The role of liquid credit in the portfolio is to generate a contractual return primarily through income yield, which compensates investors for the risk of default. The liquid credit asset class includes investments in:
(a) corporate credit across investment grade bonds, high yield bonds and leveraged loans,
(b) emerging markets corporate and sovereign debt,
(c) structured credit (e.g., collateralized loan obligations, commercial mortgage backed securities and residential mortgage backed securities) and
(d) niche areas of short duration credit such as consumer lending and other specialty finance strategies.
Our allocations to liquid credit are dynamic and vary based on the stage of the credit cycle and our assessment of the risk-adjusted returns on offer from the various sub-asset classes, which tends to vary dramatically through various stages of the credit cycle. We have been active investors since the 2008 financial crisis across almost all sub-sectors of liquid credit, investing through passive instruments, separate accounts and actively managed commingled funds to capitalize on dislocations and attractive income opportunities. While the later stages of the economic cycle are typically less interesting for liquid credit, we believe that the movement through various stages of the credit cycle will present opportunities for asset managers who can exploit price dispersion and who have deep distressed and restructuring capabilities.
In 2012, we partnered with one of our real estate managers to acquire a B-piece interest in a Freddie Mac securitization. The underlying collateral represented over 70 first lien mortgages secured by institutional multi-family properties across the United States. We believed that a 10%+ net return was achievable even after stressing for extreme default scenarios far in excess of historical averages. For our non-US clients, this offered exposure to the recovery of the US real estate sector without incurring FIRPTA taxes. The investment was partially realised after less than 12 months through a recapitalisation which has returned more than our original principal, and we continue to hold an interest in the residual which continues to pay a mid-teens cash yield.