When evaluating a BDC manager, one question tells you a lot: on what percentage of the portfolio do you act as agent, lead, or sole lender?
Fortress’s Global Head of Origination Andy Frank explains that a lead lender sets the terms, manages the borrower relationship, and holds voting control. When a borrower needs an amendment or faces covenant issues, the lead lender is in the driver's seat.
Direct origination also builds closer relationships with management teams, and earlier visibility into potential issues.
Watch to learn what that one question reveals about a manager's approach to risk.
Andy Frank:
When you're evaluating a BDC manager, ask them this simple question: on what percentage of your portfolio do you act as agent, lead, or sole lender? That answer will tell you a lot about the type of lender they are, how they think about asset management, and risk.
As an originator or lead lender, you're setting the terms of a loan. When you're leading a loan, you're also managing the borrower relationships. And most importantly, you have voting control. When a borrower needs an amendment or extension, or faces covenant issues, the lead lender is in the driver's seat. Participant lenders – those who invest in deals originated by others – often have much less influence over important decisions for the life of the loan.
We know from experience that being a direct originator of risk gives you more than just control. It's about economics, and it's about downside protection. That experience also shows us time and again the real advantage is intelligence. Agents build strong relationships with borrowers. Regardless of reporting and information rights in the loan documents, they have better access to management teams and sponsors. And that access allows for better communication, including early warning signs that not all lenders proactively seek out. In a stressed situation or even just turbulent times, the agent or lead lender has voting control and can address potential issues head on and influence the course of action.
So, when you're evaluating managers, dig into their origination capabilities, ask about their deal flow, their relationships, and what percentage they source directly.
That's why Fortress has dedicated significant resources to building strong origination capabilities.
