The Voices of Private Credit: Kevin Mallon, Halifax Capital

Q: Please introduce yourself, your role at Halifax Capital, and your background.

A: When I first graduated from Columbia University, I worked for my father’s company in inter-dealer brokering and then at another brokerage firm. The global financial crisis made me rethink my career path. I started looking for part-time work on Monster.com and found a data entry position with a company involved in legal finance.

One day, the owner of the company tapped me on the shoulder and said, “Kevin, it looks like you have half a personality. Would you like to learn how to market a hedge fund?” I agreed, and around 2008, I was introduced to the world of private credit through this litigation finance group. At the time, private credit was just starting, and litigation finance was even more obscure. I continued my career for the next 20 years in private credit, working with various asset-based lending and private credit groups.

The reason I started Halifax Capital Advisors was to bring my experience to a niche group of family offices and investment advisors I’ve worked with throughout my career. My goal is to offer them a diversified range of services, as there are many different niche verticals in the specialty finance space, and it’s essential to remain nimble.

Q: How would you explain “private credit” to a friend or colleague who isn’t in the industry?

A: Private credit is the debt capital that supports private equity-sponsored companies. It’s important to distinguish private credit from private debt, as these terms are sometimes used synonymously but refer to different things. Private debt involves companies that are not sponsored by private equity firms. For example, everything in litigation finance is considered private debt because private equity firms cannot own law firms due to legal restrictions, except under very specific conditions.

Private credit, on the other hand, is similar in nature but is directed towards private equity-sponsored companies. Both private credit and private debt differ from traditional banking, and these terms are often grouped together under the non-bank lending industry.

Q: How has the demand for alternative investments changed in the past 5 years? Is there greater demand for private credit opportunities? Are their appetites for risk changing?

A: When I entered the industry, institutional investors did not have a private credit allocation. They had real estate and private equity, but not alternative lending. That emerged from the financial crisis, with the first foray into non-bank lending being marketplace loans like Prosper and Lending Club. This was often referred to as the “Uber-ization” of finance, directly connecting borrowers and investors.

Private credit’s growth continued due to regulations like Dodd-Frank, which imposed higher capital requirements and led to bank consolidation. Over the years, we’ve seen an upward pressure on larger transactions with fewer banks, leaving many lower middle-market and middle-market companies to be serviced primarily by private markets. As a result, the demand for private credit has absolutely increased.

Additionally, the large-cap private credit space has also expanded. Mega-funds like Blackstone and BlackRock have entered private credit, taking bank financing into their models and lending it out. Thus, banks are still involved in this space.

New verticals like litigation finance, insurance-linked products, NAV financing, and secondaries have gained prominence. The demand has expanded and evolved, creating more solutions for capital providers and attracting interest from investors. The investor base has also broadened, moving from family offices and investment advisors to large institutions that are capitalizing on the illiquidity premium in private credit.

Q: When you advise your clients who want to expand their portfolio to alternative investments, what advice do you typically give them?

A: I advise clients to really appreciate the illiquidity involved in this asset class. It doesn’t take long to look back to 2008 to see what happens when capital dries up. Private credit is often viewed as a sort of ATM because these groups, due to the nature of accounting, are printing positive returns—1% to 2% per month. But when the spigot turns off, you have to be prepared for that.

I am a huge proponent of having an asset-liability match. Whether you’re a company offering deals to a fund, a fund manager managing investor capital and a portfolio of loans, or the underlying investor, everyone needs to be very honest about the duration of these investments and ensure they are in the appropriate investment vehicle.

You see many “liquid funds,” like interval funds, open-ended hedge fund structures, or even publicly listed funds that offer liquidity. You have to be mindful of the underlying liquidity because the duration of these assets can be 5 to 10 years. For example, if you have a fund that offers quarterly liquidity but the underlying duration of your loans is five years, you must have appropriate measures in place to ensure that one person’s redemption doesn’t affect the economics for future investors. Early exits can be fine, but if you wait, you can take the hits.

The main point is always to establish an alignment of interests among investors, fund managers, and deal-originating companies. Being honest and having everyone aligned is the most important thing.

Q: The question everyone wants to know: What was the first car you ever owned?

A: The first car I owned was my parents’ beat-up 1988 Honda Accord. If I recall correctly, it was a two-door and off-red exterior. I don’t have a particular story behind it, except that I did end up crashing it. Fortunately, no one was hurt, but that was the story behind my first vehicle back in 1996.