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BAYTREE CAPITAL CREDIT INCOME FUND

Baytree Capital’s Credit Income Fund is the firm’s investment platform dedicated to providing private equity and mezzanine capital to growth and middle market companies across the US.

Baytree Capital’s Credit Income Fund provides middle market companies with value-added, private equity solutions to clients across investment structures and yield parameters. Launched in 2001, the investment platform supports a diversified group of companies in acquisition financing, refinancing, recapitalizations and for growth capital needs. The investment platform targets senior secured loans, mezzanine securities, and equity co-investments in traditional middle market companies across a wide array of industries.

With offices in New York, San Francisco, Mexico City and Cayman, our dedicated team has extensive experience underwriting and syndicating transactions with an exclusive focus on the middle market. Working with our unique and diversified base of investors, Baytree Capital’s highly experienced middle market investment team is able to offer access to unique diligence insights and a broad array of industry resources that enable us to add value that goes well beyond simply being a capital provider.

WHAT IS A BDC?

BDCs facilitate the flow of capital from individual investors to the domestic private sector, including U.S. middle market companies. Generally, a BDC must invest at least 70% of its assets in private U.S. companies or public companies with a market capitalization of less than $250 million. By pooling investments from individual investors, BDCs help provide many middle market companies with the capital necessary to operate and grow their businesses. BDCs were created by Congress in 1980, but it was in the years following the 2008 financial crisis that they experienced their greatest period of growth.

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BDCs HELP MATCH THE INVESTMENT NEEDS OF INDIVIDUALS WITH THE CAPITAL NEEDS OF PRIVATE U.S. COMPANIES

What is a Middle-Market Company?

The fund defines middle-market companies as those with annual revenue between $25 million and $750 million. The middle market represents nearly 200,000 businesses across all industry segments in the U.S. and accounts for nearly one-third of private sector GDP in Europe. Middle-market companies are often among the fastest growing in terms of revenue, and in the U.S. account for 92% of jobs created since 2008.

BDCs offer access to the U.S. middle market

Nearly 200,000 businesses comprise the U.S. middle market, which accounts for nearly one-third of America’s private sector GDP and more than 47 million jobs.

If ranked as a country, the U.S. middle market would represent the world’s third-largest economy, larger than Japan’s economy but smaller than China’s. Investing in private middle market companies has historically been limited primarily to large institutional investors, such as endowments or pension funds, due to high investment minimums and suitability requirements. BDCs help provide individual investors access to this large segment of the American economy.

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Regulations limit traditional lenders

While these businesses play an indispensable role in our economy, sweeping regulatory changes have led to many banks reducing or closing businesses that historically provided capital to middle market companies. New financial regulations have even forced some non-bank lenders to sell or close their corporate lending businesses. For example, after the Financial Stability Oversight Council determined that General Electric Capital Corporation (GECC) should be subject to supervision by the Federal Reserve as a systemically important financial institution, GECC sold off, exited or significantly downsized its lending businesses, once a stalwart in the lending industry.

Bank consolidation leaves a lending void

At the same time, the number of banking institutions in the United States declined from a peak of more than 18,000 since federal regulators began keeping track in 1934 to just 5,300 in 2015. In 2015, U.S. banks represented 7% of the total investor base for senior secured loans to U.S. middle market companies, down from 28% in 2003.

As many commercial banks and non-bank lenders have scaled back their middle market lending operations, BDCs are increasingly helping to fill the void.

Benefits of BDCs

In addition to financing the growth of middle market businesses, BDCs may appeal to investors because they may offer an alternative source of income, growth and diversification.

1. Income in a low yield environment
By investing in the debt of middle market companies, BDCs may serve as a source of meaningful income for investors due to the following factors:
Yield Premium: Loans of middle market companies have historically provided higher levels of current income than those of larger private companies. Because middle market companies are smaller and generally have fewer places to turn for their capital needs, they often pay a higher rate of interest than their larger peers that may be able to access the public capital markets. Investors can tap into this “middle market premium” by investing with a manager that has a proven track record of identifying, analyzing and underwriting loans to middle market companies.
Pass-Through Income: A BDC must distribute at least 90% of its taxable income to investors to maintain its tax status as a regulated investment company (RIC). As a result, BDCs have generally generated high levels of current income as compared to many traditional income-producing investments.

2. Low correlation to many traditional investments
Middle market loans historically have had a low correlation to many traditional investments, such as stocks and investment grade bonds, and have been negatively correlated to U.S. Treasuries.
While middle market loans are more highly correlated to high yield bonds, they are typically the first obligations of a company to be repaid, before junior debt or equity investors. Unlike most high yield bonds, loans are typically secured by a borrower’s assets, including cash, inventory, equipment and property, which may help protect an investor’s principal if a company comes under financial stress.

3. Diversification and distribution requirements
BDCs may elect to register as regulated investment companies for tax purposes. As RICs, BDCs generally are exempt from corporate-level federal taxation on any income they distribute to shareholders if they:

• Meet asset diversification tests including, among others, investing no more than 5% of their total assets in any single investment or more than 10% of the voting stock of any single issuer
• Derive at least 90% of their gross income for each tax year from dividends, interest, capital gains or other investment income
• Distribute (or pass through) at least 90% of their investment company taxable income to shareholders
• Distribute at least 98% of the net ordinary income generated within a calendar year and 98.2% of their capital gain net income produced within a one-year period

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BDCs an alternate source of income and diversification

BDCs provide individuals with access to private debt and equity investments, which have historically only been available to large institutions.

A prolonged period of low interest rates has made it increasingly difficult for investors to find sustainable sources of meaningful current income. In this environment, business development companies (BDCs) may help provide an alternative source of income and diversification for investors and a timely source of capital for private U.S. middle market companies.

Following the financial crisis, BDCs have emerged as a timely source of capital for private U.S. middle market companies as regulatory changes and consolidation have limited traditional banks’ lending operations. At the same time, investors have turned to BDCs for their meaningful level of income and lower correlation to many traditional investments.

BDCs represent a diverse asset class with a variety of investment strategies and objectives. With a clear understanding of the risks and benefits they may bring to a portfolio, investors can make well-informed decisions on how to best incorporate BDCs into a diversified portfolio.

Our Approach

Baytree Capital seeks to invest in growing businesses and serve as a partner with management.

Our focus on underwriting the intrinsic value of a business enables us to creatively invest in a broad spectrum of securities across the capital structure.

We have significant flexibility in the kinds of investments we make. For example, we can act as a lead or minority investor and we can provide both equity and debt financing.

We underwrite investments between $20 and $75 million and have the ability to support the growth of our portfolio companies with supplemental capital.

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We create custom solutions for each private investment

Our highly skilled team of investing professionals allows us to develop unique perspectives and craft creative solutions that provide the optimal investment structures for our portfolio companies.

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Investing with Baytree Capital

Our long history of financing allows us to focus our underwriting on the underlying financial assets and understanding our client’s needs.

We invest capital with a long-term focus

This investing culture allows us to focus our time and effort on understanding our companies’ long-term growth plans.

We are committed to the middle market

Our focus is on middle market companies, delivering flexible, reliable capital while leveraging the firm-wide resources of Baytree Capital.

We back talented management teams

We partner with management teams with strong visions and expertise that are looking to continue to grow their companies.

We value relationships and building trust

We create strong, lasting relationships with owners and managers and build the trust of our portfolio companies by honoring commitments, responding to needs and communicating directly.

Advantages

We provide middle-market companies with flexible and tailored capital solutions while acting as a value-added partner to management and other stakeholders. Our capabilities present prospective and existing clients with clear advantages.

Flexibility and Creativity. Our experienced investment teams have the ability to think outside traditional private equity parameters. We can structure creative securities as a lead, minority, or co-investor, and can provide both debt and equity financing. Our investment span ranges from mezzanine debt to convertible preferred.

Custom-Tailored Solutions. Each company we work with is unique and requires a carefully constructed investment solution. We give each of the companies we invest in the opportunity to help create the structure that works best for them.

Value Enhancement. We act as value-added partners with management and other stakeholders. We assist management in identifying and executing value enhancement initiatives. We limit involvement to initiatives expected to cause measurable improvements in value creation and measure success through value enhancement, not fees or use of captive services.

Baytree Capitals Resources. We provide management teams with access to Baytree Capital’s franchise relationships and strategic network to accelerate value creation. We make introductions to vendors and customers, add-on acquisition targets, and opportunities for exits. We help our companies create competitive advantage by having Baytree Capital as an investor.

Deep Industry Knowledge. We work closely with experts to gain deep insight and expertise across industry sectors. Our team’s strong experience investing in the industries in which we focus serves as an advantage to management teams. We can provide access to third-party resources and industry experts to provide insights into industry trends and competitive dynamics.

Speed and Certainty. Working with a single capital provider allows for the ability to move quickly to complete transactions.

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Investment profile

We pursue investments with the following characteristics:

Transaction Type:
• Growth equity
• Acquisition capital
• Recapitalizations
• Pre-IPO financings
• PIPE / Take-private
• Selective restructurings

Investment Criteria
• Investment Size: $20-75 million
• Minimum Revenue: $20 million
• Minimum EBITDA: $5 million
• Strong management team
• Recurring revenue business model with defensible barriers to entry

Target Industries

The Baytree Capital Credit Income Fund seeks to generate current income and, as a secondary objective, long-term capital appreciation by investing at least 80% of total assets in senior secured loans made to a large number of varied companies in industries such as:

• Business and financial services
• Healthcare services and technology
• Software and technology-enabled services
• Telecom and communications
• Data, information, and marketing services
• Transportation and logistics
• Energy and power
• Industrial and manufacturing
• Consumer services
• Media and entertainment
• Environmental Services

 

BDCs and the middle market's "It" factor

To date, the middle market’s tighter structures, senior security, reduced market volatility, shorter duration, lower historical default rates, strong recovery rates, yield premium, patient and resilient ways (investors committed to holding through maturity) and GDP/job creation, have underpinned its “It” status and broad acceptance as a proven asset class. These are more than just attractive qualities; they are, in fact, hallmarks of a successful, permanent, investment opportunity.

A private wealth advisor can help you learn more.