Investment Opportunities Across the Markets

Okay, thank you all for having us. Well, it's never been hotter, attracted more tourists, or been more talked about. And I'm not just talking about Abu Dhabi during finance week. I'm talking about private credit. Just like this city, um, this asset class was considered under the radar not so long ago.

We're here to talk about the opportunity set with some true locals of the credit landscape. Franchesco from Fasinara who's been using fintech platforms to reach borrowers that banks often leave behind. Vulcan from Vibrant, a deep specialist in CLOS's and structured credit. Mahir from Loonear representing renting one of the industry's most storied funds investing in everything across corporate equity, real estate, credit, and more. And finally, Lindsay from Poland Street, a specialist in financial services investing at the cross-section of PE and private credit.

Lindsay, I would love to start with you. Um, you sit at this unique intersection and you're a financial services expert here. The topic really asks us, why might companies choose to raise debt over equity? With PE dry powder at record highs and rates coming down, are we finally going to see the M&A floodgates open? And if so, as a lender, are you willing to trade those lower spreads for higher dealer volume or you going to hold the line on pricing?

So,

we're going to hold the line um is the the the punchline answer. Uh so, thank you um for inviting us here today. Poland Street um as Carmen says, invests um focused on financial and business services. Clearly a sector that's going through massive structural change, especially since the global financial crisis. and we've been investing in that sector for 20 years and dedicated to financial services since the financial crisis.

What you know whether um a borrower chooses equity or credit there are place for both by being what we're looking to do is by being deep in our sector. We're aiming to deliver top tier returns in each of our sectors with a very narrow distribution of outcomes. So in private equity that means 3x gross with no losses if it doesn't go according to plan. And then in credit we're also like the previous panelist in asset back credit we're delivering 12% unlevered um from investment grade type risk and zero losses across the platform. So we're effectively as a specialist in a sector aiming to cut off the left tail of distribution of returns but not compromising on the returns themselves.

So I think that wherever we go um whether a business is looking we we think the asset backed and you know um um others kind of are in the sector too but you know we think assetbacked is a very important provider of providing finance to the ordinary economy the everyday living of getting mortgages getting car financingme financing they empower the everyday economy as opposed to that's how we would define it as opposed to transaction and buyout type. So I think that it will continue to be forever. Thus there'll be appropriate times for debt and equity. I think for us as a GP the challenge is to make sure we're delivering alpha whatever we're doing and we try to do that in a very narrow risk risk band as well.

Vulcan your turn. Let's talk relative value and structured credit. We're seeing a resurgence in the syndicated market and some tight spreads in corporate credit. So for an investor sitting on cash today, why would they look at CLLO equity or MES tranches versus just buying the underlying loans with the default cycle um staying surprisingly benign so far in 2025? What do you see getting better or worse as we head into 2026?

Thank you Carmen. Thanks for the nice introduction as well. I do think 2026 27 will be more volatile than the last two years for sure across the credit markets. Uh in broadly syndicated markets u it's been too quiet in terms of defaults actually. So but there has been LME uh liability management activities where the borrowers try to take advantage of the lenders.

uh in terms of CLLO's relative value if you look long-term you know CLO equity and mess branches have been performing really well over the last 20 years so I've been started investing into this area in 2002 total CLLO issuance was 18 billion 18

there's over 1 trillion outstanding now through this growth through the great financial crisis etc these vehicles prove to work the architecture of CLLO's work and I'd like to in mind that through the Greek GFC the only securitized product that didn't need a bailout is broadly syndicated CLOS's you might remember T program TARP program mortgages CNBS even the banks got bailed out whereas the CLOS's never needed that because of couple of key features your assets are shorter maturity than your liabilities that's great it's the opposite of Leman right there's underlying diversity in the pool you invest it should be invested at least to 25 different industries otherwise rating agencies will downgrade you. So there are no hidden correlations. It's really diversified. Finally, most important your structure doesn't depend on the mark to market on the of the underlying assets. So during COVID for instance, you have seen even investment grade bonds for a month they fell to 80 cents.

Loans fell to 70 cents. No single CLO had to liquidate or had a margin call whatsoever because the structural futures the test in CLOS's are nonmarktom market test. So if you're a long-term investor I think it always provides uh good risk adjusted value. Uh what we model you know my background is in physics. So what we model when we model CLOS we started modeling less recovery in broadly syndicated loans we expect less recovery is not.

70 cents but maybe 50 cents. Even then a co double beat ranch tends to sustain 8 to 10% default every year the next seven years 10% default in this market has only been seen one time in 2009 and 2010 it was less than 2%. So they are resilient. The market is tight. So it's going to get market will be a bit volatile.

But if you're a long-term investor, you want steady income. I strongly recommend CL as an equity.

Franchesco, you're you have a more interesting strategy in a world where these spreads on large cap direct lending are compressing below 6% and terms are loosening. Your unique universe is kind of fintech andme credit. So with the Fed and ECB cutting rates, are you seeing more tourism capital flooding in to your niche seeking yield or does the complexity of specialty lending keep the premium intact? And as you deploy capital today, are you finding better riskadjusted returns in financing the platforms versus the underlying loans directly?

Thank you, Carmen. Good to be here. uh tourism capital coming into our place. I mean definitively like uh there is there is a lot that in recent years and also in the last 12 months has entered the space. So we count a lot more competitors than we used to years ago.

Like Fazinara has been around 15 years almost and uh at the time we started there was literally very little like today there is a lot. So you can count the competitors in more than 40 of them perhaps that either in dedicated funds or in uh like uh in broader mixes of uh of credit can look into our asset classes. So there is a lot definitively. I would say that what puts us into a nice spot is the fact that very often the vast majority of this capital is available for easier uh lower ranking fruits. For example, marketplace uh consumer finance and especially in the US where large volumes are available.

And so for some of these large players is kind of an easy one to start off when they look at the platforms. And uh uh and uh and that is that is a space that indeed has compressed in spread terms quite a bit in recent times probably by two 300 even 400 basis point over uh over base uh rates over cash. uh where we look is more into more complex situations where there is more of a complexity premium to be grabbed like for example theme specialty finance and over there there is a more of a bridge to cross in terms of like knowledge about the collateral pools and uh like there is more uh more of a like also datari environment if you want to like play that side of the game and uh uh more the ability to construct behavioral ratings, transaction ratings and so to have a uh like uh the ability to feel comfortable about something which is less low hanging fruits and for which spreads are still quite elevated and I would count them as uh still quite a lot above the equivalent uh direct lending in in corporate space that is available. So yes, there is a lot of competition, a lot of tourism capital coming to uh place, but there are still ways to play the game in in such and such a way in which you can extrapolate an alpha and uh and utilize your track record and your lengthy experience to uh to deliver good risk adjusted returns.

M the consensus seems to be soft landing defaults are manageable, but Lonear often looks where others aren't. If corporate credit cycle is improving as the data suggests, where is the value and where are you finding the opportunity today?

Yeah, thank you Carmen. Um, for reference for the audience here, so Lonear Funds is a private equity fund. Um, for the last 30 years, we've raised 25 funds about hundred billion of capital. We currently manage $55 billion. And where we're finding opportunities are on the credit side, uh, we invest in private equity buyouts, commercial real estate, and credit.

But in the private equity buyout vertical, we also invest in corporate credit. But it's not direct lending. It's focused on pullto power strategies where we see a business which we know very well. We focus on industrials uh he you know asset heavy industries. So if we see a business we know we start tracking it.

We underwrite it through the debt. We start buying the debt because we think the business will restructure. And we've had examples where we've uh gone into owning debt before the restructuring in the US specifically where you know where the markets are deep um and then we sit through the restructuring we reorg the equity we reorg the debt we take back some debt and then we own companies at a very very attractive valuation. So it's a deep value approach but it requires a credit underwriting and then with the view that you'd like to own the equity and control the company, improve the company, do the value creation analysis and then eventually reposition the company for an exit. So I think credit has evolved.

I think the the general view of credit is direct lending and it's all very bad. It's all going to blow up. But we've seen a lot of structures, very intelligent structures that have developed in the market where you can actually own very good businesses which are just poorly levered, badly levered, overlevered, but they have good operating businesses that you can turn around. I think that's where we see a lot of opportunity.

So, we're in the capital of capital. So, here is one for all the allocators in the room. Why allocate to credit? Now, the past few years, it was a no-brainer. you had equity-like returns of 10 to 12% in senior debt with with no volatility, but we're in a very different rate and equity environment now.

So, does that math still hold? If I'm a CIO, tell me why I wouldn't just rotate back into public equities or good old private equity, Lindsay, please.

Yeah. Well, you know, you you asked the question, are we um compromising on um uh pricing and and structure? Uh we're in the assetbacked world of credit as well. Um and we are still we're not compromising on yield. We're still delivering 12% unlevered on what we assess to be investment grade risk.

Um and we are doing that on a zero looking to deliver a zero risk uh zero uh loss environment. We also don't compromise on our structures. Um most of our deals have about 12 covenants in them and very tightly structured. Goes back to the point that's been consistently made. if you have a robust structure.

So I think the riskreward is still there. Um I think there is a development in the marketplace and and people talk about assetbacked finance being new. It's new in the structure of asset management. It's existed I've been investing in the sector for 30 years. So it's existed for many many years and decades.

A lot of it used to get um um um um executed by GMAC pre-inancial crisis. So the asset class has existed and and and like um my my panelist said um had performed all the way through the financial crisis. So has very strong track record of performance. You then say well you know why invest in credit? I think a lot has been done in putting the the base level of portfolios together with direct lending which is the first asset class the anchor asset class.

There's still a lot of work to do in maturing those portfolios to do what um happened in private equity where you start to you start with buyouts which direct lending is the credit equivalent of that. You're then seeing um that um assetbacked is a really strong uh diversifier. It's non-correlated. It in stress it's duration contracts as opposed to extends. So there's a lot and and then you're finding real asset credit.

So there's a lot to do in the development of portfolios in private credit from the the the initial stages of drinking from the fire hose of direct lending. So I think there's a lot of maturity to happen in those portfolios.

Yeah, I mean equity versus credit in this tight environment for credit. Um yes, I agree with that. We shouldn't forget though uh that credit especially senior secured loans is senior to equities of the companies right so at the end of the day this is the last thing that loses money after equity gets wiped out so then when you say like shall I allocate more into equities than credit is tight are equities cheap seven eight equities are taking S&P 500 to unknown places at this point so I do think like there should be Credit allocation should approach it long term. This kind of environments that are coming, volatile environments, less recoveries, etc., it will create dispersion among managers.

Some will not perform. It's just the fact. Just recently, as you know, the first brands default was a big news. Three color default was a big news. I checked on our data out of 120 CLO managers, 102 had exposure to u to first brands.

We had zero exposure to both of them and there are other managers who had zero exposure to both of them. At the end of the day, EQT credit all the balance sheet uh of of an enterprise of a company are derivatives of the enterprise value of the company. So as long as you do your work fundamental analysis how to calculate value then you can make better educated decision do I invest into equity do I invest into senior debt or something in the mezzanine. So that's the way I will look at allocation going forward. To me it's all about execution right there is no strategy that is good in every market environment but there is a declination of uh any strategy that can perform relatively better in that market environment.

So like uh if you look at it from a macro standpoint, yes, spreads are very tight. Uh as Vulcan said, there's also the price of liquidity. Today there is a plentiful of liquidity. So it's imaginable that we need to be in a situations like this. Uh macro wise within private credit there is on the one end uh like ABF that we are discussing here.

On the other end, there is a direct lending. I mean I think there is something to be said about the fact that direct lending is and it can also be executed very well, right? Don't take me wrong but you know in general like it is true that it has a it is a it tends to be like a a floating portfolio which is uh quite concentrated long in duration with some leverage some subinvestment grade connotation to it and and of course in a in a moment in time in which the market may go in a in a down cycle presents certain vulnerabilities at the aggregate level right then you can still execute it very well. uh not only that but also it grew fantastically well in the last few years. So I think it went to almost $3 trillion dollars in a in a manner of a few years.

So definitely we need to look into that as the cycle goes through. Next to it, assetbased finance is a like a uh is a like a more is not a vidal lending. It's more collateral based lending. And so like you have something to rely on tends to be also absolute return less uh uh correlated with the level of software. Uh and uh uh and then there are different ways of declining it uh in turn, right?

So you can decide that to focus on certain aspects of it like in our case for example is a shorter duration loans uh of a highly granular n uh nature right so heavily diversified with a short duration which I think performs better in a in a weak market environment relatively speaking

you know I think from our perspective you know it's it's everything's about how much risk you're taking right so um you know I'll I'll I'll give you a Few stats. The US residential market is $48 trillion. The residential mortgages that are outstanding is about $14 trillion. Every year there's about $1.8 trillion of mortgages that are written in the US.

The market that is non- agency mortgages, which is people who have their own businesses, their own distributions, not salaries, which is non- agency. That market is $80 billion. It's a huge market. Those loans are originated at few basis points higher than regular agency loans. So you're getting opportunities in a market that is $80 billion growing.

It was 60 before 60 to 80 80 to 95 is expected this year. And there are a lot of these pockets of opportunities which are very large which we're finding uh you know great amount of value in because these are assetbacked their home mortgages um and they're first lean.

So I'll do one last fire rapid round. I think we've all been loving hearing that this is the golden age of private credit. But if typical direct lending is getting crowded and expensive where are you investing next go down the line? I think we're generally going to see the evolution of the private credit market reflect private equity with more with different asset classes whether it be SE asset back clearly is a theme secondaries um real assets reflective of the the whole span of the asset class and maturity of portfolios to reflect that

um I think the last three four years all of you have been hearing private credit direct lending private credit direct lending etc. Now you know it's sort of come to realization that there is a certain amount you can swim. I fear all these monies that is raised could flood into asset back lending space. Although assetbased lending has been out for a long time and there are experts sitting here. There might be a lot of tourist investor coming in uh without the expertise into the asset back size.

That sort of fears me a little bit but at the end my message is like these are all liabilities. These are all der derivatives of value be it collateral or be it corporate. Uh the investors should have a perspective about the valuation i.e the economy in the first place

and like the question is which opportunities we see like 2026 I would say that like like we need to be aware cycle aware right that the cycle may turn. uh it's not for sure right because there are also plenty of indications that liquidity may sustain itself well into next year right there are certain indications especially from the US administration that maybe like a a bull year 2026 in that respect but let's say that we are also at the end of a very long cycle it could be otherwise and so in that sense I think personally it's not so much about this sector this opportunity specifically is more about keeping the portfolio as much as possible short in duration highly diversified across also countries and sectors and then with very low levels of leverage because that turn could take place.

All right, Mah, wrap us up. One last prediction.

Yeah. Um I think we're going um we're going for for using credit for control, right? That strategy and residential mortgages in the US.

All right. May yield stay high and default stay low. Thank you all for joining us, guys.

Thank you very much.