After the financial crisis of 2008-09, a phenomenon unfolded: “mega-funds” of several billions and more, putting larger check sizes to work for larger companies.. 

ACME Credit Partners, an investment advisor, reaches an entirely different market. Smaller, nimble, and lean, ACME targets the lower middle market direct lending segment that is underserved and not as competitive – and an attractive risk-return strategy. In this conversation with host Jon Finger, ACME’s Peter Eschmann, managing partner, and Liz Veilleux, senior vice president and head of capital formation and investor relations, describe why this niche market is attractive for investors.  

Connect and Learn More

☑️ Peter Eschmann | LinkedIn

☑️ Liz Veilleux | LinkedIn

☑️ Jon Finger | LinkedIn

☑️ McGuireWoods | LinkedIn | Facebook | Instagram | X I YouTube

☑️ Subscribe Apple Podcasts | Spotify | Amazon Music | YouTube 

This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

You're listening to Fund Flow, a podcast for emerging managers, offering insights into the journey of new and aspiring fund managers seeking to have access in a crowded market. Tune in as McGuireWoods partner and host, Jon Finger, is joined by guests ranging from first-time fund managers to proven emerging managers, experienced LPs poised to back emerging managers, and other key participants in the emerging manager ecosystem. Hear their real world perspectives and gain actionable tips to help inform your strategy and position yourself for a successful fund closing.

Welcome to Fund Flow, a McGuireWoods podcast for emerging managers. I'm Jon Finger. Today we have Peter Eschmann, managing partner, and Liz Veilleux, senior vice president and head of capital formation and investor relations for ACME Credit Partners. ACME Credit Partners is an SEC registered investment advisor that delivers bespoke financing solutions to lower middle market companies to support acquisition, growth initiatives, transitions, and other mandates.

Welcome, Peter and Liz. Thanks so much for joining me today.

Thank you for having us.

Yeah. Thanks for having us.

Absolutely. I always like to start, and appreciate having both of you on this. It would be great to learn more about your path. Maybe give us some insights on each of your respective careers to date. And then ultimately, what in your past led you to form ACME Credit Partners?

Sure. Liz, you want to go first?

Sure. I began my career at a private equity firm, before transitioning over to public equities and public credit at Acadian Asset Management and Wellington Management. Overall, I find private markets investing really interesting and an increasingly attractive asset class. I'm personally invested in this asset class. I was introduced to Peter and our other managing partner, Jay Rogers, through a mutual friend.

I think ACME is well-positioned for growth, and I'm eager to contribute in facilitating that growth. Happy to be part of the team.

Great. My background is I've been in lending since I got out of grad school. I was at JP Morgan. Then I went to Deutsche Bank, and I spent the bulk of my career at Service Capital Management in their direct lending group. That's where I met co-founder, Jay Rogers. And really, was the genesis for forming ACME Credit Partners, where we saw an opportunity specifically in the lower middle market direct lending segment. We'll go into more detail, but we think is underserved and not as competitive, and is an attractive risk return strategy.

Absolutely. Thanks for that. It's interesting, having seen, evolution is the wrong word, but how things ebb and flow as it relates to loans. Whether it's banks, non-bank, et cetera.

I guess what I'd love to learn more about is how do you feel like you differentiate ACME from other firms in the credit market? Maybe in particular, non-bank lenders. How do you think about your unique value proposition?

Sure. Flipping the script, 25 years ago, banks were about 90% of the lending market. Today, they're probably about 10%. The non-bank lenders have grown and they've taken that role on.

How we have thought about the market and what we focus on is we saw the phenomenon coming back after the great financial crisis and the fund structures changing. You really had a lot of new participants in private credit. A lot of them with a drawdown structure. What that has done is folks have been very successful fundraising, and they've raised larger funds. What we believe is, as these funds have grown into these mega-funds of several billions and above, they have moved up market to focus on larger companies, putting larger check sizes to work.

What that has created is basically less competition in that lower middle market, and specifically around the non-sponsor side. Sponsor sides always have a following with banks and whatnot. But specifically, that non-sponsor, we find is less competitive where we can still get attractive rates. And more importantly, the structures that we want, the protections, et cetera. We can get that in this market. Where it's less competitive, so we do not have to give up as much on structural considerations as we were in the broadly syndicated market, or the upper middle market.

As you think about your competitors, how do you try to differentiate yourselves from that? Set aside the banks. From other non-bank lenders, what is it that sets you apart?

Well, I would say what we do. It's speed to execution. We're a smaller fund. We're more nimble. We tend to look at a lot of transactions. What we try to do is deals that we like, deals that we feel need certain parameters, we try to exercise on that quickly. We'll give you an answer yes or no. We'll give you a term sheet. A term sheet is one that we'll close on, go through diligence, et cetera. We don't change terms. We deliver on what we promise. I think that's kind of a big thing.

But the other part, how we differentiate, it's really kind of the target market. There's not a lot of guys that are writing checks sizes that we do, per se. But those that are, we are doing in the sponsored market to a degree, but we're focusing on that complex, situational credit opportunity segment of the market, which is less traveled than some of our other peers.

It's that part of the market, what we're targeting, et cetera, that we feel is just not as competitive, and where we're able to be competitive and find deals. Since we have closed, back in September '23, we haven't had any shortage of finding new opportunities. It's really just trying to hone in on those that are the best opportunities.

For sure. You alluded to this, so it's a good segue. Obviously, you and the team have broad and impressive experience in credit generally. Would love to learn more about how you feel like those experiences helped shape what you're building at ACME?

Sure. I think Jay and I've career ... Like I said, I spent 16 years at Cerberus. Jay spent seven years at Cerberus. He then left and became chief credit officer for a fund up in Toronto. But what I would say is that a lot of our experience were and it's well-rounded.

We follow a model we call our Cradle to Grave approach. Which is if you originate a loan, you follow that through to realization. Whether it has any hiccups, if it goes through a workout, et cetera, it's the same team doing that. That's how we were brought up. I think between the two of us, we have a lot of experience with underwriting deals, originating deals, structuring deals. But also, on the portfolio management side which we feel is a big part of the market that is maybe not, as our competitors don't put as much attention on it as we do.

That is really where we have a lot of experience doing workouts and whatever that may be. We've just been doing it for a long time. That knowledge, we bring that knowledge with us.

Absolutely. Maybe touching a little bit, you alluded to your co-founder. Let's talk a little bit about the team. I appreciate the cradle-to-grave aspect of it, where things aren't being handed off from one to the next. Maybe tell the listeners, as you thought forward as an emerging manager, talk a little bit about the construction of the team there.

Sure. Basically, our team structure is we work in small groups. Again, we want to be nimble. We want to be able to make decisions quickly. We have weekly meetings where we all sit, talk about new opportunities as well as our portfolio. Liz and her team also sit in on those calls. The point of all of that is is that we want everybody in the organization to be aware of what's going on with investments.

Typically how we structure this thing, it's a small deal team. Each deal has a senior partner, which at this point in time is Jay or myself. Then we have a VP. It's basically a two-person team that we manage the credit from origination, issuing the term sheet, all the way through the deal pays off. Again, that gets back to accountability. It's done for a reason. Even as we grow and add more people to the team, what it never will be is we want a team that's going to be accountable.

We're not looking to bring an originator in, for them to get paid based on bringing a AUM in, and then handing it off and having it be somebody else's concern. We want somebody who is going to have good credit experience, that can underwrite a deal. Originate a deal, and then write it, all the way through portfolio management. We think that leads to better overall returns, lower loan losses, and ultimately a better outcome for investors.

With a relatively lean focused team there, maybe talk to the listeners a bit about how you evaluate potential opportunities. What's important to you? I know you mentioned non-sponsor. But what are some of the hallmarks that you look for in a given potential opportunity?

Given that we are a small team, we rely heavily on third party diligence. I would say, in the vast majority of our deals, that's going to equate to getting quality of earnings, looking at audited statements, industry reports, asset appraises, et cetera. We rely heavily on that and those type of third parties to do our diligence because we are such a lean team.

But when we're looking at a deal, we have certain parameters. Our current portfolio right now is we're not that overly levered. I think our average leverage on our portfolio is under three times. But typically, everything we're doing is a senior secured. First lien, second lien. It needs to fit within that box.

When we're doing our underwriting, we typically are looking at, right off the bat, what's the downside here and what's our worst case scenario? And what is our workout scenario? How can we exit a loan? We're typically doing two types of transactions. Cashflow lending, based off the enterprise value. And/or we're doing turnaround deals, in which we're looking at the underlying assets. If the turnaround doesn't work, can I get out? Can I sell a division, can I liquidate the assets, et cetera? Just a different way to approach some of these transactions.

Where we're looking at the gamut, in terms of underwriting the assets, underwriting the company, going through all the analysis that typically you would do with the industry, et cetera. We do focus a lot on the lower middle market. We're not dealing with people who are top three in their industry. These are smaller companies that are typically, call it operating experience of at least five years, generating revenue north of 50 million, and generating a positive operating income. That's typically the environment. All North American based. Again, we're industry agnostic so we'll look at everything. It's more of a situation, customer loss, customer concentration, whatever it may be. We try to structure upfront, box in that risk, get comfortable with it, and do the deal that way.

With the Cerberus in the background for each of you, maybe elaborate a bit on the importance and impact of deal structuring, playing in the lower middle market, and maybe how it's different than some of the things you may have done in the past.

I'd say the biggest difference is the size of the company you're with, and the sophistication of the borrowers. A lot of these folks, these firms, they don't have a very well-built out financial team. You're typically dealing with the CFO, maybe it's a controller and the CEO type of thing. The level of sophistication is not necessarily there, as you would see in a $50 million EBIDTA business.

What does that do for you, and how do you have to approach that? Structure is the answer. Like I said, we're doing typically, these are senior secured deals. They have multiple covenants, three or four financial covenants. There's also very big affirmative covenants. We're very big on reporting. We want to see monthly, quaterly, annual budgets and the like. How do you do that? We spend a lot of time on the portfolio management side.

I think this is a benefit to some of the borrowers, in that we are talking to our companies weekly, biweekly, et cetera. We're establishing a relationship. We're following the financials, we're understanding where they are in the industry, et cetera, and gauging progress. But what I think that also helps these CFOs do though is understand how a bank, or these private credit lenders, are looking, the type of information they want. That gets them a little bit regimented, too. Maybe their reporting isn't what it should be. We believe you get into these cadence of how you report, and what we're looking for, et cetera, I think that they can manage the business a little bit better that way. I think the relationship's beneficial in both ways.

Absolutely. Recognizing relatively industry agnostic, as you think about your sweet spot for your borrowers. Over the years, how have you seen the landscape of evolve in the lower middle market with these borrowers?

Typically, when you're dealing with this size of the market, there's companies that are successful, there's companies that are not going to be successful. The ones that are are typically growing through acquisition, through growth, get acquired. A lot of them hit that size for a private equity firm to become attractive for them. Other ones just won't work and go out of business, whatever it will be.

What I will say though is that there's been less people who have focused on that. Everybody likes doing sponsor deals because it's repeat business. They'll do one deal, two deals, three deals. We're the same with, with a sponsor. But on the non-sponsor side, sourcing these transactions are difficult. It's time-consuming. They take longer to close. But we think, at the end of the day, you can get a better return, better structure, et cetera. That's why we pursue them.

I would say that, in terms of competition though, everybody takes the same amount of time to underwrite a 10 million check as it does 50, 100, et cetera.

Sure.

I think people have tended to try to move up market, write bigger checks, et cetera.

Right now, we're competing with banks who I think, depending on where they are in the economic cycle, regulations, et cetera, tend to ebb and flow in this market. Competition goes up and down, et cetera, where you see it. In my opinion, it's a very big, it's a very vast market. Quite frankly, it's underserved. I'm not really too concerned with more competition in there. I think at the end of the day, people are going to vote with as you raise a bigger fund, you need to write bigger checks. As long as you can stay disciplined, I think this is going to be an attractive market for a long period of time.

Great to hear. One last, probably two-part question, around the core of your business in the credit side of the equation. I guess, part A. If you wouldn't mind sharing with the listeners the impact of interest rates, Fed funds rate, how high it's been for an extended period of time, where it appears we're headed next month and beyond. Not asking for you to weigh in on where it appears we're headed. But surmising that the Fed's funds rate is coming down, what that means for both your business and your borrowers.

Then I guess, part B. Talk to us a little bit about what you see out there. Softness, any issues with the consumer side of things. Maybe just talking more generally about what you're seeing from your borrowers and their respective businesses.

Well, I would say a higher interest rate environment, where we are today, is probably not good for the longterm. I don't think that's controversial. I think a lot of people will say that. Do we benefit from SOFR being 5-and-a-half percent, 5%? Sure. But I think longterm, borrowers can only withstand so much. Firms can alter when they have inflation, cost inflation, goods, et cetera, they can offset that to a degree. Raising prices, cutting SGNA, whatever it may be, restructuring the business a little bit. But if you have your interest rate cost tripled in a matter of a year, how long can you sustain that for? I personally believe not very long. I think we're into this about a year or so. I'm not sure how much longer companies are going to be able to withstand that.

What do they start to do? They start cutting some of the longer term prospects. Whether it's marketing, cap ex, whatever it may be. There's a real effect to the business the longer interest rates stay this high. I'm of the opinion, if rates were to come back down a point, two points on SOFR, that's going to be much better for the economy, much better for these companies. I think the longer they stay where they are, you're going to start to see more and more distress in the market.

I think the second part of the question, what we're seeing, we are sort of seeing that. You're seeing bankruptcies have escalated, default rates are ticking up. Companies are running out of liquidity. What do they have to do? I think we're seeing a fair amount of transactions that, quite frankly, don't make a whole lot of sense. I think people are putting up that last ditch effort to see if they can get it done. Hire a banker, go see if you can get this refinanced. But even that these levels, it doesn't make a lot of sense.

I tend to think that, if things don't change in the near-term, we're just going to see lot more financial distress in the system. Distress can be good for us. We like some level of stress in the system, et cetera. It creates opportunities. But going back to '08, '09, when you had the financial crisis, obviously that was too far. That's not something we were looking for. Something in between is what makes our business work.

Good old Goldilocks, right?

Sure.

That's super helpful. I appreciate your insights on that.

Maybe turning the corner here a bit, and talking about your fundraise. I guess, as you set off on the fundraise journey, looking back to the beginning, what were some of your highest priorities beyond getting the fund closed? As you set out on the journey, what were the things that you and your co-founder prioritized?

I'll answer this, and I'll invite Liz to comment as well.

Basically, we wanted to, understanding that fundraising is never easy. Fundraising for a first-time fund, even less so. I think what we have seen over the past year or two is that even that success rate has gone down. The fundraising has been very difficult.

How have we been approaching that? We basically, our strategy, we were trying to be very clear on what our target market is. We do believe that this niche market is attractive. We do believe that the risk return parameter, for a long period of time, the longterm, we think is going to be very attractive for investors. Returning capital on a quaterly basis, getting to some of the events that we have seen around the longer hold times for LPs because they're not getting distributions back from whatever strategy. We think all that plays very well for private credit and that's what we're targeting.

But I think what we wanted to do, and I think Liz is a big part of this, is to develop a team not just for today, but for how this thing can succeed. And make sure that we did our first close back in September with a group of investors. But how can we really grow the business, but how can we also structure it to make it more of that institutional feel that those types of investors are going to be comfortable coming in and investing alongside of us? That's why we registered with the SEC. It's why we audited our books for '23, even though we were in existence for a few months. We're trying to do all these things, not necessarily for today, but to set us up for success down the road.

I'll head it off to Liz, but she's been a big part of that. Of how do we really regroup and design the fundraising aspect to succeed?

Thanks, Peter. I guess, just to add on to that, I would say having strong relationships is really important. That's something we will continue, over the years, to continue to work with our current investors, potential new investors. Peter, Jay, and I have been in this industry for over 20 years, so clients that we've worked with in the past that have approached us about investing into our fund.

I think it's really important to have your due diligence set ahead of time. Within our data room, to have legal, compliance, operational structures already in place is really important as we build a strong track record. Those are things that we worked on over this past year, that I think will really set us up for success for the rest of 2024 and beyond.

Excellent. As you look back on the successful fundraise, what were some ... This is a question I always love to explore and probably gets some of the best answers for our listeners. What are some of the biggest challenges that you faced? Whether it was strategy, whether it was being first-time fund. What were some of those challenges you faced throughout the fundraise process?

Well, I guess twofold. Personally, Jay and I have been on the investing side most of our careers. We lacked that fundraising side. It was developing that part, which has been a big learning curve. One that we've been happy to take on, et cetera. It's wearing multiple hats. That, and it's doing the deals. Then obviously, it's on the operational side. It's finding the team to put in place that's going to be able to handle and do all of that. Part of that is, quite frankly, is finding the right third party partners to do that. I think early on, we spent a fair amount of time going through and putting the infrastructure in place to do that.

Second, it's team building. Having Liz in place, our investment team in place. Then coming back to the fundraising, it's been the type of investors. We did our first close with three very successful family offices. They've been very helpful and it's been good to work with them. Now we need to understand, to broaden that outreach. That's what Liz's main goal is. But to really broaden the scope, fine tune our pitch and our focus, and attract more investors coming in.

Sorry, Liz. I did know if you wanted to add anything there?

No. I agree with everything that Peter just said. I think through some emerging manager programs, there's a lot of ways that we can raise our brand awareness and bring in more clients into the fund.

I would say one other challenge that we have seen is that some LPs that were heavily allocated to private equity have been experiencing prolonged M&A slowdowns due to the higher interest rates, which was affecting their distribution timelines. That, I guess, would be one other challenge.

For better or for worse, nothing that you could do about that.

Right.

There you go. Did you use a placement agent, or no?

Initially, we did use a placement agent on an interim basis, and then decided to bring that function in-house with hiring Liz.

Got it. As you look back, for both of you, I guess what advice would you give to other emerging managers out there looking to raise their first fund? Private credit, strategy agnostic wise. What advice would you give other emerging managers?

Yeah, I guess I'll go first. What I would say is that it takes a while, it takes a long time. I think where we've been at this for a long time, I don't think we're close to being finished. It's a long process. You have to have the right team in place. It's not easy. First-time fund, everybody knows it's not easy. It can be really difficult. Persevere through it. Yeah, that's what I would say.

I would maybe add onto that. That crafting a compelling pitch, and clearly being able to articulate what sets you apart from other managers in your space is really important. Also, networking within the industry and talking to other managers that are maybe a year or two ahead of you can be really helpful, just to hear what's worked for them or what hasn't. Especially within your particular asset class, can be really important and maybe save you a lot of time.

Then lastly, just prepare for due diligence so that, when you get to that point with a potential LP or investor, that you're ready and that you have everything set to bring them on board.

Great insights there. Well, Liz, Peter, thank you so much for joining me today on Fund Flow, sharing your insights both on the fundraise, and then also your day-to-day business. Thank you to our listeners, for joining us on this latest episode of Fund Flow. We hope you join us again next time.

Thank you so much for having us.

Thank you.

Thank you for joining us on this episode of Fund Flow. To learn more about today's discussion, please email host Jon Finger at jfinger@mcguirewoods.com. We look forward to hearing from you.

This series was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this series, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in this installment. The views, information, or opinions expressed are solely those of the individuals involved, and do not necessarily reflect those of McGuireWoods. This series should not be used as a substitute for competent legal advice from a licensed professional attorney in your state, and should not be construed as an offer to make or consider any investment or course of action.