Sponsor relationships can provide deal flow and support for portfolio companies. But a differentiated private credit portfolio may require looking beyond the transactions most managers are pursuing.
Loans to companies that aren’t backed by private equity sponsors typically demand more origination effort, deeper due diligence, and direct relationships with management teams. But that additional work can significantly reduce a lender’s overlap with other managers, at the same time as giving lenders an in-depth view of business fundamentals.
Fortress’s Global Head of Origination, Andy Frank, explains why the sponsor versus non-sponsored mix can shape both the opportunities a manager sees and the risks it takes.
Watch to learn what this mix may reveal about a manager’s sourcing capabilities and portfolio construction.
Andy Frank:
Many private credit managers talk about their sponsor relationships, how they work with the big private equity firms, and how that creates deal flow and support for portfolio companies.
Let me give you a different perspective on deal selection and why at Fortress we put much more focus on non-sponsored transactions than some of our peers. It's a harder business generating non-sponsored loans. It takes a lot more origination effort, more time between identifying the opportunity and closing the loan, and much more due diligence than a typical sponsor transaction where the sponsor's presenting you with a neat, clean packet, including third party reports.
Non-sponsored deals also give us something important: differentiation. If everyone else is chasing the same sponsor deals, those who put in the extra work to do non-sponsored transactions are creating a portfolio that's differentiated and has less overlap with other managers. At Fortress, we have built an origination engine to seek out these non-sponsored transactions, and are actively looking to increase the percentage of non-sponsored deals in our portfolio.
When you do all the due diligence yourself, you build direct relationships with management teams and really understand the business fundamentals.
When you're evaluating private credit managers, ask them about their sponsor versus non-sponsored mix. Ask why they make that choice. That decision affects both the opportunities they see and the risks they're taking.
