The #1 consideration when choosing a private credit manager
Epsilon’s Joe Millward explains why investors should value a private credit provider’s lived experience to effectively manage risk.
In private lending, experience is crucial, especially when navigating downturns that stress-test a business’s cash flows.
While the growth of private credit has captured attention in recent years, many investors overlook the importance of working with lenders who have weathered market crises.
Joe Millward, Founder of Epsilon Direct Lending, knows firsthand how difficult conditions can get, having lived through the Global Financial Crisis (GFC) and worked in tougher economic environments in the UK and Europe.
His focus isn’t just on returns during favourable conditions, but on how to protect investors when things go wrong. With senior secured loans and robust due diligence processes in place, Epsilon ensures that their portfolio is well-positioned for both growth and resilience during downturns.
In this episode of The Pitch, Joe Millward shares insights into the realities of lending through crises, the protections in place for investors, and why private lenders must be prepared for challenges ahead. He walks through the critical role of risk mitigation and how the experience of navigating tough times can lead to more sustainable, long-term returns.
Edited transcript
In private credit, we focus a lot on opportunities, but what happens when things go wrong? What are the protections for lenders and their investors?
Capital is at risk, Vishal. Investors aren't earning 8, 9, 10, 11, 12% per annum risk-free, so what can go wrong is investors can lose capital. When you're lending, that means that you've had a default, a failure to pay interest or principal, or an insolvency event.
A receiver or an administrator might be appointed to a company, and the recovery rate could be less than the loan’s face value, resulting in a capital loss to investors. Things are relatively smooth right now in Australia, but we’ve been in benign economic conditions for a long time.
Investors can be lulled into a false sense of security, but it's crucial to understand the importance of having real-world experience from living through downturns like the GFC.
How bad can things get based on your experience during the GFC?
Epsilon was founded by three people. I’m from the UK and worked in private credit funds management from 2001 until 2010.
The Epsilon team including Mick Wright-Smith worked at Barclay's in Europe through the GFC, and Paul Nagy was in restructuring advisory. We bring complementary skills and direct experience of how bad things can get.
In Europe and the US, things got pretty bad. Many private credit lenders experienced significant losses. When you wake up to find that multiple loans are underperforming, it’s not a fun experience.
What I encourage investors to think about is having access to an investment committee with real experience navigating those situations.
What protections do you have in place when a position starts underperforming?
Our loans are senior secured, which means if a company defaults, we’re the first creditors to get paid back. We ensure that the value of the collateral, usually the going concern value of the company, exceeds the loan amount.
We also implement safety mechanisms that allow us to take action before the company's value goes below the loan value.
All our loans have financial covenants that allow us to take enforcement action if there's a breach. This gives us leverage to negotiate with shareholders and C-suite executives, ensuring the value of our collateral remains protected.
How does Epsilon mitigate risks in downturns?
We believe long-term, sustainable returns are defined by how well you perform during downturns. It’s easy to make consistent returns in good times when companies are profitable and can meet their interest payments.
But when companies underperform or a recession hits, that’s when private lenders can face capital losses.
At Epsilon, we focus on return of capital, not just return on capital. We encourage investors to assess the experience of the fund managers and investment committee members in managing through real recessions and downturns, so their recovery methodologies are proven in real-world scenarios.
What red flags do you look for when evaluating a borrower, regardless of the economic conditions?
I look for businesses that can clearly articulate how they generate free cash flow. If the leadership team can’t explain that simply, something’s off.
Transparency is also critical for us. We require full access to financials, operations, staff, and sites. We meet with various management layers to assess the culture and understand the company’s reason for existence.
We stress-test these factors to ensure we’re lending to stable, growing companies with clear, sustainable business models.
Can you give us an example of companies you've worked with during downturns?
We’ve had some tough situations. During the GFC, we worked with a luxury yacht manufacturer that faced major losses due to order cancellations and fraud. We had to take recovery action, including seizing yachts.
There was another case with a large manufacturer that underperformed severely. The recovery process was emotionally charged, with the founder visibly distressed. These experiences aren’t easy, but they’re part of our role to protect investor capital.
At Epsilon, we believe that our experience in managing through such challenges gives us a strong edge when another downturn inevitably happens.
What was the end outcome of these tough situations?
Through the GFC, we did experience some losses and impairments, but we also had successes. We turned around some companies, and we bought bank loans at deep discounts as banks became forced sellers. This allowed us to make significant capital gains on investor capital.
Ultimately, all our investors’ capital was repaid at par, which highlights the resilience and proven track record of our approach.
Never miss an update
Enjoy this wire? Hit the ‘like’ button to let us know.
Stay up to date with my current content by
following me below and you’ll be notified every time I post a wire
Vishal has over 15 years' experience in financial journalism and has a particular interest in property, exchange-traded funds (ETFs), investing strategy and financial history.
........
Epsilon Direct Lending disclaimer
The information contained in this video has been prepared by Epsilon Direct Lending Pty Ltd (ACN 636 861 464) (EDL, Manager or Epsilon). Epsilon is a corporate authorised representative (number 001281871) of Epsilon Investment Management Pty Ltd (ACN 680 224 284) the holder of AFSL number 564491 and is given to only 'wholesale clients' (as defined in the Corporations Act 2001 (Cth)). By receiving or viewing this video, you are representing that you are a ‘wholesale client’ and that you will keep this video and the information therein confidential including not to provide it to retail clients. No financial product advice is provided in this video and nothing in it should be taken to constitute a recommendation or statement of opinion that is intended to influence a person or persons in making a financial product decision. Any advice given by EDL, its associates or related parties in connection with this video is general advice only.
Purpose
This information in this video is intended to provide a general outline in relation to the Epsilon Direct Lending Fund (EDL Fund) and the Epsilon Direct Lending Senior Loan Fund (SLF) (collectively “Funds”) only and is not intended to be a definitive statement on the subject matter. This video is not intended to be relied upon by recipients given the contingent nature of the content matter. The information in this video does not take into account your objectives, financial situation or needs.
No verification or due diligence exercise of the information contained in this video has been undertaken. This video contains a summary of the proposed investment terms of the Funds and certain other documents. Prospective investors should not construe the contents of this video as tax, financial, legal or investment advice. This video does not purport to be complete, accurate or to contain all information which its recipients may require to make an informed assessment of whether to invest in the Funds. Before acting on the information contained in this video, or making a decision to invest in the Funds, potential investors should make their own enquiries and seek professional advice (including financial product advice from an independent person licensed by the Australian Securities and Investments Commission (ASIC) to give such advice) as to the investment in the Funds and its appropriateness in light of their own circumstances. This video does not constitute an offer for the issue, or sale, of any securities. Neither this video nor the information contained in it or any other information supplied forms the basis of any contract or any legal obligation.
Contents
Forward-looking information in this video – which can be identified by the use of forward-looking terminology such as “may,” “can,” “will,” “would,” “should,” “seek,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” “target,” “believe,” or the negatives thereof or other variations thereon or comparable terminology including statements of intention, projections and expectations of investment opportunities and rates of return – is provided as a general guide only and should not be relied upon as an indication of the future performance of any investments managed or arranged by EDL. No representation is made as to future performance or volatility of any investments managed or arranged by EDL. In particular, there is no guarantee that any investment program outlined in this video may be successful. Persons should rely solely upon their own investigations in respect of the subject matter discussed in this video and carefully consider the risks before deciding to invest.
Any past performance information given or financial models of prospective returns in this video is given for illustrative purposes only and should not be relied upon as (and is not) an indication of future performance.
Any comparative index shown is provided solely for informational purposes as an indication of the performance of various capital markets or alternative investment strategies in general. Comparative indices are not benchmarks, nor should one conclude that the investment strategy will or will not be correlated with an index. Comparisons of alternative investment strategies to indices are subject to material inherent limitations. In particular, the universe from which the components of an alternative investment strategy are selected includes a significant element of “survivor bias”. Accordingly, indexation of alternative investment strategies tends to overstate the beneficial aspects of these strategies while obscuring certain risks, including the “risk of ruin.”
This video may contain hypothetical performance results, which have inherent limitations. Further information about assumptions made in deriving these results may also be found throughout this video. No representation is being made that the Fund’s portfolio will or is likely to achieve results like those shown. In fact, there can be significant differences between hypothetical and actual results. One deficiency with any hypothetical construction is the benefit of hindsight. Whilst due care has been given to minimize the effect of hindsight upon the results, it cannot be eliminated. In addition, hypothetical investing cannot consider all risks associated with being able to faithfully execute the investment strategy as and when the model indicates. There are other factors related to the proposed investment strategy that cannot be fully accounted for in the preparation of hypothetical performance results and potential investors should be way of placing undue reliance on the hypothetical results.
Fees and costs stated in this video are exclusive of any applicable GST. All dollar amounts are in respect of Australian dollars (unless specified otherwise). EDL gives no recommendations or opinions about whether or not an investment is suitable for you. Further, EDL gives no express or implied representation or warranty as to the accuracy or completeness of the information, opinions and conclusions contained in this video nor the value of any investment that it arranges or manages. In preparing these materials, EDL has relied upon and assumed, without independent verification, the accuracy and completeness of all information available to EDL. Investors should consult their financial adviser in relation to any material within this document.
Exclusion of liability
EDL, Epsilon Direct Lending Holdings Pty Ltd and their founders, directors, employees and agents (Group) do not accept liability for any loss or damage suffered or incurred by the recipient or any other person or entity however caused (including negligence) relating in any way to this video including, without limitation, the information contained in it, any errors or omissions however caused, or the recipient, or any other person or entity, placing any reliance on this video, its accuracy, completeness, currency or reliability. The Group does not accept any responsibility arising in any way for any errors in or omission from this video or for any lack of accuracy, completeness, currency or reliability of this video. The Group does not accept any responsibility to inform the recipient of any matter arising or coming to their notice that may affect any matter referred to in this video. The Group does not authorise any person to make any statements or representations that are not expressly contained in or contemplated by this video. Any liability of and member of the Group to the recipient or to any other person or entity arising out of this video is, to the maximum extent permitted by law, expressly disclaimed and excluded.
Livewire disclaimer
Livewire gives readers access to information and educational content provided by financial services professionals and companies ("Livewire Contributors"). Livewire does not operate under an Australian financial services licence and relies on the exemption available under section 911A(2)(eb) of the Corporations Act 2001 (Cth) in respect of any advice given. Any advice on this site is general in nature and does not take into consideration your objectives, financial situation or needs. Before making a decision please consider these and any relevant Product Disclosure Statement. Livewire has commercial relationships with some Livewire Contributors.
3 topics
Vishal has over 15 years' experience in financial journalism and has a particular interest in property, exchange-traded funds (ETFs), investing strategy and financial history.
Expertise
Vishal has over 15 years' experience in financial journalism and has a particular interest in property, exchange-traded funds (ETFs), investing strategy and financial history.
Expertise
Comments
Comments
Sign In or Join Free to comment
most popular
Equities
Buy Hold Sell: 2 standout ASX names for FY26
Livewire Markets
Equities
Buy Hold Sell: The best and worst performers of FY25
Livewire Markets