A Q&A with Lee Kruter, GoldenTree: How to be strategic in private credit in a competitive market

Over the past decade, private credit has seen significant expansion, offering a wide array of styles and strategies. GoldenTree’s approach to private credit stands out for its solutions-oriented transactions, providing capital that addresses specific objectives often unmet by public markets or traditional lending channels. By focusing on larger borrowers—typically companies generating $250 to $500 million+ in EBITDA—and investing across both public and private credit markets, GoldenTree positions itself uniquely within the space. This versatility allows the firm to structure deals across the capital spectrum, making it less dependent on market cycles while serving issuers across various industries.

Private Credit has expanded significantly over the last decade with many different styles and strategies. What is GoldenTree’s approach to private credit?

GoldenTree’s private credit investments are characterized by solutions-oriented transactions. Our investments commonly solve an objective for the issuer or sponsor that may be more challenging for public markets or traditional lending channels to address. Therefore, the capital we provide tends to be more transitional in nature. We focus on larger borrowers, with our typical portfolio company generating $250 - $500mm+ EBITDA. Our range is also a differentiator: we invest across credit asset classes in both public and private markets which gives us unique perspective. We can also structure transactions across the capital structure, for various uses and to issuers across all industries - broadening our opportunity set and making deployment less cycle dependent.

Spreads have tightened and markets have loosened. What type of opportunities is GoldenTree identifying in this market?

We have a broad playbook, which enables us to capitalize on changing market dynamics as the opportunity set shifts to ensure we are maximizing relative value. For example, in 2019-2021, we avoided technology LBO transactions given high valuations and unattractive pricing. In late 2022 and early 2023 when limited capital was available for these types of transactions, we made several investments in the sector that secured attractive terms and cycle high economics. In the current environment, opportunities we are focused on include creating balance sheet solutions, refinancing shorter maturities, providing working capital, and funding strategic growth acquisitions. We see these types of transactions as offering the best risk-return today in a tighter market.

Fund sizes continue to grow with some approaching $40B+ in size. What are the implications on the asset class?

With fund sizes at record highs and substantial dry powder to deploy, there is greater competition in the asset class. This has led to tighter spreads and looser terms especially in larger sponsored-backed transactions in well-trafficked sectors. Many managers are focused on scaling AUM which can lead to overly diversified portfolios that impact the return profile. We expect this to lead to return compression and increased performance dispersion over time for the asset class. Our approach is different. We do not have an origination model focused on scaling AUM. We have deliberately sized our funds so we can be selective on deals that fit our process and maximize risk adjusted return.

Larger issuers are increasingly utilizing both public and private markets for financing alternatives. Is this a structural change to the asset class? What does this mean for current private credit managers?

Increased depth and sophistication in private credit markets has led larger sponsors and issuers to view private credit solutions as a sustained alternative to public markets. For certain situations, factors such as speed, confidentiality, and complexity can make the transaction a better fit for private markets. Ultimately, we think public and private markets will continue to converge, and mangers that invest actively in both markets will have a competitive advantage in sourcing transactions and serving as a comprehensive partner to an issuer across both markets.

Private Credit has not experienced a meaningful cycle yet. However, with rates now elevated for two years and growth potentially slowing , do you expect default rates to increase in Private Credit? What will characterize the winners and losers of the next cycle?

While we don’t see systemic risk, private credit defaults and recovery rates will likely follow the path of public markets. Certain vintages are more at risk. As an example, many of the transactions from 2020-2021 were done at aspirational valuations and underwritten for a lower base rate environment. Several years later, higher interest cost and slower growth has made certain issuers more vulnerable. Said simply, we expect a higher dispersion of outcomes. In this environment it is critical to focus on fundamental value, which is where our process starts: what is a company worth, how substantial is our asset coverage, can the issuer generate consistent EBITDA and free cash flow growth, and is there a clear catalyst to repay our debt. Alongside the fundamental work, we believe it is critical to have resources to ensure you are structuring strong documentation with terms and covenants that preserve value, and also can work through a process should a company underperform. Unlike most private credit providers, GoldenTree has an over 15-person Restructuring & Turnaround team which has significant experience leading these processes from a legal, operational and financial perspective to optimize outcomes which we think positions us well.