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Myths about the use and risk profile of junior capital often stem from misconceptions that overlook the protections that experienced, disciplined lenders put in place to deliver compelling risk-adjusted returns. Today’s junior capital is a time-tested, durable form of financing, offering high-quality, sponsor-backed borrowers flexibility and the capacity to invest in growth.
Contrary to common misconceptions in junior capital:
- Subordination does not mean high risk and low quality. We believe borrower quality, portfolio manager experience, equity cushion size, covenant packages and sponsor support are far greater determinants of risk. Investors could boost risk-adjusted returns by moving down the capital stack and providing junior capital for high-quality companies
- Payment-in-kind (PIK) is now commonplace and often structured at origination to provide flexibility and support for successful value creation.
- Managers can deploy regardless of macroeconomic conditions, demonstrating durability through economic cycles.
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Investing involves risk; principal loss is possible. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, derivatives risk, dollar roll transaction risk and income risk. As interest rates rise, bond prices fall. Below investment grade or high yield debt securities are subject to liquidity risk and heightened credit risk. Foreign investments involve additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. Please note investments in private debt, including leveraged loans, middle market loans, and mezzanine debt, are subject to various risk factors, including credit risk, liquidity risk and interest rate risk.
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