Role of Liquid Credit
Liquid credit provides an income-driven return stream that offers a spread premium above government bonds, and also creates diversification benefits relative to equities. Credit investments are senior to equity in a company or entity’s capital stack, so we generally expect lower volatility and more stable returns than for equities, though the volatility of credit portfolios may increase during stress periods. We search for opportunities in credit markets which provide relatively high yields relative to expected losses from defaults, or where potential for price appreciation may lead to attractive total returns.
The liquid credit asset class includes investments in corporate credit across investment grade bonds, high yield bonds and leveraged loans; structured credit, including residential and commercial mortgage-backed securities, collateralised loan obligations, and asset-backed securities; emerging market corporate and sovereign debt; and niche areas of short duration credit such as specialty finance and consumer lending strategies.
How We Invest
Our allocations to liquid credit are dynamic and vary based on the stage of the credit cycle. We form views of the risk-adjusted returns available across the various sub-asset classes based on bottom-up analysis. We are active investors across almost all sub-sectors of liquid credit, accessing opportunities via actively managed commingled funds, customised fund-of-ones and on occasion, tactically timed passive investments. We seek to concentrate our focus on niche areas of credit which historically have offered higher spreads due to complexity, capacity constraints and/or a liquidity premium, such as structured credit.
Case Study
In 2020, we partnered with a specialised lending manager to provide a bridge loan con-investment, the proceeds of which capitalised the renovation of the Climate Pledge Arena, the new home of the Seattle Kraken hockey team. The loan was extended only for the duration of the construction time period, after which the loan was to be repaid via historical tax credits secured at the project’s completion. The manager sought our co-investment capital as the size of the loan would have exceeded the maximum position sizing in the manager’s main fund vehicle. The project was completed on schedule and the loan achieved the target net IRR.
