League of Their Own

At the start of 2017 spring training, the NY Yankees had a undrafted prospect on their roster named Ruth. Not the Babe, of course, though the coincidence has been noted. “It’s kind of cool to have the same last name,” said Eric Ruth, a 26-year-old pitcher.

Interestingly other than the Bambino there have been no Ruths in major league baseball. 149 Smiths, 110 Johnsons, 97 Jones, 0 Schwimmers. Alas, having the Sultan of Swat’s surname doesn’t insure success. Last week Mr. Ruth was sent back down to the minors.

There’s a cruel reality to leveraged lending as well. Calling yourself a senior debt provider doesn’t mean the assets you book carry the same risk/reward as cash-flow loans managed by top middle market firms who support private equity. As a pitcher’s ERA is a fair indicator of his capability, so is the yield parameter of an asset manager.

For example, middle market senior debt now fetches about a 6.5% all-in yield. It’s generally been in the 6-7% range for almost four years. When we are asked about asset managers generating 8 – 10% unlevered returns, we infer these investments by definition must be higher risk that those with lower returns. But without analyzing every single loan in that managers’ portfolio, it’s hard to demonstrate to the uninitiated.