As investors reassess private credit, New Mountain Capital's Laura Holson says direct lending is offering attractive opportunities with wider spreads and improved lender protections. She joins Bloomberg Open Interest to explain why higher rates can benefit floating-rate investments, what risks borrowers face, and why her firm favors defensive-growth sectors such as industrial automation and animal health.
Let's get more on financing the AI build out now with Laura Holson, COO of credit at New Mountain Capital. Do you agree with Connor? Is it really that amazing out there because it sounds phenomenal.
It does sound good. Look, I mean, I think the reality is there are puts and takes right now. Uh we are seeing a pretty attractive time in direct lending, but no doubt, uh there are going to be winners and losers across the board.
100%. I suppose he would suggest that too, saying it's who can pull the projects out of the ground. But what opportunities are attracting the most bidders right now?
Yeah, I mean within direct lending, we see the market opportunity as pretty attractive, right? You have base rates that are a little bit higher uh and trending even higher from here. You have spreads that have widened versus the tights in 2025. and then you have a market environment where leverage has come down a little bit. documentation has improved for lenders. So we are seeing pretty good risk adjusted return opportunities within the world of direct lending.
When you do see an opportunity like that though, isn't everybody all over it?
They are. I mean it's undoubtedly competitive. Um I think obviously with some of the flows that we've seen within private credit, uh it actually feels like some capital has left the system, which is a little bit healthy, I think, to bring that supply demand uh imbalance back in check.
Left to go where?
Yeah, I mean, I think they some of the capital pulled out as a result of some of the headlines, right? And just some of the concern about the asset class in general, which, you know, I think is normal, but again, a little bit healthy.
Has that pushed yields up or is it likely to even just in the coming weeks?
I think it has pushed spreads up uh for sure, right? So if you compare 2025 where everything was priced in a very tight band of 450 to 475. What we're seeing now is spreads really ranging in a much broader range from 475 to 600 plus in some cases. And so we feel like that is good compensation.
What did you make of the Vota pullback by some of the banks, so JP Morgan and Goldman, I believe. You know, even though there was an 11% yield on that, and yet you saw the banks pull back and and I'm not sure what the demand was like out there.
Yeah, I mean, look, I think it's hard to comment on, you know, specific instances, but in general, the the direct lending market was born, right? Out of some of the bank pullback in general. And so I think the capital has come in to support some of these businesses and and we feel like it's um attractive opportunity, you know, for what we're seeing.
When it comes to other parts of lending, so we're seeing some 2027 forecasts start to come out now. So JP Morgan saying that US CLO issuance will actually be down quite substantially. So looking at a decline and penciling in about 130 to 140 billion in new issuance in the next year, but that's 35% lower than last year's. What does that mean for the market?
Yeah, I mean, look for the CLO market, um, you know, it we'll have to see what the issuance broadly looks like. I mean a lot of it comes back to what is the M&A environment going to be? And that is hard to predict. I think, you know, we've been waiting for the flood gates to open for a while within the world of M&A volume. Um and we haven't really seen it quite yet. I think we remain optimistic that there are a lot of reasons why M&A should pick back up and ultimately that will drive things like uh leverage loan issuance and ultimately support CLO demand. Um, but we'll have to see. We'll have to see if the some of the macro environment settles.
Speaking of the macro environment and I suppose the Federal Reserve being a huge part of what you do, I mean, if the Fed needs to raise sooner maybe than anticipated or if it just raises again regularly in December, you know, are people going to demand higher yields in or higher, you know, wider spreads? Or will it spook enough people that they'll just leave?
Yeah, well, I think one of the benefits of direct lending is the fact that it is a floating rate asset class. So as base rates increase, the all-in yields that we can afford to pay out to investors also increases. Of course, the flip side though is our borrowers, right, are paying those floating rates as well. So the question is, can they withstand that? And, you know, as rates have risen, I think this time it's been less dramatic, obviously, than what we saw a few years ago. And generally, I would say most of these capital structures have been set up for a rate environment that like we're in plus or minus 50 basis points. So there is, I think still,
So there's cushion.
There's cushion there.
Let's talk about some of the areas that you actually like. So, I mean, beyond AI, which obviously you're interested in various parts of the AI. There's also, uh, for example, industrial areas, and I was just looking at your note earlier, you were looking at industrial automation in particular, animal health, asset light logistics. Can you give us some examples or even geographically where you might be looking?
Yeah, so at New Mountain, we're we are focused mostly in the US, um but we do focus on what we call defensive growth sectors. And the reason why that's important is because as as we were talking about, just the macro, there's so much volatility, there's a lot of noise out there. And so defensive growth seeks to take some of that noise out there. So we're investing in acyclical sectors that are going to be resilient regardless. So we're not tied to the strength of the consumer. We're not tied to supply chain disruptions or volatility. Uh and that's what leads us to some of the sectors that you mentioned. We like certain areas of infrastructure services that benefits from some of the AI tailwinds, but isn't directly exposed to it per se. Certain areas of animal health with just more pets, more needs for those pets. So those are some examples of those defensive growth sectors.
