today’s market are universal. Inflation is a global issue. Bond returns have been lackluster. And equity markets? You get liquidity but at the cost of significant drawdown risk.
Our Strategy offers a way to break free from these constraints. It’s not tied to public market sentiment. It delivers real, meaningful returns that keep pace with your financial needs.
So, What’s the Catch?
Let’s be honest: no investment is perfect. Private loans are less liquid than public bonds, potentially requiring a longer-term commitment (we estimate that it would take us around a year to fully liquidate our portfolio). However, you get so much more for accepting the lower liquidity—and you can protect your capital from significant drawdown risk.
Isn’t that a great trade off?
In Summary
The Garrington Private Credit Strategy has consistently outperformed Corporate Bonds, delivering average annual returns of 8–12%. These aren’t pie-in-the-sky numbers; they’re rooted in real, tangible lending to middle-market companies with strong fundamentals.
We often lend to firms that are too large for small-business loans but too niche for public markets. These companies typically have robust collateral but are still willing to pay a premium for flexible financing.
Diversification is often referred to as the only true “free lunch” in investing. We believe that our Strategy also offers this benefit by avoiding additional risk while still aiming for higher returns. In today’s competitive and increasingly transparent investment landscape, such opportunities are rare. This approach allows investors to achieve better risk-adjusted returns—full stop.
Ready to Rethink Your Portfolio?
When was the last time your Corporate Bond portfolio made you excited? I’ll wait. Private credit, on the other hand, has been quietly revolutionizing portfolios for those willing to take a closer look. It’s the modern answer to outdated fixed-income strategies.
Whether you’re a cautious investor looking for steady income or a seasoned pro seeking uncorrelated returns, the Garrington Private Credit Strategy has something to offer.
Toreigh Stuart
Managing Director
