Alternative Credit Q&A: Eric Kim, VSS Capital Partners
The credit space was something of a bright spot in the private markets in 2023 as elevated interest rates contributed to stronger returns for a wide range of debt strategies. Greg Winterton spoke to Eric Kim, Principal at private markets investor, VSS, to learn more about the firm and to get his thoughts on what’s in store for 2024.
GW: Eric, let’s start with something of a look back at last year. In the debt space, what were some of the trends that you feel were most noticeable, and will these trends persist in the medium term?
EK: There was definitely a pullback by traditional senior lenders, from the amount of leverage they were willing to provide as well as the types of companies they were willing to look at. Given that backdrop, we saw an increase in demand for flexible capital solutions to help fill that gap, whether that was from private lenders or structured capital solutions, and we expect traditional lenders to remain relatively tight over the next 1-2 years.
GW: VSS specialises in the healthcare, business services and education industries. Which of the three saw the most activity for VSS last year, and again, do you expect this to be the case in 2024?
Eric: Due to the nature of the vertical industries in which we invest, we continue to see significant investment opportunities across each of our key verticals. Our pipeline remained strong throughout the year even in this challenging market environment, and we very much expect this to be the case going into 2024 as well.
GW: One trend that’s well-covered in the trade media is that of private markets firms becoming more of a catch-all to a portfolio company, offering a range of solutions up and down the capital structure. What’s VSS’s approach here? Do you have funds that offer purely equity or debt, or hybrid funds, and why?
Eric: We differentiate within the private markets by being flexible in terms of capital structure. We have a single fund where we can deploy equity or debt capital, as that allows us to really apply the optimal capital structure for each opportunity we come across, as no two situations are completely alike. In addition, investing out of a single fund keeps complete alignment for us as the GP and our single LP base.
GW: Naysayers have begun to predict that private debt represents something of a systemic risk. What’s your counter?
Eric: Private debt plays a critical role in the capital markets, often filling an unmet need from lower mid-market companies, particularly when traditional banks are pulling back from the market. Through any market environment, all companies have capital needs, and private credit or structured capital helpS solve that need while allowing executive management teams of portfolio companies to retain control.
GW: Lastly, Eric, there will be many investors who have not yet taken the plunge in terms of allocating to the private credit markets. What are one or two topics you’d urge LPs to focus on in due diligence, and why?
Eric: Private capital and structured capital are able to fill a vital need in a portfolio that wants to allocate capital to firms that protect downside while ensuring meaningful participation in the upside. So, we believe that there is opportunity for LPs to evaluate firms on more of a risk-adjusted basis. Through that lens, private credit and structured capital are very attractive solutions for LP portfolios.
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Eric Kim is Principal at VSS Capital Partners
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