With the miles between equity rounds stretching on like a dark and winding road to nowhere, private credit has become a lifeline for founders running out of gas.
Emerging manager Star Strong Capital—nearing a five-year standout track record on its $90 million direct-lending separately managed account—is betting the time is right to hit the capital-raising trail for its first commingled fund.
CEO and CIO Spring Hollis has set a $250 million fundraising target for Star Strong’s flagship direct lending vehicle, according to a person familiar with the matter and marketing materials reviewed by PitchBook.
Hollis, a former credit-focused managing director at Deutsche Bank, where she spent nine years, operates in the lower middle market, a universe of potential borrowers bookended by companies doing $5 million to $50 million in revenue.
The vehicle, Star Strong Income Partners, is a strategy extension of the firm’s existing SMA. The idea is to cut loans to early- to mid-stage, maturing startups, as well as later-stage companies, with ample cash flows and adequate balance sheets—operators that typically chase seven- to eight-figure loans.
Nine-figure financings are the domain of private debt behemoths. That’s where Goldman Sachs Alternatives raised a casual $20 billion and Ares Management‘s senior lending fund closed on $15.3 billion. And those voluminous loans are where Star Strong won’t spend a single dollar.
Hollis, who confirmed the launch to PitchBook exclusively, said her US-centered strategy is sector-agnostic. Her due diligence domain mostly consists of medium-sized companies with recurring cash flows and healthy loan-to-value ratios, founders who can pony up proper collateral.
“The vast majority of private debt capital,” she said, “is focused on larger companies … We’re working on no shortage of eligible companies, under our definition of what the lower middle market is.”
The segment has worked for Star Strong so far.
The Connecticut-based direct lender’s SMA gained 14.01% in 2021, 15.97% in 2022, 13.87% in 2023, and 4.83% this year through May, according to investor materials.
In executing 148 deals from its January 2021 launch through May of this year, Star Strong didn’t record one down month.
Hollis, also an alum of debt shop Park Cities Asset Management, declined to comment on fundraising or performance, citing private placement rules.
Equity deal duration dragging out
Through June 30, late-stage VC-backed firms were showing a median of two years between rounds, according to PitchBook’s Q2 2024 US VC Valuations Report—rising year-over-year and up from 1.6 years a decade prior.
Lacking suitors with dry deal powder, more startups have taken on debt.
It wouldn’t be worth the effort for a Goldman Sachs or Ares to do debt deals with companies under nine figures of revenue. But Star Strong will, and the firm thinks it’s established a competitive advantage in operating at those loan levels.
Star Strong, according to its marketing, handles loans of $2 million to $20 million apiece, typically keeping open 50 positions with an average loan term of 30 months.
The firm’s capital is funneled into two main categories.
The first, direct lending, consists of a book of direct, secured loans floated to EBITDA-positive startups. A good chunk has been earmarked to stable, bootstrapped operators.
The second, specialty finance, consists of asset-based financings tied to smaller companies. Truly early-stage operators would almost always lack Star Strong’s prerequisite cash flow requirements to be deemed creditworthy.
So, specialty lines of credit come into play. They’re backed by real assets, not their balance sheets—an AI startup, for example, could pledge its GPU rigs as collateral on a loan.
It can be more expedient to finance a bootstrapped company, considering leadership has no obligation to consult a venture capitalist or private equity fund manager before coming to terms.
LPs often gripe about liquidity in private credit. Would-be Star Strong investors aren’t likely to complain, though, because its LP-friendly lockup. Many private credit funds impose lockups of at least half a decade.
Star Strong’s lockup is just one year, with quarterly redemptions thereafter on minimum investments of $250,000. LPs will pay a 2% management fee and cough up 20% of gains.
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