News
According to a newly released research report by the global ratings agency KBRA, findings show that “KBRA-rated Private Equity and Private Credit firms demonstrate resilience through market challenges.” Furthermore, KBRA concludes that — amid ongoing trade tensions, tariffs, market volatility, and a possible economic slowdown — alternative asset managers, particularly those geared toward PE and PC, are more resilient on average than other types of financial institutions.
This should be good music to the ears of institutional investors carefully weighing private market asset allocation decisions and commitments in 2025 amidst continued, unprecedented market uncertainty. While the impact of inflation, credit defaults, capital markets volatility, cybersecurity threats and geopolitical conflicts have spread through the deal-making environment, private capital firms are still expected to generate attractive returns for their investors, finds KBRA.
To be certain, there isn't one established “road map” private capital firms can pull out of the sleeve to successfully transverse choppy market environments. Naturally, chief investment officers and other decision makers at pension plans and other institutional allocators will want to better understand how General Partners think about deploying capital in a heightened risk environment. Moreover, we believe it is of critical importance to examine what investment philosophy underpins General Partners’ activities.
What is their DNA? Have they been shifting their investment approach opportunistically? How committed is the firm to their proclaimed investment philosophy?
In our experience, guiding principles developed over decades of investment experience, coupled with discipline in execution and prudent flexibility, have proven key to delivering consistently positive results, both during good and more challenging business cycles.
For the potential benefit of investors and institutional allocators seeking to tap first-hand experience in navigating the wide-ranging market risks as well as insight into investment considerations and market dynamics, we have outlined below 11 guiding principles that have bolstered our firm’s investment philosophy:
Play offense and defense during times of dislocation
During times of market dislocation, there are often opportunities to invest in high-quality businesses — including at attractive valuations — and help portfolio companies grow through add-on acquisitions and gain market share.
Maintain capital deployment discipline
In short, we are believers that volatility rewards preparation. So, too, does the deployment of capital at a disciplined pace which allows us to act decisively when others retreat from deal-making. This positioning has ensured we remain buyers and not bystanders when the compelling investment opportunities are sourced.
Favor asset-light businesses with defensible moats
While uncertainty remains about the full impact of tariffs or inflation on US businesses, it is worth considering an investment focus that prioritizes the value of capital-efficient, scalable businesses able to adapt [quickly] to evolving market conditions and that can benefit from durable competitive advantages (e.g., analytics capabilities or regulatory complexity). Likewise, we think it’s prudent to avoid investing in capital-intensive business models such as manufacturing or other businesses that require large capital expenditures.
Emphasize low leverage
The importance of being deliberately conservative when approaching a company's capital structure is an important consideration when investing in a business, particularly during challenging business cycles. While the use leverage can support value creation amid a favorable capital market environment, the borrowing of excessive debt may make a company more vulnerable to changes in the macroeconomic environment, such as inflation or interruption in a company's supply chain. The ability to prioritize flexibility as a means to preserve cash flow and support sustained growth in challenging economic environments is also important for borrowers to consider.
Capital structure diversification and control
The ability to invest across the entire capital stack — including senior and junior debt, preferred equity, and common equity—provides critical flexibility for both sponsor and company management / entrepreneurs – in our case, of growing businesses in the lower middle market. As the sole institutional investor in many cases, we work to streamline decision-making processes and reduce execution risk. This control enables close alignment with management and allows us to respond rapidly when market dynamics shift.
Prioritize downside protection
A focus on capital preservation when making a new investment, particularly during an uncertain business cycle, is of strategic importance when structuring transactions and to protect against downside risk. This includes measures such as incorporating the right covenants and governance voting rights, ensuring optimal alignment with a portfolio company’s management team, along with maintaining structural priority in a portfolio company’s capital stack. Preserving principal in volatile times becomes as important as generating upside from an investment.
Evaluate and invest behind secular trends
In an evolving, tech-enabled business landscape it is crucial that investments are based on long-term growth drivers. For example, we deliberately target sectors [such as education, tech-enabled services and healthcare] that are undergoing lasting transformation. These themes will provide the structural tailwinds to support continued growth, while generating sustained and compounded return performance.
Embrace variable cost structures
A flexible cost base provides powerful protection during downturns. Having navigated various market cycles, we favor businesses where costs naturally scale with revenue helping to preserve margins, manage liquidity and enable faster recovery from a challenging business cycle. Bottom line, operational elasticity forms a cornerstone of long-term resilience.
Bring a long-term ownership mindset
With the mindset of a long-term partner, not a short-term sponsor, it follows that firms can make strategic decisions that support continued business health and value creation over extended periods. We underwrite for operational durability and compounding value as opposed to trying to realize a specific target exit multiple.
Build diversified portfolios
Intentional portfolio diversification — across sectors, end markets and business models — reduces correlation risk and enhances consistency, even when certain market segments face pressure. Diversification among our portfolio companies represents a structural advantage, not an afterthought.
Over the past 20 years, VSS Structured Capital funds have built a rigorous, disciplined approach to sourcing, diligence, structuring flexible capital solutions, and portfolio management. By institutionalizing the lessons we’ve learned — the cornerstone of our investment thesis, we have compounded not just capital, but knowledge that has benefited investors as evidenced by our ability to consistently deliver for them.