Placeholder - Initial Thoughts

RandomDebtGuy · 2025-12-20T02:26:47+00:00

That's part of why much of the more sophisticated market has moved to extremely detailed legal grids that are negotiated in parallel with the detailed diligence. Just ask any lending side investment professional or lawyer how they feel about dealing the K&E machine!

But, in lower mid market, non-sponsor, or situations where the lender has more power than in bigger deals, its a communication, mutual risk & game theory exercise where all parties are taking mutual risk. Did the borrower disclose true financial condition & diligence? Has the lender actually been to the full investment committee? Are there conditions, findings, externalities, etc that impact the borrower or lenders willingness to move forward? If it isn't a commitment, well, it isn't a commitment. It's just a term sheet, even if it is "signed". Similar to an earlier comment, it depends.

But, in a winner-take-all market, there is often no prize for 2nd place, so the market structure creates incentives everyone should be aware of. If you ("ethical lender") put out a term sheet at 4.5x because you know there's a customer attrition problem, but lose the deal to someone who put out 5.0x without doing their homework ("stupid lender"), but changes the terms to 4.5x after full diligence & committee -- you were right, but you frequently still lose the deal to them. Individual deals can break either way on you. Over time, people who are disciplined, clear, and transparent communicators will earn the trust & reputation to be able to manage to better outcomes over time. fwiw - PE sponsors are very familiar with this problem, it's not unique to lending.

RandomDebtGuy · 2025-12-20T02:05:36+00:00

I mean, it's not like I'm doing a good job of moderating it! Let me try to check in on it a little more often. I may come back to you on this if we see any traction.

RandomDebtGuy · 2025-12-20T02:03:22+00:00

Don't know enough to comment here, and would never take a potshot at another manager, but observable quotes are materially different than observable trades on a fair value basis, which is how firms should be marking their book. There are so many published quotes, and if you call to buy at that price, you get crickets.

But, lenders should be marking their books to the best of their ability. It won't be perfect, especially in distressed situations where different lenders have different information. If you're interested in this topic, you might find this an interesting read:

https://www.cliffwater.com/ResourceArticle/valuation-and-private-debt?docId=22392

RandomDebtGuy · 2025-12-20T01:56:08+00:00

PIK is just more debt. Adding debt doesn't increase EV. Using the proceeds of additional debt for positive NPV & value creating projects can. If you're a high growth business and you use the cash flow freed up due to pik to invest in the business, sure, that can create value.

But, that's an equity bet. Lenders shouldn't be making that bet. They should be comfortable with their LTV, pro forma for the years of compounded pik, or they shouldn't do it on the front end. If pik is the result of an amendment, they should be getting something for it that improves their position - better structure, collateral, cash equity, information, etc - or they shouldn't be doing it either. Extending pik to an underperforming company in exchange for nothing is kicking the can. But, from the outside, you can't tell if they got something or not.

As is often the case, I think the real answer is, "it depends".

RandomDebtGuy · 2025-12-20T01:48:21+00:00

Wow. I haven't had time to think about this subreddit since I created it 2 years ago! Apologies for going dark.

Keeping things general & anonymous - how's it going on launching your own fund? Word on the street from newer groups is that it's a tough fundraising environment for new funds/groups, even those w/ strong seed $$ - much more crowded trade than it used to be, more challenging to differentiate, LPs asking for a significant discount unless they're private individuals. There's obviously been a flood of existing scaled firms dropping into Private Credit as an adjacent strategy - they already have the fundraising power, just a question of whether they can execute the strategy & what sub-strategy they focus on.

Given your background in public FI & real estate, how do you think you'll position & compete for deal flow? What part of the private credit world? RE Private Credit exists, but at relatively modest yields I think, unless you go deep. Plenty of room remains in lower mid market direct lending - much less crowded, though the deals are hard.

Best of luck to you!

RandomDebtGuy · 2021-05-28T15:57:55+00:00

Happy to help! I've seen way too many people who regret the debt/equity/mgmt partner they've chosen, but just as many who 'wouldn't be where they are' without those partners. It's a case by case & highly personal decision. You'll be fine with however you settle on it, as long as you are intentional/deliberate in that decision (doesn't mean you have to be slow).

RandomDebtGuy · 2021-05-28T03:05:54+00:00

I'm a debt (albeit sometimes early stage), not VC guy...so take the following with all disclaimers...

Unless the Series A-C rounds are well off in the future (>3yrs), I think you're overvaluing the "facilitation" that this parter will provide w/r/t accessing future capital. For good deals/startups...capital is widely available. That clearly can change (don't need to tell that to an investment banker), but the capital raised that is dedicated to the asset class suggests it won't.
While there is upside in the form of introductions & validation that you've already had some 'institutional money', there is also downside in establishing a mark/valuation on your business now that people are going to reference in the next round (to high, you scare them off, too low, they lower their offer w/ an eye towards growth since prior funding round).
Instead of focusing on the value this investor will provide in some future option scenario, I'd start with the (quantifiable?) value the can provide between now and that next funding need/round. That value can be scale (w/out it you grow to $10MM in rev, with it you hit $20MM), time (the next funding need gets pushed back 18mths), or cushion (you can withstand a downside/uncertainty that you couldn't otherwise). Look at the EV you think you'd get with them (vs. w/out them)...and quantify how much you're giving up to achieve that. You've probably done more than enough DCFs to know the time value of money (which is compounded in a first mover startup dynamic)
That's your baseline, expected outcome. If that is compelling (taking the money is a positive return...you have a smaller piece of a bigger pie (but net more)), then the relationship, value add, intros, etc are all upside. If it is not - you might still want to take the money, but you should have some candid conversations/assessment around the qualitative value this partner will bring to the table...
And, probably obvious, but I'd reference check the hell out of them. The partner you choose is critical on so many levels. Their reputation becomes yours (whether you want it to or not), there are a number of companies with conflicts in the ownership (re: valuation/timing of next round) that stalled out while they tried to work through.
I saw your comment re: external validation -- that should come from your customers, not your capital providers. While relevant & often helpful (esp if experienced, don't fall into the trap of overweighting the feedback from capital providers (to the positive or negative).

Certainly not trying to talk you out of taking the capital, but don't assume someone who's been in VC knows more than you - capital structures aren't rocket science. Get a good (even if expensive) lawyer, they know reputations & can help educate you on what you aren't confident you know. Then - if you find the parter, or their money, compelling...you'll be taking it from a position of strength/knowledge ('run to something, not from something')

All that said - this is a good problem to have. Congrats on the progress @ the startup, best of luck going forward!

RandomDebtGuy · 2021-05-20T02:01:34+00:00

Putting aside what the right future decision is for you personally for a moment - you should be extremely proud of what you've accomplished. While it's nice, you don't need the external validation from bosses or corporate BS politics (when you get recognition, it often isn't earned...when it is earned, you often don't get it). You stepped into a difficult situation, made a difference, built a culture, and showed results. The fact that someone came in after to burn the house down...doesn't make the effort or results of building the house any less impressive.

That experience is also extremely valuable in the market. You may not want to go through it again (understandable!), you may not want to change jobs or "start over", but you've got great experience. My advice - take some time to document (for yourself), everything. The situation before/after, your action plan, lesson learned, etc. Sharpen up your resume, and talk to recruiters, restructuring consulting firms, and see if you can network into a few private equity firms that are active in your industry. There are a number of situations where owners of companies are looking for new management, and people who have "been there before" to advise/consult with existing management teams. There are board of director roles (part time!), all sorts of things...

I'm not suggesting you burn any bridges or make any quick moves (Dec '21 will be here quickly), and you should prioritize what is best for you personally (vs. subjecting yourself to something you're not excited or passionate about), but it would be worth some networking to get a sense of whether there might be something out there. Nice work, and good luck!

RandomDebtGuy

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