CVC Income and Growth: a private credit investment with a high yield

An opportunity for individual investors to participate in the rapidly expanding private credit market is provided by CVC Income & Growth

Since private credit is still a specialized investment, many of you who are reading this article will be wondering what it is right away. Private credit, which is a highly specialized field that is now an essential component of financial markets, is simply defined as lending by non-bank organizations like hedge funds or private equity firms.

According to data from a recent Goldman Sachs report, private credit under management has increased from nearly nothing in 15 years to about £21 trillion in assets worldwide. Private-credit lenders filled the void left by banks in the years following the financial crisis, which is why this has occurred.

Nimble lenders.

Because private credit companies are frequently more agile and able to provide borrowers with greater flexibility, they are frequently chosen over banks.

For instance, a small, heavily indebted business in a non-mainstream sector might not be able to raise capital on the public markets because of costs or market conditions, and a bank might deny it a loan because of its risky balance sheet. Alternatively, a private equity firm with a private credit arm may be able to provide financing in a matter of days on terms that are advantageous to both the lender and the borrower.

Direct lending, sometimes referred to as private credit, can be hazardous. Goldman Sachs states that "since direct lending is a type of leveraged financing, it is reasonable to anticipate an increase in losses and defaults when the economy is under stress or faces the possibility of a recession." Even so, the majority of direct lending is senior lending, which is defined as "the direct-lending market's more cautious sub-investment grade loans and their current assets of about 232 million."

One that yields a lot.

Consider the private equity behemoth CVC Income & Growth (LSE: CVCG), which is overseen by CVC Credit Partners. With assets of about 232 million, this trust makes investments in high-yielding sub-investment grade loans in the direct lending market.

Over 80% of CVCG's loans have variable interest rates, meaning that the interest rate they pay is reset every three months. By the end of March, the portfolio's loans were trading at a weighted average price of 92.1, up from 12.7 percent at the end of 2024. The yield to maturity was 12.9 percent (hedged into sterling), with 100 being at par or the issue price.

CVCG mostly lends to businesses owned by private equity, frequently to finance acquisitions. The management team doesn't spend much time considering the positive because it's not a major concern of theirs. "We simply do a downside stress test to determine the amount of headroom we have to pay off our debts," Pieter Staelens, portfolio manager, told Portfolio Advisor last year. "We prefer to invest in uninteresting businesses that make money.

Outperforming the peer group.

There are two components to the portfolio: the opportunistic side, where managers apply capital more actively in distressed opportunities, and the income-producing side. This helps the trust outperform its competitors and creates income and capital growth.

CVCG has been the only trust in its industry to increase net asset value over the last five years, excluding dividends paid, producing both income and capital growth. Over that time, it has generated an annualized total return of 16 percent, with returns of 29 percent last year and 18 percent in 2023.

Although the trust is able to and has paid out more dividends, the target dividend is 9p per sterling share annually. Nonetheless, it has issued over 12 million shares this year and is also capitalizing on the need for private credit access. This puts it in a strong position to take advantage of future credit demand because it has money on hand to invest when opportunities arise.