Exploring sports as a metaphor for responsible lending
“The Best Defense is a Good Offense”
The above is a familiar maxim across sports. While fans often celebrate dominant defenses for holding opponents scoreless, experienced observers recognize that a strong offense is oftentimes the missing link that allows a defense to truly shine.
In American football, an effective offense sustains long drives, controls time of possession, allows the defense to stay rested, and keeps the game clock running. As remaining time dwindles, so too do an opposing team’s opportunities to score. In this way, offensive success can materially reduce defensive burden, making the defense appear more dominant than it might otherwise be in isolation. This dynamic, where offense and defense reinforce one another, is commonly described by players and coaches in postgame interviews as “complementary football.”
While this concept is well understood in sports, its application to private market investing has received far less attention. This paper argues that sustainability can function as a mechanism for complementary football in the private credit markets—supporting both value creation and risk mitigation when evaluated holistically rather than in isolation.
Contextualizing to Private Markets
In private markets, investor priorities often diverge sharply along asset class lines. Equity strategies are typically associated with value creation, while credit strategies are primarily oriented around risk mitigation. These objectives are not mutually exclusive, but the rhetoric, incentives, and decision-making frameworks within each asset class tend to emphasize one over the other.
For the purposes of this metaphor, value creation can be viewed as offense, and risk mitigation as defense. The parallel is straightforward. An offense is designed to maximize positive outcomes – points scored – just as value creation seeks to maximize financial upside. A defense, by contrast, exists to minimize negative outcomes – points conceded – much like credit underwriting focuses on protecting against downside risk.
This defensive orientation is both rational and necessary in the private credit space. Lenders are principally concerned with the timely repayment of principal and interest. Investment committee discussions often center on downside scenarios, stress tests, ‘bear cases’, and protection mechanisms to ensure that returns are preserved even under adverse conditions. Unlike equity investors, lenders typically do not participate meaningfully in upside beyond a fixed contractual return. A borrower may become extraordinarily valuable during the life of a loan, but the lender’s investment return remains capped.
Conversely, an offense-first mindset is more logical for equity investors. While risk is certainly considered, the core investment question often resembles: How much value can this business create by the time the clock runs out? In other words, how many points can be scored before exit?
If the best defense is truly a good offense, then value creation should have a role to play in making risk mitigation more effective. When offense and defense are evaluated together rather than in silos, the result is complementary football. For the remainder of this paper, the focus will be on what complementary football means specifically for private credit investors, and in a sustainability context.
Underwriting an Offense
It is well-known that lenders are usually less able to directly steer their borrowers’ operations than equity investors. Weak covenant structures, no board seats, and no equity interest – either in isolation or in combination – each hurt a lender’s ability to influence operational change.
For that reason, it is important to clarify that a lender’s evaluation of a prospective borrower’s offense should be underwritten in the same fashion as its underwriting of the borrower’s defense. It is a similarly speculative exercise. Where the assessment of a defense is a best-efforts evaluation of the borrower’s ability to protect against downside risk over the loan term, there should also be a best-efforts offensive assessment of the borrower’s ability to create upside value by strengthening and diversifying cash flows in the same period.
The intent of this sports analogy is therefore not to suggest that the lender needs to spearhead a go-to-market strategy for a borrower’s new product line. Instead, the guidance is to consider the borrower’s (and/or Sponsor’s, if relevant) growth thesis as a possible counterbalance to the potential operational risks that may arise during the loan term. While the ability to influence those outcomes might be a plus, it is not a prerequisite to executing complementary football.
Linking Sustainability to Complementary Football
Environmental, social, and governance (“ESG”) considerations have been a subject of intense debate in recent years, particularly in the United States. Despite the controversy, ESG is best understood not as a single ideology, but as a broad set of business-relevant factors that include climate management, health and safety, data privacy and security, ethics, labor practices, and supply chain management, among others.
Each of these factors by themselves can influence both risk mitigation and value creation. As such, sustainability should be viewed as a tool that supports both good defense and good offense.
A few examples, to underlie this point:
Example 1 – Consider a growth-stage company operating in the data security solutions market. Like any business, it faces both risks to manage and opportunities to pursue, many of which relate directly to its privacy and security practices, which is a facet of its ESG posture.
From the defense-oriented perspective of a lender, underwriting diligence might focus on the likelihood and severity of a costly data breach, or of material noncompliance with data regulations like HIPAA or the GDPR. These sustainability-related risks can have direct and significant cash flow implications in the form of litigation costs, regulatory penalties, reputational damage, and customer attrition. If sufficiently severe, such events could impair the borrower’s ability to service its debt. It is therefore both reasonable and necessary for lenders to assess if the company’s internal controls, policies, and procedures are sufficient to reduce or prevent these risks.
As previously alluded, the offensive potential of a business will be a primary focus of the equity investor: new products, expanded markets, differentiated capabilities, and the extent to which the company’s security expertise enables first-mover advantages, premium pricing, and/or market share gains. These factors drive growth, valuation multiples, and ultimately more favorable exit outcomes.
Example 2 – Consider a chain of car washes in the arid climate of the American Southwest. A significant cost driver might be a specific location’s water intensity, such that the business is focused on avoiding municipal penalties tied to water use exceedances, particularly during drought periods.
A defense-minded credit underwriter might consider the rising cost of the water, the thresholds for regulatory compliance with water use statutes, and the ongoing costs to build, maintain, or replace water reclamation systems at each site. The best-kept facilities have the lowest risk of a shutdown related to water use noncompliance, which helps to raise a location’s cash flow ‘floor’, because the likelihood of an outright shutdown is significantly reduced. As extreme weather conditions like droughts become more commonplace due to the effects of climate change, the car washes in these regions with the most efficient water use infrastructure will be best positioned to withstand changing municipal water-use statutes.
Now consider the value creation perspective. Consumers are increasingly tying purchasing decisions to eco-friendliness. The capability of a car wash to maintain best-in-class water efficiency could become a point of marketing differentiation, increasing customer traffic and enticing consumers away from less efficient competitors. The ‘adapt or die’ nature of the market could also create opportunity to expand and buy local competitors that bore the financial burden of municipal penalties and shutdowns due to their own water inefficiency.
The critical question for lenders remains whether these two dimensions should be evaluated independently. If new products, markets, and customers generate stronger and more resilient cash flows, do they not also mitigate certain downside risks? Put differently, should lenders consider whether a strong offense can compensate for a less-than-perfect defense?
To those that would agree with this sentiment, it should stand to reason that a lender may occasionally benefit from a ‘sponsor mindset’. The consideration of – and/or conviction in – certain top-line drivers in an equity sponsor’s value creation plan could help a lender get more comfortable with certain downside risks whose adverse cash flow impact could incline their investment committee to otherwise think twice about moving forward.
Historically, sustainability risks are often assessed in isolation, without sufficient consideration of the sustainability-driven value opportunities that may materialize over the life of the investment. This siloed approach can lead to an incomplete understanding of a borrower’s true risk profile.
Sustainability as a Net Posture, Not Isolated Risk
Importantly, lenders should not interpret this guidance as advocacy for adopting an offense-only mindset. Certain sustainability risks – if severe enough – cannot be offset by growth alone. Substantial data breaches or executive-level bribery and corruption schemes have the capability by themselves to lead to bankruptcy. However, treating risk mitigation and value creation as entirely separate domains may result in overlooking meaningful factors that improve credit outcomes or inform investment committee decisions.
This is where the concept of “complementary football” becomes instructive. In scenarios where the metaphorical offense is sufficiently strong, it may reduce the adverse impact of certain defensive vulnerabilities by enhancing cash flow durability, improving financial flexibility, or accelerating de-risking through diversification or growth.
From this perspective, the traditional notion that value creation is exclusive to equity strategies falls short. Sustainability-driven growth initiatives may translate to differentiated products, access to new customer segments, preferred supplier status, or pricing advantages, which can create value at a level that meaningfully lessens, offsets, or even exceeds certain sustainability-related risks within the same business.
Evaluating these dynamics requires a comparative assessment that is often inherently subjective; it would be a complicated endeavor to perfectly encapsulate the financial trade-offs between sustainability-driven risk and value. However, applying a broader “complementary football” lens provides a structured way to assess an investment’s net sustainability posture – the balance between sustainability-related risks and sustainability-enabled value creation – rather than viewing risk in isolation.
For private credit investors, this integrated approach has the potential to improve underwriting quality, enhance risk-adjusted returns, and align sustainability considerations more closely with core investment objectives. If done well, the scoreboard will show it.
For lenders interested in exploring the merits of sustainability in their “complementary football” toolkit, reach out to Adam Davies (Adam.davies@slrconsulting.com) at Malk Partners, now part of SLR Consulting.
Author
Adam Davies
Adam Davies is a Vice President and the Head of the Private Credit Sustainability Advisory Practice at Malk Partners, part of SLR Consulting. Since joining Malk in 2019, Adam advises Private Credit GP clients in exploring, developing, and reinforcing sustainability integration strategies at the firm, fund, and investment level. Advisory support spans across pre-close transactional sustainability due diligence, as well as higher-level support such as formulating fund-level sustainability strategy, aligning clients to relevant industry frameworks (domestically and abroad), creating sustainability and stewardship policies, meeting LP expectations, training investment professionals, developing post-investment strategies for borrower engagement, and more. Adam is a graduate of Boston College’s Carroll School of Management.
Malk Partners does not make any express or implied representation or warranty on any future realization, outcome or risk associated with the content contained in this material. All recommendations contained herein are made as of the date of circulation and based on current ESG standards. Malk is an ESG advisory firm, and nothing in this material should be construed as, nor a substitute for, legal, technical, scientific, risk management, accounting, financial, or any other type of business advice, as the case may be.