Navigating every market cycle with Fidelity’s private credit

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With deep relationships and the power of its platform, Fidelity positions itself as an all-weather provider of private credit across business life cyclesivate credit across business life cycles

IN THE past few years, businesses looking to finance new ventures or buyouts have often found themselves dissatisfied with traditional bank terms. Once seen as a niche product, private credit has quietly ballooned into a $1.7 trillion industryi that’s risen to prominence as a key alternative to banks. Since the 2008 financial crisis, and more recently the regional banking crises, this sector has become the go-to for businesses in need of flexible financing, offering capital to everything from real estate developers to tech startups. With pension funds, sovereign wealth funds, and other institutional investors now pouring capital into private credit, it’s clear this isn’t a passing trend – it’s a permanent fixture in capital markets.

Fidelity Canada Institutional serves a diversified client base across all major asset classes, focusing on corporate and public defined benefit and defined contribution pension plans, endowments and foundations, insurance companies, MEPPS, and financial institutions. Built on over 50 years of serving the needs of institutional investors worldwide, we offer active and risk-controlled disciplines, including Canadian, US, international and global equity, fixed-income, asset allocation, real estate, and custom solutions.

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“A covenant default doesn’t mean the sky is falling – it means there’s an opportunity to address issues early, before they become more severe. For our industry, stress is actually good for the best of the best”

David Gaito, Fidelity Investments

Fidelity Investments’ direct lending platform is carving out its own space in this booming industry, and Gaito and Icuss are doing things differently from their peers. Rather than chasing AUM growth or rushing to scale quickly, they’re focused on building a viable and lasting business – deal by deal. Fidelity’s approach? Steady, disciplined, and always asking the tough question: what could go wrong? It’s a strategy rooted in quality over quantity, perfectly aligned with Fidelity’s long-term investment philosophy of stability and strength.

“Private credit’s a bit of a backwards investment strategy – you figure out how you might lose money before you even think about getting your principal plus a little interest,” says Gaito. “There is no upside like in equity, so you’re always asking: what could go wrong?” This approach defines the firm’s strategy in direct lending, and the cautious mindset reflects what’s required to thrive in private credit. It’s a philosophy that Fidelity Investments has mastered. The firm’s strategy is rooted in understanding risk, building lasting relationships, and staying consistent through market cycles – three pillars that make Fidelity Investments well suited for the private credit market.

Fidelity has been a dominant force in the investment management world for over 75 years. “We think in decades, not days,” Gaito explains. Unlike many companies that dash haphazardly to grow AUM or scale through acquisitions, Fidelity’s approach is different: it doesn’t buy; it builds. Gaito points out that by developing its direct lending team internally, Fidelity Investments maintains control over its culture and operational standards. Each member of the direct lending team underwent a rigorous hiring process and was selected for their depth of knowledge and unique perspectives and expertise. As Icuss notes, Fidelity has been in high-income credit for over 45 years. “We were one of the first to launch a high-yield fund back in 1977 and the first to roll out a broadly syndicated loan fund in 2000. Today, we’re the largest player in the space, with over US$90 billion in public and liquid high-income credit.”ii

Private credit’s rise to prominence isn’t just about capital – it’s about trust. Borrowers, especially those in the middle market, look for lenders who can move quickly, understand their business, and most importantly, provide more than just funding. A strong lender in this space brings deep relationships with private-equity sponsors and industry know-how to structure loans that work for all parties involved. The most successful companies take what’s known as the “middle-market approach,” where direct relationships with private-equity sponsors enable the lender to be a true partner. These relationships are forged not just over good deals but through difficult ones – when things don’t go as planned, and the lender has to step in, restructure, and manage risk. As Icuss points out, “It’s not just about financing; it’s about having the resources, expertise, and relationships to make the right calls. And when you can get those things right, you’re positioned to lead.” It’s these relationships that provide the strongest competitive edge, allowing firms to source the best deals and maintain selectivity, even in a crowded market. In contrast, the upper mid-market can often be more transactional, driven by how much a lender can hold or how aggressive they can be on rates and structure. Gaito notes that while those markets have their place, Fidelity Investments prefers the core and lower mid-market where relationships take precedence.

“What makes [the private credit] asset class so appealing is its predictability. You don’t have to worry about wild market swings, but you can still capture returns that are often as good as, if not better than, equities”

Therese Icuss, Fidelity Investments

Private credit is a relationship-driven business, but it’s also data-driven. Behind the scenes, players in this space rely heavily on their research teams, accessing insights that go far beyond traditional due diligence. “The best credit managers aren’t just relying on their gut – they’re relying on deep research,” says Icuss. “In our case, we have nearly 400 analysts across every sector imaginable.iii That’s what gives us the confidence to make the right calls, time and time again.” Gaito emphasizes the importance of this deep dive into each potential investment: “It’s easy to say yes to the obvious opportunities and no to the clear risks, but the real skill is in that middle 60 percent. That’s where the research makes the difference.” But research alone isn’t enough. Scale also plays a major role in the success of private credit firms. The largest players have built institutional infrastructures that provide them with the back-office strength to operate smoothly. When dealing with complex deals, the last thing you want is to be bogged down by operational issues. Having a strong infrastructure means Fidelity Investments can focus on what matters – making smart investments and protecting clients’ capital. “The three keys in direct lending,” Icuss explains, “are having a unique sourcing capability, a consistent and independent underwriting process, and an active portfolio management process.” For Fidelity, sourcing is about relationships and reputation. The firm is a lender, not an allocator, highlighting the importance of being selective and building deep relationships. Fidelity doesn’t pigeonhole itself into being just a lower mid-market or an upper mid-market firm. It starts with who the owner is, underwrites to their strategy, and positions Fidelity as a partner throughout their business life cycle. This adaptability allows Fidelity to finance smaller companies as they grow, providing solutions that many other firms cannot match. “We can finance a business at $5 million and grow with them to $100 million,” Icuss says. “Very few firms can offer that, and the power of being part of a platform like Fidelity, one of the largest buyers of liquid loans, really differentiates us.”

Building for the long haul

Research and scale

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Published November 4, 2024

Laying the foundation: Expertise and relationships

Not to be cavalier, but stress is good

There are different ways to build a business. As Icuss says, you can be an allocator, buy the market, and grow very quickly. You can take a relationship approach, call on 10 to 15 sponsors, and do all their deals. But you can also take a credit-by-credit approach, looking at each opportunity to make sure it stands on its own. Fidelity Investments embraces the latter, the old-school lending model, and pairs it with a platform that supports its disciplined approach. Fidelity’s focus isn’t on growing AUM at breakneck speed. Icuss emphasizes, “We are here to build a business that’s bigger than us, that’s going to last for decades, and that’s evident in everything we do.”

protects both investors and borrowers. “We believe in real financial covenants,” Gaito says. “A covenant default doesn’t mean the sky is falling – it means there’s an opportunity to address issues early, before they become more severe. For our industry, stress is actually good for the best of the best.” Those who thrive during challenging times can scale faster, using their experience to build trust with both borrowers and investors.

Disclosure: Information provided in, and presentation of, this document are for informational and educational purposes only and are not a recommendation to take any particular action, or any action at all, nor an offer or solicitation to buy or sell any securities or services presented. It is not investment advice. Fidelity does not provide legal or tax advice. Before making any investment decisions, you should consult with your own professional advisers and take into account all of the particular facts and circumstances of your individual situation. Fidelity and its representatives may have a conflict of interest in the products or services mentioned in these materials because they have a financial interest in them, and receive compensation, directly or indirectly, in connection with the management, distribution, and/or servicing of these products or services, including Fidelity funds, certain third-party funds and products, and certain investment services. Fidelity Investments Canada ULC (“Placement Agent”), an exempt market dealer registered with the securities regulatory authorities in each of the provinces and territories of Canada, is acting as placement agent for the Fund(s) listed on Exhibit A (each a “Fund”) advised by Fidelity Diversifying Solutions LLC and/or FD Funds Management LLC (“Manager”) (each a “Fund”), and, in that capacity, is not acting as investment advisor to prospective investors in any Fund. Potential investors must make their own investment decisions regarding a potential investment in a Fund. Placement Agent is not a current advisory client of the Manager and is not an investor in any investment vehicle managed, advised or sponsored by the Manager. Placement Agent and the Manager disclaim affiliation, but have certain indirect shareholders in common. For providing solicitation and other services with respect to certain investors who invest in the Fund, Placement Agent will receive placement fees in an amount of 50% of the investment management fees paid to the Fund by an investor introduced by the Placement Agent (the “Fees”). As a result of the Fees, Placement Agent has an incentive to recommend an investment in the Fund, which presents a material conflict of interest. Placement Agent also may do business or seek to do business with and earn fees or commissions from the Manager or its affiliates, as well as with other third-party fund sponsors that may have similar or different investment objectives from the Fund. Examples of such business may include the provision of advisory and placement services. Accordingly, potential investors should recognize that Placement Agent’s participation as placement agent for interests in the Fund may be influenced by its interest in such current or future fees and commissions, including differentials in the fees that are offered by Placement Agent or other third-party fund sponsors and that the Placement Agent is subject to material conflicts of interest. Because Placement Agent and the Manager have certain indirect shareholders in common, Placement Agent may have an incentive for you to invest in a Fund managed by the Manager, as Placement Agent and the common shareholders of both Placement Agent and the Manager will benefit from increased assets under management and investment management or other fees paid to and retained by the Manager or its affiliates, a proportion of which is paid back to Placement Agent in accordance with the Agreement.

i Source: Preqin, as of 09/30/24 ii Source: Fidelity Investments, as of 09/30/24 iii Source: Fidelity Investments, as of 09/30/24

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“What makes this asset class so appealing is its predictability. You don’t have to worry about wild market swings, but you can still capture returns that are often as good as, if not better than, equities,” says Therese Icuss, managing director of Fidelity Investments’ direct lending investment team. Institutional investors are not betting on stock appreciation – they’re securing consistent, predictable payments, backed by the borrowers’ assets. David Gaito, head of direct lending at Fidelity Investments, explains, “You’re not looking for big wins in private credit. You’re looking to get your money back, with interest, every single time. That’s what makes it so powerful.”

“The best credit managers aren’t just relying on their gut – they’re relying on deep research. In our case, we have nearly 400 analysts across every sector imaginable”

Therese Icuss, Fidelity Investments

The firm’s internal capital-raising efforts far exceeded expectations, and despite the aggressive, borrower-friendly market of late 2021 and early 2022, Fidelity remained patient and disciplined. They could have deployed all capital between December 2021 and June 2022, but did not. The firm faced no pressure to grow more rapidly, which allowed Fidelity to avoid chasing thin pricing in an overheated market. Their commitment to staying selective and steady ensured that when the market dislocated, Fidelity Investments was positioned to thrive. As Gaito and Icuss show, private credit isn’t about clever strategies or quick wins – “it’s really just boring; we do the same thing over and over again.” It’s about consistency, discipline, and managing risk to build a business that lasts.

“It’s easy to say yes to the obvious opportunities and no to the clear risks, but the real skill is in that middle 60%. That’s where the research makes the difference”

David Gaito, Fidelity Investments

Building for the long haul

Research and scale

“It’s easy to say yes to the obvious opportunities and no to the clear risks, but the real skill is in that middle 60%. That’s where the research makes the difference.”

David Gaito, Fidelity Investments

Therese Icuss, Fidelity Investments

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Laying the foundation: Expertise and relationships

David Gaito, Fidelity Investments

Therese Icuss, Fidelity Investments

Gaito believes that stress reveals which firms have built their strategies to last and which are merely riding the wave of a booming market. “In an expansion, a lot of firms cut corners. But when credit stress comes, it starts to weed those firms out. I don’t want this to sound too cavalier, but stress is good. For us, we invest as if stress is right around the corner. Because when it comes, we’ve got to manage it the right way. That’s how you scale in this business – by coming out of stressful times successfully.” Stress testing and covenants aren’t justsafeguards – they’re part of a well-designed system that protects both investors and borrowers. “We believe in real financial covenants,” Gaito says. “A covenant default doesn’t mean the sky is falling – it means there’s an opportunity to address issues early, before they become more severe. For our industry, stress is actually good for the best of the best.” Those who thrive during challenging times can scale faster, using their experience to build trust with both borrowers and investors.