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Client Q&A

Q&A with Dean D’Angelo, Partner, Stellus Capital Management

History has shown that lenders with ‘dry powder’ who have built resilient portfolios heading into difficult economic times, end up doing well and, in many instances, making great investments through the downturn.

When you and your colleagues spun out of DE Shaw more than a decade ago to create Stellus, did you envision what Stellus would be today? What is the same or different than you thought?

When we spun our business out in early 2012, the Direct Lending/Private Credit asset class was in its infancy. We were focused on raising capital by educating investors on our market and the opportunities for growth as banks were beginning to temper lending post “The Great Recession.” A decade later, the trends we were beginning to see in 2012 have accelerated each year. Private Credit is now a core asset class, on pace to be the third largest alternative asset class behind PE and VC.

Fortunately, we have been able to grow steadily since our launch as an independent firm. From trying to raise a modest private credit fund in 2012, we now manage approximately $2.8 billion across multiple vehicles. So, we have exceeded what we thought we could do back in 2012 and we have been surprised at just how quickly private lenders replaced banks as the main source of debt capital in our market.

Stellus focuses on providing lower middle market credit. Why is this focus attractive to you and your and investors?

We have continued to focus on the Lower Middle Market (“LMM”; businesses with EBITDA up to around $50mm) because it is a large, growing segment of the broader middle market where our tenure and track record give us an edge.

In the LMM, reputation matters. When a lender builds a reputation as a reliable partner for almost 20 years and hundreds of transactions, like we have, they create strong relationships with top LMM PE firms and management teams. This dynamic creates steady, quality deal flow. Additionally, deals in the LMM are well structured with strong covenants and conservative leverage and loan-to value metrics. Our investors understand these attributes and realize that successful LMM Direct Lenders can deliver great risk-adjusted returns when compared to other options in the credit markets.

Why should RIAs and high net worth investors consider investing in private credit?

Private Credit has shown over time to deliver some of the key attributes RIAs and HNW investors look for in income investments: low volatility, capital preservation and stable returns. These attributes are even more important in times, like today, when there is heightened volatility and uncertainty in public debt and equity markets.

Private Credit, as a floating rate instrument, is also a great inflation hedge. Unlike fixed rate alternatives, changes in interest rates should not create volatility or impact value.  You just need to look at what happened in the High Yield and Municipal Bond markets this year to understand the value of floating rate debt in the current environment.

What do you anticipate the private credit dealmaking environment will be like in 2023?

I think the environment next year for private credit dealmaking could be challenging. If the economy slows as many project and interest rates stay high, new deal flow could be muted. With that said, even if new M&A activity slows, we think 2023 could end up being a good year. History has shown that lenders with “dry powder” who have built resilient portfolios heading into difficult economic times, end up doing well and, in many instances, making great investments through the downturn. For example, there could be great opportunities to help current portfolio companies take advantage of a market where add-on acquisitions could be very attractive.

What is your life philosophy?

I generally believe that if you are diligent, respect and listen to those around you and find ways to help others succeed and be happy, you will end up doing well and being happy. This goes not only for business, but also for building a strong family and community.

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