In a recent fireside chat hosted by Giovanni Amodeo, Glenn Harrison, the founder of LO3 Capital, shared his extensive insights on identifying successful niches in private credit, particularly focusing on the lower middle market. The discussion, rich with strategic and operational details, spanned various aspects of private credit investment, highlighting Harrison’s journey and the innovative approaches of LO3 Capital.

Background and Formation of LO3 Capital: Glenn Harrison detailed his career trajectory, starting from his formal credit training at Fleet Bank and Bank of Boston in 2001, moving through significant roles at Merrill Lynch, and eventually founding LO3 Capital. He emphasized the gap he observed in the market for dynamic cash flow lenders not just serving private equity-backed companies but also owner-operated businesses. This led to the establishment of LO3 Capital, which now manages $255 million in assets under management (AUM) with $123 million invested across 10 platform companies.

Unique Market Niche and Timing: Harrison pointed out the importance of timing and choosing the right niche. LO3 Capital’s focus has been on providing proprietary deal flow with owner-operated direct companies, a segment often overlooked by commercial banks. This strategy became particularly effective following the failures of Silicon Valley Bank and First Republic, which created a vacuum in the market that LO3 Capital could fill.

Operational Strategy and Workflow: Harrison explained LO3 Capital’s approach to private credit, which involves a detailed and supportive partnership with businesses. Unlike commercial banks that may retract during economic downturns, LO3 Capital offers stable, committed capital with flexible covenant structures. This approach not only supports businesses through economic cycles but also aligns closely with their growth and operational strategies.

Deal Sourcing and Evaluation: Annually, LO3 Capital reviews over 400 deals, representing over $4 billion in potential investments. These deals are sourced from a diverse network including private equity sponsors, lower middle market investment bankers, and referrals from CEOs and CFOs within Harrison’s extensive network.

Technology and Efficiency: Harrison highlighted the use of technology in streamlining operations and enhancing deal evaluation processes. LO3 Capital leverages CRM systems, cloud-based fund management, and portfolio monitoring software to efficiently manage its extensive deal flow and maintain rigorous due diligence.

Future Outlook and Aspirations: Looking ahead, Harrison expressed aspirations to grow LO3 Capital’s fund universe and continue serving the lower middle market segment effectively. He emphasized the potential for scaling up and possibly establishing larger funds tailored to this market segment.

Key timestamps:

00:09: Introduction
00:34: Background and Experience
02:49: Identifying a Niche
04:31: Stable Capital Provider
06:31: Deal Flow
07:45: Business Model and Discussion
10:31: Opportunities in the Market
12:04: Operational Efficiency
14:12: Future of Private Credit
18:43: Investor Concerns
20:34: Impact of Election Year
21:45: Final Questions
22:07: Sponsorship and Equity Deals
22:56: Private Equity Landscape
24:34: Risk Assessment and Investment Decisions
25:31: Investment Strategy and Returns
26:13: Interest Rate Considerations
27:54: Aspirations for LO3 Capital