Investment Philosophy of Brook Taube Medley
Introduction
In addition to his roles as CEO and Chairman of the Board of Directors for Medley Capital Corporation (NYSE: MCC), Mr. Taube is a Managing Director and Chief Investment Officer for Medley. Mr. Taube was a Partner at CN Opportunity Fund prior to the creation of Medley. Mr. Taube created T3 Group, a primary and consulting firm focused on distressed asset and credit investments, before forming CN Opportunity Fund. Before joining T3, Mr. Taube was a Partner of Griphon Capital Management. In 1992, he commenced his career at Bankers Trust, where he most recently served as Vice President in Structured Finance and Capital Markets.
Primarily offering senior secured floating rate loans ($25M-$150M) to private middle market companies in the US with annual sales between $50 million and $1 billion, Medley focuses its investment activities on credit-oriented strategies. Medley avoids widely publicized investment opportunities and focuses on direct loans to businesses that are underserved by the conventional banking system. It finds investment opportunities through direct relationships with companies and financial intermediaries-such as local, regional, and national bankers, accountants, attorneys, and consultants-as well as financial sponsors. Medley is often sought after as a financing partner of choice, as it is one of the largest providers of private debt.
Investment Philosophy
While middle market private debt is an intriguing asset class originating through bilateral direct lending, it combines the appealing upside participation typically offered by mezzanine and other equity-like instruments with the downside protection of senior secured bank loans. In addition, middle market debt providers also have priority of return, control over the restructuring process as well as any sales of the assets, capital raises, and insurance proceeds due to their senior standing in a borrower’s capital structure.
Private debt investments hold a variable or fixed coupon that is paid regularly, typically monthly or quarterly. Regular interest payments on private debt investments, as well as amortization of payments over time, reduce the aggregate level of risk exposure to the private debt investor, even though common equity holders typically do not realize cash or other periodic returns on their investments until a liquidity event.
In the case of private debt investment portfolios, there are also additional equity “kickers,” which typically over time have generated an extra 5–10% IRR above that generated by the overall returns. Examples of such equity involvement include options, warrants, cash flow sharing, co-investment rights, and other participation features. Standard protections consist of anti-dilution protection, tag-along rights, and piggyback registration rights in option and warrant agreements. Cash-flow sharing agreements usually feature waterfall structures, where the lender participates in cash payouts once good debt servicing has occurred.
Private debt has become popular because it has low volatility and stable returns and remains unlinked to public capital markets. More notably, private debt investments do not require the presence of strong M&A or public equities markets to provide realized returns because they are based on contractually agreed-upon, regular principle and interest payments. Even if public markets remain tough for a long time, private debt investments can still provide the baseline returns.
The “J Curve” refers to the fact that investors in illiquid assets, like private equity, typically wait a long time before seeing investment returns while continuing to pay capital contributions (including management fees). Private debt, on the other hand, can lessen this J Curve effect because it provides consistent (monthly or quarterly) cash payments of principal and interest.
Conclusion
By lending to private borrowers that are not so well-off in the public credit markets or the traditional banking system, private debt firms may be able to earn a premium over those lenders in the syndicated loan market. In addition, due to the private and less efficient nature of such a market, lenders often command very favorable terms and conditions on loans. And due to these factors, private debt investments would provide investors with a better means of diversifying their portfolios by offering equity-like attractive returns and risk profile of senior secured debt.
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