In a recent fireside chat, Andrew McDonnell, Founder and Managing Director at Arrowpoint Capital, shared his expertise on the private lending trends in Australia’s lower-mid market. Here are the key takeaways from the conversation:

Background and Experience: Andrew McDonnell has over 20 years of experience in corporate lending in Australia, with a background in banking and private debt. He left HSBC to start Arrowpoint Capital, a private credit provider focused on the lower mid-market sector.

Private Lending Trends in Australia: The alternative corporate lending market has opened up significantly in recent years, driven by the need for funding in the lower mid-market sector. Banks are less inclined to lend to smaller businesses, creating an opportunity for private credit providers like Arrowpoint Capital.

Origination of Transactions: Arrowpoint Capital originates transactions through a network of intermediaries, including private equity firms, accountants, lawyers, and direct relationships with target borrowers. They focus on building a proprietary network to access attractive deals and have a first look at preferred transactions.

Attractive Deals and Credit Metrics: Arrowpoint Capital targets stable companies in defensive sectors with clean operating cash flows and conservative leverage metrics (average opening leverage of 2 times debt to EBITDA). They prioritize partnerships with borrowers and aim to provide a compelling alternative to bank funding.

Assessing Borrowers and Deals: Andrew emphasized the importance of transparency, ease of working with management, and skin in the game (owners’ personal wealth invested in the business) when assessing borrowers. They also conduct independent reviews of financials and legal contracts.

Data Collection and Management: Arrowpoint Capital tracks deals they pass on, including those that may be revisited in the future. They use this data to inform their credit assessment process and improve their understanding of the private corporate credit universe.

Technology and Workflow: While technology can improve certain aspects of the workflow, Andrew believes that credit assessment and qualitative inputs are still critical and cannot be completely automated.

Investor Interaction and Communication: Andrew sees technology facilitating information flow to investors, but not replacing the need for human interaction and due diligence. He emphasizes the importance of transparency and regular communication with investors.

Trends and Concerns: Andrew predicts that family offices will continue to play a significant role in backing credit funds, and investors will demand more transparency and disclosure from fund managers. He also notes that manager selection is a key concern for investors in the asset class.

Crowding in the Lower Mid-Market: Andrew does not believe the lower mid-market in Australia will become too crowded in the near future, citing a persistent under supply of capital and a growing borrower universe.

Overall, Andrew McDonnell’s insights provide a valuable perspective on the private lending trends in Australia’s low-emmit market, highlighting the opportunities and challenges in this space.

Key timestamps:

00:09 Introduction to the Fireside Chats
02:37 Transition from Banking to Private Debt
04:38 The Role of Partnership in Lending
06:06 Skills Development in Private Credit
07:49 Challenges of Transitioning from Banking
08:42 Transaction Origination Strategies
10:51 Defining Attractive Deals
12:19 Assessing Borrower Suitability
13:34 Evaluating Management Teams
15:15 Data Management for Declined Transactions
16:14 Understanding the Private Credit Landscape
18:09 Investor Interaction and Technology
19:11 Trends in Family Office Investments
20:39 Communication Strategies with Investors
21:38 Understanding Investor Concerns
23:28 Market Dynamics in the Lower Mid Market
24:58 Conclusion and Final Thoughts