Katch crosses USD 200m in funds’ AUM, reaches 100m in its flagship Fund and 850m in firm-wide assets under management through robust and controlled growth in smaller private-debt first-lien loans.
Private debt is a fascinating area of the global investment landscape. It has statistically been, by quite a margin, the most profitable asset class in the last few decades, be it on a risk-adjusted or absolute return basis. In a world where everything seems to be moving in lockstep, from commodities and traditional bonds, to credit and stock, and of course hedge funds, these vehicles who justify their inflated fees on their supposed ability to generate performance regardless of the market environment, private credit offers a combination of characteristics that ticks many different investor types’ boxes. These include performance – our Funds target net annual returns between 7 and 16%-, lack of volatility, lack of correlation to traditional assets, and -at least in Katch’s case- a hefty dose of downside protection consistent with the belief that the focus should be on downside protection as upside “takes care of itself”.
As we cross a few important milestones in our development, we wanted to briefly reflect with you, our investors, without whom none of this would have been possible, on this fascinating world and on the value that helps us navigate and avoid the inevitable pitfalls and risks that present themselves regularly to us as capital allocator.
We focus on liquid private debt in the sub-15 million USD area, which means that we concentrate on relatively small opportunities in the marketplace, those that are deemed too small or outside scope with traditional lenders. These opportunities have been forced out of those lender’s universe, which has considerably shifted the risk-return couple in favour of lenders willing to look at them. We observe that for a given level of yield, the levels of protection offered to us, investors in smaller deals, are orders of magnitudes higher that those offered to larger borrowers, those that are traditionally served by the investment management behemoths such as Blackstone and KKR. We routinely consider deals yielding well into the teens, that come with large amounts of collateral (or assets offered to us should the borrower default on its obligation), oftentimes in values reaching 150 or 200% of the money lent. This means that upon default, we have the latitude to seize and liquidate an asset that is worth more than enough to ensure the repayment of principal, interest, default interest and costs. By contrast, private debt deals in amounts of 100’s of millions are usually, in current market conditions, offered with no protection or covenant, and yield in the mid-single digit territory.
In this context, we spend large amounts of time and energy ensuring that we access the best opportunities across the jurisdictions where we are active, which are most developed economies, plus Brazil, a country where the institutional background, the market maturity, the protection offered to institutional investors, and yields in the factoring business (the financing of short-term assets, where we are active) combine to generate excellent risk-adjusted return, perhaps more than anywhere else globally. In addition to the network of Katch’s partners and senior officers, we enjoy market access through our captive factoring and real estate operations in the UK, where brokers access is crucial. This brings depth and breadth to our sourcing effort and ensure that we get to see a continuous stream of interesting opportunities. This, in turn, allows us to build well diversified, liquid, protected and flexible portfolios.
At Katch, we consider ourselves as specialist credit investors and while the principals boast decades of investment management experience, we know where our edge lies, but also which areas we are best off avoiding. These include currency hedging- we never take foreign exchange risk if we can help it. We hedge currency exposure with various tools including futures, forwards, swaps and even options at times, and this allows us to reduce the volatility of our performance to the bare minimum. As a matter of fact, none of our funds, which are all priced independently by our administrator, has so far experienced in almost four years of track record, any negative month. This has become an important characteristic of our investment products and as major investors into them, we have grown together with our clients to appreciate this level of performance stability.
While the recent past has not been without challenges, the strength of our portfolios throughout these rather testing times has further cemented our confidence in our philosophy and investment process. So, we are simply looking to do more or the same while continuously investing in resources and talent. We now execute investments from 4 different offices and enjoy the combined effort of about 30 dedicated and talented staff, and continue to grow our funds in a controlled and robust fashion. As we navigate the current crisis we take solace in the thought that it can only get better, and that even in these untested territories our investment approach remains robust and resilient.