CVC Income & Growth: a high-yield play in private credit

Private credit remains a niche investment, to the point where many of you reading this article will immediately be wondering exactly what it is. In a nutshell, private credit means lending by non-bank entities – such as hedge funds or private-equity firms – and despite being a very specialist area, it is now a crucial part of financial markets.

Globally, private credit has grown to roughly $2.1 trillion in assets under management from almost nothing in 15 years, according to data from a recent Goldman Sachs report. This has happened because private-credit lenders have stepped into the gap left by banks in the years after the financial crisis.

Nimble lenders

Private-credit firms are often more nimble and able to offer more flexibility to borrowers, who often prefer to work with them rather than with banks for that reason.

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For example, a small company in a non-mainstream industry with a lot of debt may be refused a loan from a bank due to its risky balance sheet and may not be able to raise money on the public markets due to market conditions or cost. Instead, it can turn to a private equity firm with a private credit arm, which could offer financing within a few days on terms that are designed to suit both the borrower and the lender.

Private credit – also known as direct lending – can be risky. “Direct lending is a form of leveraged finance, and losses and defaults can be expected to rise when the economy faces strain or the prospect of a recession,” says Goldman Sachs. Still, most direct lending is senior lending, which means it is “often characterised by more cautious sub-investment grade loans in the direct-lending market and now has roughly £232 million in assets.

A high-yield portfolio

Take CVC Income & Growth (LSE: CVCG), which is managed by CVC Credit Partners, part of the private equity giant CVC. This trust invests in high-yielding sub-investment grade loans in the direct-lending market and now has roughly £232 million in assets.

More than 80% of CVCG’s loans are floating rate, with the interest rate they pay resetting quarterly. At the end of March, the loans within the portfolio were trading at a weighted average price of 92.1 (100 would be at par or the issue price) with a yield to maturity of 12.9% (hedged into sterling), up from 12.7% at the end of 2024.

CVCG largely lends to private equity-owned firms, often to fund acquisitions. The management team doesn’t spend much time looking at upside, “because that’s not really our concern. We just stress test the downside to see how much headroom there is to cover our debts,” portfolio manager Pieter Staelens told Portfolio Advisor last year. “We like to invest in ‘boring’ companies that generate cash flow.”

Beating the peer group

There are two elements to the portfolio – the income-producing side of the portfolio and the opportunistic side, where managers take a more active approach to deploying capital in distressed opportunities. This helps generate both capital growth and income and gives the trust an edge over its peers.

Over the past five years, CVCG has been the only trust in its sector that has grown net asset value, excluding dividends paid, generating both capital growth and income. It has produced an annualised total return of 16.7% over that period, with a return of 29.2% last year and 18.1% in 2023.

The target dividend is 9.25p per annum per sterling share, but the trust can and has paid additional dividends. However, it is also taking advantage of the demand for access to private credit this year and has issued more than 12 million shares. This means it has cash on hand to invest when opportunities come along, leaving it well positioned to capitalise on further demand for credit.

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