In the intricate world of finance, the direct lending landscape has always thrived on resilience. As we find ourselves navigating an economic downturn, resilience has taken center stage like never before, particularly in the realm of middle-market direct lending. Our current economic climate may be challenging, but it also presents a unique opportunity – the opportunity to build a team that is not just equipped to weather the storm but to find growth within it.

The key to this growth lies in strategic recruitment. In this blog post, we will discuss the significance of durability in today’s challenging economic climate, particularly in the middle market direct lending sector. Following that, we’ll dive into the blueprint of assembling a resilient team and the crucial roles that contribute to its success.

Subsequently, we’ll guide you through the talent market, offering insights on spotting the direct lending all-stars. We’ll then focus on the role of resilience as a critical skill in potential candidates, and how to recognize it.

Beyond recruitment, we’ll discuss how to cultivate and encourage strength within your team. Finally, we’ll explore how to leverage economic downturns into growth opportunities with an adaptable team at your helm.

Regardless of the size of your private credit strategy, this post aims to empower you to build a direct lending team that can thrive amidst a downturn economy. Stay with us as we delve deeper into these crucial areas.

Resilience matters in economic downturns for middle-market direct lending.

The financial industry has always been a dynamic landscape, characterized by the ceaseless ebb and flow of economic cycles. Amidst this, resilience emerges as a crucial attribute that not only determines survival but also defines success. In the context of middle-market direct lending, this characteristic takes on an even more nuanced role, navigating the intricacies of private debt in times of economic downturns.

Middle-Market Direct Lending: The Resilient Navigator

Direct lending to the middle-market is an area where resilience is put to the test, especially during economic downturns. This sector involves extending loans to mid-sized businesses, which are often more vulnerable to economic headwinds than larger corporations. Despite these challenges, middle-market direct lending offers a range of opportunities, with options that cater to various risk appetites and provide portfolio diversification.

Interestingly, market conditions that may seem unfavorable on the surface can yield better returns in middle-market direct lending. This is because the strategy entails strict underwriting and deal terms, ensuring careful risk management. Amid economic uncertainty, institutional investors still find private debt attractive due to its ability to generate contractual returns, produce higher yield premiums in a rising-rate environment, and offer diversified strategies that function under varied market conditions.

Current Landscape: A Test of Resilience

The year 2023 presents the industry with a series of challenges, including persistent inflation, higher interest rates, and the prospect of slower economic growth. Around 76% of private credit executives anticipate higher default rates, signaling a potential increase in risk.

In response to these anticipated challenges, private credit funds and business development companies (BDCs) are shifting to more defensive investment strategies. These strategies include moving to less risky lower-yielding assets and leveraging at the fund level to generate higher returns. For instance, Goldman Sachs BDC and New Mountain Finance increased their first-lien assets while reducing their second-lien assets, a move that shows a strategic tilt toward safer investments.

Simultaneously, these funds are diversifying their portfolios by recruiting co-investors, reducing their costs, and expanding their reach into the market. There has been a rise in co-investment strategies to lower interest rate risk, achieve higher returns, and access a broader range of deals. However, the use of leverage, while beneficial in boosting returns, can also increase the risk, especially during a downturn. Therefore, it’s crucial for investors to understand the credit risk of the underlying investments.

To build a resilient direct lending team, key roles are essential for creating your dream team.

As the market conditions become more uncertain with the prospect of higher interest rates, inflation, and slower economic growth, a competent team can navigate these challenges and ensure steady returns for their investors.

Key Roles in a Direct Lending Team

●     Deal Origination Specialists: This role is primarily responsible for identifying and sourcing potential investment opportunities. They maintain relationships with intermediaries, industry contacts, and potential borrowers, and are skilled at assessing the market for viable investment prospects.

●     Credit Analysts: Credit analysts are the backbone of a direct lending team. They meticulously analyze the creditworthiness of potential borrowers, scrutinizing their financial health, business model, industry position, and more. Their goal is to mitigate risk and ensure the firm’s capital is deployed securely.

●     Portfolio Managers: Portfolio managers are the strategists of the team. They are responsible for managing the existing portfolio of loans, making decisions about loan approvals, pricing, and terms, based on the assessments from the credit analysts and the overall strategy of the firm.

●     Restructuring Specialists: As we prepare for a potential increase in defaults, restructuring specialists are becoming even more critical to a direct lending team. These professionals manage investments during a downturn, providing the necessary expertise to navigate challenging economic conditions.

●     Risk Management Professionals: These individuals identify, monitor, and manage various risks associated with direct lending. They work closely with credit analysts and portfolio managers to ensure risk is minimized across all investments.

Crucial Skills for a Direct Lending Team

●     Analytical Skills: From identifying potential investments to assessing credit risk, analytical skills are paramount in a direct lending team. The ability to scrutinize financial statements, market trends, and economic indicators is crucial for making informed lending decisions.

●     Relationship Management: Deal origination specialists and portfolio managers need strong relationship management skills to foster connections with potential borrowers and maintain healthy relationships with existing clients.

●     Negotiation Skills: Strong negotiation skills are necessary across several roles in a direct lending team. Whether it’s negotiating the terms of a loan or managing a restructuring process, the ability to drive a hard bargain while maintaining positive relationships is crucial.

●     Adaptability: In an industry that’s constantly evolving and facing new challenges, the ability to adapt to changes quickly is key. This is particularly relevant in the current economic climate, where firms are bracing for a potential uptick in defaults and a shift in market dynamics.

●     Risk Assessment: An inherent understanding of risk and the ability to assess it accurately is fundamental, particularly for credit analysts and risk management professionals.

As previously stated, this shift in the private debt landscape has prompted firms like Goldman Sachs BDC and New Mountain Finance to adjust towards less risky, lower-yielding assets in anticipation of a downturn. Moreover, there has been a trend of private credit funds recruiting co-investors to increase deal diversity, lower interest rate risk, and achieve higher rates of return.

Building a resilient direct lending team requires a careful selection of professionals with the right mix of skills and expertise. As the industry navigates through these uncertain times, a well-rounded team will be the bedrock of success, ensuring the firm can adapt and thrive no matter what the economic climate.

Experience the power of a resilient team as they turn downturns into remarkable opportunities.

Economic downturns and market volatility are natural aspects of the business cycle. While these situations pose challenges, they also present unique opportunities for those equipped with the right strategies and expertise.

As the industry prepares for an uptick in defaults and a potential economic downturn, private lenders are shoring up their restructuring teams and adopting more defensive strategies. Firms are rebalancing their portfolios to prioritize first-lien assets and are utilizing leverage at the fund level to generate higher returns, albeit with an increased level of risk.

In response to these trends, private credit funds are employing novel strategies such as co-investment to increase deal diversity and lower interest rate risk, while also maximizing returns. However, while leverage can boost returns, it also carries the potential to amplify losses during a downturn, underlining the importance of a thorough understanding of the credit risk of the underlying investments.

This complex environment requires a resilient team that can navigate economic downturns and seize the opportunities they present. With 20 years of experience in the private equity and debt market, The Locke Group is uniquely positioned to guide you through these challenging times. Our team’s expertise and deep understanding of market dynamics enable us to identify talent that can capitalize on opportunities that others may miss during periods of economic uncertainty.

In conclusion, while the current economic climate poses challenges, it also presents opportunities for those who are prepared. By partnering with The Locke Group, you are choosing a resilient team with the experience, expertise, and strategic insight needed to help you navigate these turbulent times successfully. Together, we can turn these challenges into opportunities, by making sure that you have the right team in place that is primed for long-term success.

(Institutional Investor)
As investors rethink their private equity allocations, the PE secondaries market has benefited – reaching a new record of $57 billion through H1. As long as concerns about inflation, rising rates, the war in the Ukraine and impact of Covid remain, the Secondaries market will offer diversification, liquidity and should continue to thrive.

Last May, we commented on a Quartz article, What does work look like after the pandemic? Our guidance was that company leaders should prepare for an increasingly virtual workplace. The pandemic would force manager sentiment to catch-up with candidates’ desires for remote work and flexible arrangements. The pandemic is not over, but we’ve finally hung the 2021 calendar on the wall. Where do we stand? Here’s what we saw in 2020 and an update on what we expect work to look like in the future.

Looking back at 2020

When office workers went home in March, we were concerned that our clients would stop hiring. Remarkably, they did not. By and large, the need to hire won out over the need to meet in person. There were hiccups with remote interviews and it was hard to get comfortable conducting final interviews remotely, but employers’ message was clear – “we need talent.”

The combination of remote work and hiring demand tilted the tables strongly toward high-value, passive talent (often to the dismay of active candidates who were out of work). Uncertainty related to the pandemic and remote onboarding led to increasing conservatism amongst most passive candidates and significant handwringing amongst those who made the leap to a new opportunity. The sticky question persisted: can one build real bonds with their new team and make a strong impression over Zoom?

Our clients were uniformly empathetic and willing to be flexible. The strings of old pre-pandemic knots loosened as managers became more flexible on re/location, onboarding, and long-term work arrangements. We hired several candidates in 2020 who will not live in the same city or state as their team in 2021. While this may sound unremarkable to some, it’s a new leaf for banking, trading, and investment teams. Employers have been especially flexible on relocation timetables as the need to be in-person for onboarding disappeared.

Looking ahead

As a reminder, candidates were already asking for flexibility before 2020’s great transformation. Managers were reluctant to grant it, preferring to have new hires in the office, at the desk, and working alongside the team. We believe the new reality will flexible, but not to an extreme – it will be balanced. We expect increasing comfort with virtual solutions to some problems and more flexibility towards remote work, but the value of in-person collaboration and socialization cannot be understated. Here’s what we expect:

Zoom (interviews) are here to stay

While still imperfect, video conferencing and collaboration software proved its value and is only becoming more robust. We expect more work will happen online whether collaborators are working from home or down the hallway.

Interviews will be more flexible and easier to coordinate. Preliminary interviews will be virtual-first with the option to arrange an onsite, while final interviews happen in-person once again. Candidates will save travel time and PTO as many employers – though not all – will see the sense in conducting early stage interviews virtually. Candidates will be given the option to hike into the office if they choose (and if their interviewers are not working remotely). Candidates should expect to suit-up for onsite interviews with executives and hiring managers, but Zoom and Teams interviews are here to stay for everything preceding.

Virtual onboarding left a void

It is extremely difficult to form a relationship and build bonds with new teammates online. Expect some aspects of onboarding and training to remain virtual, while the desire to collaborate and build relationships will draw teams back together. We expect to hear this desire to be expressed from both sides.

Back to the whiteboard for critical project teams

In the words of one manager, virtual worked in 2020, but they will tackle critical problems more quickly when they are back at the whiteboard.

“We proved that we can do it remotely, but I know we can solve some problems much faster when we gather around the whiteboard and figure it out together.”

New teams and those leading critical initiatives will be some of the first to be back onsite and working at their projects together.

More flexibility, but no WFH revolution

Bottom line, we expect most employers to allow new hires to work from home at least one day per week, and many will give more. Some employers will break new ground by hiring candidates who work remotely but live within commuting distance of the office. That is, close enough to be present for critical meetings and some facetime.

However, we do not expect a WFH revolution. In our experience, candidates who live and work remotely eventually express the desire to be with a team again. We expect to hear that desire in chorus when normalcy returns. At the same time, employers will be cautious about their location strategy, especially with respect to impact hires. We expect more flexibility on a week to week basis, but most candidates will be expected to live near the office to maintain a strong connection to their team. In the end, all parties should be better off.

What do you think? Let us know!

Sean Locke is Managing Partner and Founder of TLG | slocke@locke-group.com

Tom Hudson is a Partner and Head of TLG’s Quantitative Services practice | tom@locke-group.com

The Locke Group (TLG) is a specialist executive search firm which has served the financial industry since 2003. As a boutique, we are deeply invested in our clients – our care for their experience and the experience of their candidates is second to none.

And keep an eye out for our upcoming 2021 Candidate Experience Manifesto, where we’ll lay out the keys to crafting an excellent candidate experience. Find our inaugural 2020 publication here.

We’re in the midst of a crisis.

With heightened uncertainty, some companies have frozen all hiring, while others are reviewing open headcount and approving case-by-case. Regardless, hiring and onboarding are not easy to execute remotely.

What are your candidates thinking?

The short answer is that they’re remarkably understanding, but patience doesn’t eliminate uncertainty and it doesn’t last forever. How can you keep them happy and engaged? Should that be a priority right now?

How you recruit impacts your brand and your commercial success. The best companies know it. They focus on crafting a positive recruitment experience and they don’t lose sight of it easily – even during hiring freezes or times of crisis.

You may have higher priorities – business continuity first of all – but if you employ a few simple practices now, you will remain top of mind with your candidates, create a positive impression, and be well prepared to engage them successfully on the rebound. Here’s what you need to do.

It’s all about expectations

Hopefully your company is still recruiting and hiring, but with COVID-related uncertainty, your 2020 headcount may be under review or frozen altogether. Regardless, the #1 rule of providing a good recruitment experience is active communication – it applies in every environment.

In practice, this means 1) setting clear expectations and 2) communicating with your candidates regularly, even if infrequently (more on that last comment below).

Right now, you should set (or reset) expectations with the candidates in your pipeline and decide on a basic schedule for communicating with them. Let them know when they can expect to hear from you next, how often, and if possible, what type of update you’ll bring. Active communication is the keystone for constructing a satisfying recruitment experience, and it will serve you well in every scenario.

Be conservative

Recruitment is emotional. Like forgetting a friend’s birthday, unmet expectations can be a big source of pain and disappointment. Fail to deliver feedback or a recruitment update on time and your candidates’ feelings will range from ‘that’s disappointing’ to ‘they don’t care about me’. It may sound ridiculous, but it’s not far off.

That’s why it’s OK to be conservative when setting expectations with your candidates. You don’t have to predict the future, but you do have to communicate – just make sure you can keep your promises. Here’s an example of how to communicate during a freeze:

“Unfortunately, we have decided to pause all hiring for the time being. I may not have a substantive update for some time, but I wanted to let you know we plan to keep in touch with you. I’ll ping you on April 10th and once every two weeks until things change. Of course, I’ll be in touch sooner with positive developments – and don’t be afraid to email me if you have an update or a question.”

It’s OK to be conservative with your timeline, frequency, and even the substance of your communications. That candidates know they can expect to hear from you will have a greater positive impact on their experience and engagement than what you actually say. This is a great way to stand out and avoid dissatisfaction.

Use one voice

Do hiring managers know the status of their headcount? Who is communicating with candidates? Periods of uncertainty are no different than business as usual – it’s best to have a single point of contact to avoid mixed messaging and confusion (that is, ‘one voice’).

If you’re the decision maker, make a single person from your team the point of contact. Who you choose is up to you – it could be you/the hiring manager, HR, your executive search consultant, etc. – just choose one person. Equip them with their message or give them the authority to decide on proper messaging themselves.

As a bonus, electing a single point of contact will simplify things for your team and allow them to focus on running the business when you need all hands on deck.

Reel in the slack

When your freeze ends and business returns to normal, what steps will remain in your recruitment process? Which of those steps can you complete now? You will need to hire as quickly as possible when things rebound – so reel in the slack in your recruitment process now by completing as many steps as you can, remotely. Here’s a list of ideas:

• Video interviews – completing stakeholder interviews now will make scheduling final interviews easier, later
• Tests – programming, modeling, behavioral and cognitive tests, etc.
• Writing samples
• Case studies
• Reference checks
• Offer negotiations
• Background checks
• Drug screenings

Candidates will be glad to have the engagement while other companies sit on the sidelines, and you’ll be in a good position to hire quickly when normal operations return.

Ask for updates (don’t just give them)

These times are unprecedented – don’t tune them out! Ask your candidates for updates. How are they faring personally? How is their company managing the crisis? What are they hearing from other employers? Are they progressing with other interviews and has their recruitment timeline changed?

Your questions will undoubtedly have a positive impact on them. Why? It’s straightforward – people like to know that you’re thinking about them. Setting expectations and providing regular updates is a great foundation for a positive experience, but you wouldn’t believe what a small amount of genuine interest will do for their engagement in your company – and it’s as easy as asking a question.

Another bonus – remember, it’s in your interest to track your candidates’ recruitment timelines. If another suitor is progressing to final interviews or to offer, you need to know about it. If you’re on a hiring freeze, you may be limited in your ability to respond, but at least you will know what you’re up against.

Let them go

One of the kindest things you can do for an interested candidate you will not hire is to release them.

If you know it’s going to be long-term freeze, don’t put your candidates on ice – let them know. Each candidate will appreciate the clarity, and some more than others.

Some may need to decide on another offer, respond to an internal promotion or commit to a long-term project, or maybe they’re thinking about buying a house – who knows? Regardless, give them the clarity they deserve.

In conclusion

Crafting a positive recruitment is critical to your brand and commercial success. At the ground level, it’s all about setting expectations – be conservative, but let candidates know when and how they should expect to hear from you. Next, use ‘one voice’ when communicating – your candidates will appreciate the clarity while your team will appreciate the ability to focus.

Get ahead – reel in as much ‘recruitment slack’ as you can remotely and don’t forget to ask your candidates they’re doing. They will appreciate the engagement and you will successfully shorten recruitment timelines once hiring is live. Lastly, release your candidates if you know you’ll be on a long-term freeze. They deserve the clarity.

The present crisis may be disrupting business and normal ways of life, but it doesn’t need to hurt your brand in the minds of interested candidates. Follow these simple steps to stand out, make a good impression, and land top talent quickly when business rebounds.

One last thing… a recruitment pep talk

If you’re a manager, this next comment may cause some discomfort, but try to see the bright side – millions of candidates are more available than ever as they work from home. Don’t withdraw from the market. Reach out to them!

Your target candidates are at home and available to talk. It’s an amazing opportunity to recruit, so get out there.

(Shameless plug) What if you don’t have time to make phone calls or build a pipeline of talent? We do! It’s our profession. Reach out to us – we are here to listen and to help you attract the talent you need to power your business. We may already have a relationship with your next impact hire.

Sean Locke is Managing Partner and Founder of TLG | slocke@locke-group.com

Tom Hudson is a Partner and Head of TLG’s Quantitative Services practice | tom@locke-group.com

The Locke Group (TLG) is a specialist executive search firm which has served the financial industry since 2003. As a boutique, we are deeply invested in our clients – our care for their experience and the experience of their candidates is second to none.

Check out our 2020 Candidate Experience Manifesto for 10 Keys to an excellent recruitment experience. It has the facts and even has bonus tips which you can begin to implement today.

(Bloomberg) Why Direct Lending Is a Booming Part of Private Debt

Investor demand and their search for yield has contributed to the continued growth of Private Credit and specifically, direct lending in 2019. There seems to be no signs of slowing down in 2020 with 39% of investors saying they expect to increase their commitments to private debt funds in the next 12 months.

What happens when things slow down? Can the non-bank lenders survive?

Click to read our 2020 Candidate Experience Manifesto (PDF).

83% of candidates will share a positive interview experience with their inner circle*, but 66% will also share a negative experience – a figure which is growing year-over-year. Either way, how you recruit impacts your brand – your reputation spreads among candidates and influences their decisions. What are hard-to-reach, passive candidates hearing about your company?

In our inaugural Candidate Experience Manifesto, TLG provides the 10 keys to an excellent candidate experience, complete with helpful tips which you can begin to implement today.