Beata Kirr is chief impact officer and investment committee member at The Copia Group, a diverse-owned investment advisor that provides capital solutions to privately held, lower middle market companies. Beata is a member of the five-person founding team building a social impact private alternatives firm, where she is responsible for delivering a distinctive impact investing platform and establishing The Copia Group as a thought leader in private markets and investments from an impact lens.

Russ Alan Prince: What are the responsibilities of a chief impact officer? 

Beata Kirr: I believe that, soon enough, companies and investors will evolve away from the idea that ESG—environmental, social and governance—is a separate undertaking and, rather, look to incorporate this assessment within a traditional risk/reward framework. In that capacity, a chief impact officer will be critical on the executive leadership team to consider the positive and negative impacts of core decision-making. I am focused on four primary areas of responsibility:

• Establishing an impact framework and repeatable impact measurement process for our investments.

• Acting as a voting member of our Investment Committee, assessing our potential investments through an impact lens.

• Staying current on racial and gender equity trends related to the wealth gap, what defines a good job and a good employer, with an eye towards establishing unique thought leadership.

• Engagement with our impact community (broadly defined as current and potential investors, but also other impact investors and our physical community through our volunteering and philanthropic engagement efforts).

Prince: Why is private credit and direct lending to lower middle market businesses a highly compelling asset class for investors?

Kirr: The “private credit” moniker includes a variety of sub-asset classes, each with unique characteristics. The Copia Group focuses specifically on direct lending, which involves originating, underwriting and structuring customized lending facilities. We define our market as the lower middle market—EBITDA >$1mm; Revenue $5mm–$150mm—for privately held U.S.-based businesses. 

Our five-year return outlook for directly originated senior loans as of 1Q 2024 remains ~10 to 13% unleveraged net, with subordinated debt, hybrid capital and mezzanine debt scaling up to 20%+. These returns compare favorably to long-term return outlooks for public equities, around high single digits, and core bonds around mid-single digits. Levered loans and high yield are hovering in the high single digits, but direct lending has comfortably delivered a 200bps premium to the liquid levered loan market consistently.

From a risk perspective, as these loans are directly originated and not publicly traded, they are not subject to the same pressures as the liquid high-yield market, with a history of substantial retail investor outflows. Additionally, the lender can work with the borrower on strong covenants and terms to ensure cash flow is paid, even in the case of a technical default.

It may take longer to get, but the history of the asset class has been highly protective relative to equity and even bond market drawdowns. In the Great Financial Crisis, direct lending was down 7% vs. leveraged loans -30%. That downside protection held up similarly well in the COVID crisis, with direct lending – 5% and leveraged loans down 13%. (Source: Cliffwater Direct Lending Index and Morningstar LSTA US Leveraged Loan Index)

As a result of the return and risk characteristics cited above, direct lending has established itself as an asset class with low correlations versus the traditional markets and, therefore, can be a unique diversifier relative to return-seeking and risk-mitigating asset classes like stocks and bonds.

From a tax perspective, returns are mostly characterized as income, so high-net-worth investors and family offices often prefer to deploy an allocation from tax-sheltered vehicles. However, the after-tax return characteristics with today’s return outlook remain compelling, even when compared to equities’ more favorable capital gains treatment. 

When assessing the key drivers of return, risk, correlation, and taxability, the direct lending proposal is an attractive one today, and a strong reason why this asset class has grown from a niche $400 million in 2010 to nearly $1.3 trillion today and projected by Preqin to become a $2 trillion asset class by 2027. 

Prince: Why are these businesses turning to private credit as a funding source?

Kirr: According to Capital IQ, there are around 100,000 lower middle market businesses in the U.S. These businesses represent an important employment, economic, and innovation source. Historically, they have been banked by the regional banking sector, but post the Global Financial Crisis, and after the Silicon Valley Bank crisis, banks have pulled in their desire to lend risk capital. This change opened a tremendous opportunity for fund managers to fill the void. According to McKinsey’s Global Private Market Review, banks accounted for nearly 70% of sponsored middle market financings in 2013, which in 2022 was down to 11%. 

Prince: You emphasize a shift to investors looking for more breadth in the social impact investing opportunity set. Could you elaborate on why you believe this shift is important and how The Copia Group is implementing it?

Kirr: ESG-influenced investing has gained substantial traction, with many investors and businesses acknowledging the importance of incorporating ethical and sustainable practices into their strategies. The environmental focus has attracted substantial focus and assets, especially post the historic IRA legislation, which encouraged substantial new spending in the U.S. If you wished to specifically invest in the social dimension, the options have primarily been focused on affordable housing development, CDFI lending and micro-finance. 

The Copia Group is focused on shrinking the wealth gap by being a provider of mission-critical capital for growth, while preserving business equity, by primarily lending to ethnically and gender diverse-owned/led lower middle market privately held companies. Our loans can make a difference to a business’s growth trajectory and profits, ultimately leading to wealth creation for the owners and employees, along with job creation.

Business equity is a primary driver of wealth in the U.S, yet, according to the U.S. Census Bureau and the Federal Reserve’s most recent Consumer Finance Survey, the Black population represents 14% of households, yet only 3% of business ownership and 2% of wealth.

Also, the rise of union activism highlights a growing sense of dissatisfaction among employees in various industries, especially hourly workers. We believe that companies that strike the right balance here will retain their employees at a higher rate, and ultimately, continue to drive their business success. Our belief is well supported through numerous studies, but perhaps the most powerful, the JUST Capital Workers Leaders Index, which tracks public company’s commitments to prioritizing employees as a key stakeholder by measuring KPIs such as CEO to worker pay ratio, benefits, disclosure of diversity data, internal promotion rate, and turnover as just some examples. Their Worker Leaders Index has outperformed the Russell 1000 Equal Weighted Index by 14% as long as they’ve tracked it from 12/31/21 to 3/31/24.

Russ Alan Prince is a strategist for family offices and the ultra-wealthy. He has co-authored 70 books in the field, including Making Smart Decisions: How Ultra-Wealthy Families Get Superior Wealth Planning Results.