Art Penn Quoted in Nikkei Article

The U.S. Small and Medium-sized Lending Markets Are Rapidly Expanding: An interview with Art Penn, Founder of Pennant Park, an Investment Company Specializing in U.S. SME Financing

By Momoe Ban – Nikkei Newspaper: “World Plus” Edition

Momoe Ban and Nikkei Asian Review conducted a Q&A with PennantPark Founder and Managing Partner Art Penn, delving into the expansion of investment opportunities and strategies for SME financing. Specifically, Art provided his perspective on Japanese institutional investors’ expansion into SME investments, citing that most are seeking out high-yield investment products. “Our financing is typically around 5.5 to 6% of the London Interbank Transaction Rate (LIBOR) plus 6 to 8% per annum,” he said. “In addition, our typical lending credit (LTV, the ratio of outstanding loans to collateral value) is around 50%, which is a relatively safe loan, and is suitable for Japanese institutional investors. We have been lending to SMEs over the past 13 years and we pride ourselves on their ability to generate stable returns during financial crises and recessions.”


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The investment market for loans to small and medium sized enterprises (SMEs) is expanding rapidly in the U.S. financial market. Institutional investors have realized these loans provide creditworthy investments with high interest rates. As a result, capital is flowing in. Currently, in the U.S., SMEs have $800 billion in outstanding loans.

We recently spoke with Art Penn, founder of PennantPark, a U.S.-based firm specializing in direct lending to SMEs, which received investments from Japanese institutional investors, about its strategy and investment opportunities.

What are the characteristics of loans to SMEs?

“Although the loan market for SME in the United States is quite large, commercial banks are not involved. Investors like us are filling the gap. We support the growth of the enterprises and are their partners. Our primary focus is secured first lien loans, limited to the most credit worthy parts of the capital structure. That safeguard gives us ample cushion in our investment positions.”

Why are Japanese institutional investors attracted to this investment?

“Japanese institutional investors with low domestic interest rates are looking for higher yielding investment products. Our loans typically yield around 5.5-6% above the London Interbank Transaction Rate (LIBOR) and 6-8% annually. Also, our typical loan to value (the ratio of the outstanding loan as a percentage of the capital structure) is around 50%, which is a relatively safe loan that is in line with the Japanese institutional investors’ target.”

“We have been lending to SMEs over the past 13 years and we are proud to be recognized by investors for our ability to generate stable returns in times of financial crisis and recession.”

What are the criteria for the company selection to avoid borrower default?

“Currently, we are lending to over 140 companies in 25 industries. We are focusing on companies that are expanding their businesses, while at the same time they have a steady cash flow and can repay debt. Annual cash flow is typically between $20 million and $40 million and corporate value is between $150 million and $500 million. We avoid startups and companies with no cash flow. As for the industries we like, they include healthcare, business services, and software. We avoid manufacturing companies with high capital investments. We also don’t lend to economically-sensitive industries such as retail, energy, paper, coal mining, chemical industries, etc. ”

What are the factors that will lead to a tailwind and a headwind in future lending activities?

“Automobiles and other manufacturing areas are weak due to the U.S.-China trade dispute. But in general, the strength of the economy has been a tailwind for lending to SMEs. There are no signs of a recession so far; however, we are lending only to those companies with businesses that do not deteriorate during a downturn. ”

“As with all industries, disruptions to existing industries are headwinds: Amazon threatens the retail sector, Airbnb the hotels, and Uber to taxis. We need to quickly identify companies that will be a disruptor in the near future. Furthermore, geopolitical risks, such as the situation in the Middle East and the new coronavirus from China, can also be headwinds. “