Matthew Prout, Managing Partner at Falcon Investments, joined Giovanni Amodeo for an insightful fireside chat. The discussion covered a range of topics, providing a deep dive into the evolving landscape of the credit market. Here are the key highlights:

Background and Role at Falcon Investments: Matthew Prout shared his extensive 25-year career in investment banking and private equity, detailing his journey from Lehman Brothers to Falcon Investments. He explained Falcon’s focus on junior capital management in the North American middle market, emphasizing their investment strategy in subordinated debt securities and preferred stock.

Evolution of the Credit Market: Prout discussed the significant cycles in the credit market, notably the Global Financial Crisis (GFC) of 2007-2008 and the COVID-19 pandemic. He highlighted the current trend towards direct lending and the influx of capital into this space, noting the inefficiencies in the middle of the balance sheet where Falcon operates.

Investment Strategy and Market Niche: Falcon Investments targets companies with EBITDA ranging from $20 million to $80 million, focusing on the 40-70% range of enterprise value. Prout explained their approach to balancing risk and reward, aiming for high teens returns through a mix of subordinated debt and minority equity positions.

Deal Sourcing and Repeat Business: Prout emphasized the importance of relationships in deal sourcing, with Falcon typically reviewing 800-1000 transactions annually and completing 8-10 deals. He highlighted their strong network of private equity firms and entrepreneurs, as well as the role of their operating partner network in sourcing and executing deals.

Assessing Borrowers and Market Sophistication: The discussion touched on the evolving sophistication of borrowers, with larger companies often having multiple private equity owners. Prout noted the increased awareness and understanding of various capital products among borrowers, leading to more balanced capital structures.

Talent and Specialization: Prout underscored the importance of talent in Falcon’s success, detailing their approach to hiring from both credit and M&A backgrounds. He discussed the shift towards industry specialization within Falcon’s five verticals: food and beverage, IT services, healthcare services, education technology, and tech-enabled services.

Future Trends and Market Outlook: Looking ahead, Prout predicted steady growth in private equity exits and significant growth in the secondary market for private credit. He also addressed concerns about the rapid influx of capital into direct lending, suggesting a potential compression in returns.

Conclusion: The fireside chat provided a comprehensive overview of Falcon Investments strategy and the broader trends in the credit market. Prout’s insights into market cycles, deal sourcing, and the importance of specialization offer valuable perspectives for investors and industry professionals.

Key Timestamps:

00:09 Introduction to the Fireside Chat
01:12 Falcon Investments: A Junior Capital Manager
02:17 Evolution of the Credit Market
03:26 Identifying Market Niches
05:17 Investment Strategy and Risk Assessment
06:24 Balancing Growth and Client Success
07:33 Borrower Sophistication Over Time
11:03 Deal Origination Strategies
13:36 Incentivizing Operating Partners
14:42 Evaluating Investment Opportunities
15:53 Talent Acquisition and Future Needs
19:01 Learning from Missed Opportunities
20:27 Transitioning from Agent to Investor
21:40 Investor Concerns and Future Focus
22:35 Risks in Private Credit
24:05 Trends in Deal Structures
25:04 Growth in Private Credit Secondaries