Q&A with a 20+ year private credit veteran: 3 trends to watch, how to prepare for downturns, and more
In this blog, we have a Q&A with Stellus Capital Management's Partner and Co-Head Private Credit, Dean D'Angelo. Stellus is one of the longest tenured direct lenders specializing in senior secured loans in the lower middle market.
It's no secret why we chose to provide investors with exposure to Stellus's fund on the Heron platform:
- Their team is a veteran firm with 20+ years of experience focusing on small and mid-sized businesses.
- They've invested over $9.8 billion across industries.
- They are one of the few firms who have successfully navigated multiple market cycles, delivering steady returns for investors.
Let's dive into the Q&A to see what 2025 trends Stellus's management is tracking along with how they successfully navigate downturns.
Heron: What trends are you tracking in 2025 for private credit?
Dean D'Angelo: We're tracking three areas in 2025:
1) Increase in high-quality deal flow.
We're looking forward to a potential material increase in quality deal flow as the M&A market continues to improve. We have plenty of capacity in terms of capital, along with band width from our deal team and back-office.
"For investors, this means more high-quality companies in our portfolio to help deliver returns."
2) Strong demand for private debt from lower and middle market companies.
In our sector of the private credit market (Lower Middle Market which are companies with revenue of about $5 to $50 million), we're seeing a continued retrenchment of commercial banks and a strong demand for debt capital from private credit providers like our firm. We have been witnessing this continued trend for the past 3-5 years. Looking at it another way, this trend has largely played out (banks are no longer material participants) and private credit suppliers like Stellus have filled, and will continue to fill, the void.
"This puts us in a strong position in 2025."
3) Interest rates may flatten leading to potentially higher returns for investors.
Overall, this will not change how we operate or underwrite deals but it should lead to a higher distribution rate and returns for our investors than previously anticipated with lower interest rates. All of our deals are floating rate and tied to short-term funds rates (e.g. 3 month SOFR), so asset level yields have been lower as the fed funds rate has been reduced by about 100 bps over the past year. Markets had been expecting more rate cuts, but we think this has shifted to a flat rate environment for the next year or so.
"This trend could make private credit an even more attractive allocation for investors."
Heron: How does your firm prepare for potential downturns?
Dean D'Angelo: We prepare for a downturn through underwriting and portfolio management that is designed to "always expect a downturn" in the near term.
That means making sure we have downside protection through:
- Careful credit selection and underwriting
- Strong financial structures (i.e. low leverage, top-of-the- balance sheet senior secured loans with robust financial covenant packages and tight documentation)
- Very active portfolio management
Tight financial structures with low leverage allows a lender to have a loud, early voice in the face of underperformance prior to material risk to principal.
Active portfolio management means being prepared to take an active role, as needed, in transaction restructuring, including “taking the keys” if needed to preserve our capital. These are proactive steps we take to ensure the high-quality nature of our portfolio.
Heron: What is Stellus's approach to fund management?
Dean D'Angelo: Our goal is to deliver best-in-class risk adjusted returns with a keen focus on capital preservation. To hit this goal we make sure each aspect of our business – deal origination, credit analysis & execution, portfolio management & valuation and investor communications – work together seamlessly.
With this focus, we have proven over the past 20+ years our ability to meets our goals and generate significant value to our investors through a stable, high yielding income strategy focused on capital preservation.
"Our goal is to deliver best-in-class risk adjusted returns with a keen focus on capital preservation."
Heron: What separates a high-quality fund manager from the rest?
Dean D'Angelo: High quality managers differentiate themselves by having a proven, repeatable investment strategy that delivers strong returns over an extended period of time, particularly through market cycles.
They should be able to show deep expertise in their asset class and will, most often, have worked together as a team for many years. Best-in-class managers will have developed rigorous systems and processes that have been improved/refined over time to reduce business operating risk.
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Disclosure:
The views expressed in this Q&A blog do not necessarily reflect those of Heron, its affiliates, or representatives. Heron does not endorse or guarantee the accuracy or reliability of any statements made.
This content is for informational purposes only and should not be considered financial, investment, or legal advice. Readers should conduct their own research and consult a financial advisor before making any investment decisions. Heron is not liable for any losses or damages resulting from reliance on this information.
