Thomas Majewski: Sure. So a long time ago, these were called middle-market CLOs and then a little bit of direct lending CLOs and I think the phrase of the day in the market, they’re now called even private credit CLOs. And these are CLOs that look and feel a lot like the typical CLOs that Eagle Point Credit Company invest in, except they’re typically to non-spot, non-bank-led deals that are led to private credit arranged deals. In many cases, the private credit world is getting bigger and bigger. And in many cases, we’ll do $500 million to $1 billion loans. These are small little $50 million, $100 million loan. They’re still quite sizable. But now in many cases, they’re being arranged by private credit money managers versus investment banks.
Over time, private credit has really done quite well from the fault and recovery perspective. So when we look back historically, you can see, if you look at the default rate and certainly any private credit manager will have some data or nearly certainly, we’ll have some data that shows how private credit has outperformed broadly syndicated credit. And I think that’s directionally accurate. The one thing that’s missing in our opinion is, in the private credit market, there’s not an ability or mindset of the collateral managers to reinvest cheap when defaults go up. So the classic example is through the financial crisis, where, according to many measures, middle market credit, as it was then called now private credit, had fewer defaults and higher recoveries than syndicated loans.
Syndicated CLOs outperformed middle-market CLOs, not because they had better credit but because the collateral managers were able to reinvest at $0.60, $0.70 and $0.80 on the dollar. Middle market managers were lending at L+800 instead of L+600. 200 basis points is nice, 30 basis points of discount — 30 points of discount is obviously much better. So one of the things we’ve really grappled with is while actually the arbitrage on private credit CLOs looks better than many syndicated CLOs today in terms of the potential equity IRR their long-term ability to actually outperform in times of market distress is less certain. We have a small number of what would be called middle market or private credit CLOs in the portfolio. There’s one or two called Lake Shore in the portfolio, which would fall into that category.
And there, we believe that collateral manager has a particular ability to pivot into the syndicated market should prices fall in the syndicated market significantly. So it’s something we’re open to. We certainly have the ability and wherewithal to invest in. It’s something we keep a close eye on and keep close dialogues with the issuers. Many of the issuers in that space. We’re not 100% convinced many of them have the DNA to really make CLOs perform in times of deep cycle in distress versus many of the syndicated managers that we partner with. And one of the examples we point out, if you look at ECC’s NAV from let’s say, December 31, 2019, roll it forward a year or two, while obviously, obviously, it went down in Q1 of 2020, our NAV ended up increasing materially somewhere between 25% and 30% if memory serves, although please check the numbers in the quarters measured starting from December 2019.
So pre-COVID going through. And that’s because of both our proactive management within our portfolio and reinvesting within our fund. And then similarly, many of the CLO collateral managers navigating through the distress and building par at deeply discounted prices in the syndicated market. So the data has kind of proven itself out time and time again, although we are becoming more intrigued by some private credit CLOs. We do look at the market, but it’s an important thing for us to make sure the collateral managers involved in any CLO we’re investing with have the wherewithal and DNA to know how to pounce in the secondary market for loans when it’s really, really cheap and that’s usually the best time to be buying is when everyone else is selling.
