Source Talks ep. 32

Source Talks is a series where we discuss deal origination with expert PE and M&A pros.
In this interview, David Toll of speaks with Ian Larkin, CEO at Maranon Capital on their record-high year for deal flow and how the prospect of a recession is impacting their investment approach.

So Ian, tell us about Maranon Capital and the deals you do there.

The Maron Capital has been around since 2007. It was started by a group of us who had spun out and formed Maranon, which is a middle market private credit shop based in Chicago. We team of 54, solely focused on middle market private credit, and that’s primarily PE-sponsor-backed. Occasionally, we’ll back a management team and an independent sponsor

Talk a little bit about your portfolio and how it’s performing.

We have over a hundred positions and we certainly have things on our watch list. Overall, the portfolio’s in reasonably good shape, and has maintained revenue levels, grown revenue margins, et cetera. We have five or six transactions on what we call our ‘red watch list’. And those are taking up the majority of our portfolio management’s time.

Talk about how the recent rise in interest rates and growing prospects of recession are impacting the pace of deals that you’re doing there this year.

For Maranon, we’re having a record year. This year will be a record across the last 15 years since we’ve been existence. So, it really hasn’t impacted deal flow per se, but it certainly has impacted how we’re looking at transactions, how we’re structuring transactions, what kind of pricing we’re looking at.

Let’s start with the senior loan market. There, we’re definitely seeing spreads up 50 to 75 basis points, all due to action of the fed. Our cost of capital has gone up. Certain funding vehicles like CLOs remain challenging in terms of issuance.

So, I think that the shift in the marketplace has really been felt over the last three to six months. Spreads are up, leverage ratios are down. We’re spending much more time looking at forward interest rates, forward yield curve, and the impact on covenant levels, cushions, et cetera. So, it certainly has impacted how we look at transactions. It hasn’t significantly impacted our appetite and our willingness to invest.

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