ONE CONSEQUENCE OF THE GLOBAL CREDIT AND BANKING crisis is an ongoing lack of available capital for so-called middle-market companies. Big banks don’t lend to smaller businesses as freely as they once did, and firms like CIT Group have followed suit. Meanwhile, several hedge funds have pulled back or moved into other markets. “The hedge fund community generally was once a serious provider of private credit to these companies,” says Robert Ladd, CIO of Stellus Capital Management.

This retreat creates a huge opportunity for firms like Ladd’s. Houston-based Stellus focuses on lending to companies with annual earnings before interest, taxes, depreciation and amortization of $5 million to $50 million. The firm has two main investment strategies: a middle-market direct lending business and private equity financing for the energy sector. Stellus invests across the corporate capital structure, through first- and second-lien loans and mezzanine and convertible debt as well as preferred and common equity.

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