Episode 70

NOVEMBER 2, 2022

Petra on the diversity of the investment grade private credit market

Petra Wendroth, Managing Director, Portfolio Manager, Private Fixed Income at SLC Management, discusses the variety of investors that make up the investment grade private credit market and why now is still a good time to consider the asset class.

Steve Peacher: Hi, everybody. This is Steve Peacher, President of SLC Management, and today I’m joined by Petra Wendroth, who's a managing director and a portfolio manager in our private fixed income group, has been there for a long time. Uh, and today we're going to talk about investment grade, private, fixed income, which is one of our real strengths at SLC and within Sun Life. So, Petra, thank you for taking a few minutes today.

Petra Wendroth: Thanks for having me, Steve.

Steve Peacher: So, in past broadcasts we’ve talked a bit about what we call PFI – private fixed income – so, let’s just maybe start with a general question about who invests in the landscape. Who invests in private fixed income and how does it fit within their portfolio?

Petra Wendroth: That's an important question. There are a variety of investors interested in the asset class, from P&C insurers to life insurers, re-insurers, pension funds, trusts, and increasingly family offices and high net worth individuals. It might be a surprise to those who don't follow the asset class, how broad the investor base truly is. If you look at investment grade private fixed income in its totality, you have an asset class that is able to provide durations from short to super long, that makes it a particularly useful tool to have in the portfolio toolbox. In addition to excess running yield, structural credit protections, and diversification benefits that the asset class is also known for. Because of the private classification, one might think that investment grade privates fixed income is strictly reserved for an allocation to alternatives. That is not the case. What we have seen is investment grade private fixed income takes its place as a complement to investors broader fixed income allocation. It is not just about credit exposure and yield enhancement. Liability matching is also a meaningful part of the asset classes practical application.

Steve Peacher: So, you mentioned in your answer that there are opportunities to invest across the curve, across the interest rate curve in the private fixed income marketplace. So, talk a bit about that. What are the, what are some of the opportunities? Some examples maybe of opportunities at different points in the curve in the investing grade private fixed income markets.

Petra Wendroth: On the shorter end financing can take the form of floating rate mortgage or corporate loans or fixed rate financings with lower durations, including securitizations of consumer and commercial loans and leases. As you move further along credit tenant leases start to make an appearance along with other medium term contract monetization from aircraft pieces to energy savings performance contracts. On the long end, power generation projects with an emphasis on renewable energy on transmission start to feature as do ground leases and public private partnerships for an assortment of long-lived infrastructure assets, from roadways to hospitals. It is a very diverse asset class, and it would be a challenge to list all the forms of financing available. Regardless of which segment there is a common thread that runs true to the investment philosophy that guides the asset class, particularly SLC Management, and that is a focus on non-cyclical and recession resistant sectors with monetizable cash flows and senior structures with strong capital cushions.

Steve Peacher: Well, I do think you make a point that it may not be as obvious to those who aren't as familiar with this asset class, that there are so many, there's so much diversification to be had. Different points of the curve, different types of investments, different types of risks. And so, it is quite a diverse segment, and that that may not be as well known by the product marketplace. I want to ask about this point in time, so we've had very volatile markets. We've had dramatic rise in interest rates. We've got inflation running at high single digit levels, we’ve had volatility in equities. So, I guess quite simply do you think this is a good time to be investing in the investment grade private fixed income market?

Petra Wendroth: Yes, investment grade private fixed income as a as the class is predicated on generating relative value over comparable publics. It is the spread carry that drives the asset classes future performance. Recognizing that coupons and the reinvestment of those coupons are a meaningful part of fixed income returns. That added spread carry can help over the longer term. That said, we are seeing extraordinary yields today, even though activity in the space has slowed down over the last quarter, there are opportunities demonstrating attractive value if you know where to look. By providing financing solutions that satisfies the needs of our borrowers in a manner that the public markets cannot effectively or officially provide we cultivate what I would like to refer to as a ‘solutions premium.’ To just use the definition of an inefficient market is putting it simplistically. There are other factors at play – borrowers and sponsors like a partner with permanence, a partner they know they can work with and understand and potentially a partner they can grow with over the long haul. We have a long history and have been able to cultivate a breadth and depth of expertise across the full spectrum of investment grade private solutions, the solutions our teams provide along with other critical elements of the private markets, including certainty of execution, is what drives the premium apart from the yield premium there are other factors that add to the evergreen appeal of investment grade private fixed income, such as access to information, covenants, and collateral that exercise influence and protect the downside and smaller lender groups, all factors that can help ease some of the tensions we face in the markets. Today we have ourselves abided by that principle and have invested through cycles stretching as far back as the late 1980s in some of our teams’ earliest transactions. This ties back to the remarks I made earlier on, and also to the old adage it is less about timing the market and more about time in the market.

Steve Peacher: Well, you mentioned tenure and I know, just shifting to, I guess you don't like to end these with a kind of a personal question. And you've been with the team for ten years, you just recently celebrate your ten-year anniversary with SLC Management, and I’m very jealous that you also recently took a Sabbatical to kind of celebrate that which is great. Could you just talk about that? What'd you do during that sabbatical?

Petra Wendroth: Very happy to take advantage of the six weeks available to me this summer. With all the events that transpired over the last two years, I knew exactly what I wanted to do with my time away. As soon as the kids were done with the school year, we hopped on a plane and headed to Singapore. That's where I’m from. It was the perfect opportunity to reconnect with family and friends that we’ve missed, and the extended time made the experience so much richer and enjoyable. Really a far cry from the two-week, other side of the world travel bootcamps that we use to take. The children got to spend time, quality time, with their grandmother, other members of our family, and really engage with that part of their heritage. It goes without saying, mental, physical, and emotional wellness are so important to have. It was so nice to have a concentrated block of time simply to focus on family, friends and health. It was truly an amazing Sabbatical.

Steve Peacher: Well, as I said, I’m jealous, and I’m sure it's a trip your kids will never forget and you’ll never forget. So, Petra thank you so much for taking a few minutes today to talk about the investment grade PFI market, and thanks to everybody for listening to this episode of “Three in Five.”

Petra Wendroth: Thanks, Steve.


This content is intended for institutional investors. The information in this podcast is not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information contained in this podcast. Any statements that reflect expectations or forecasts of future events are speculative in nature and may be subject to risks, uncertainties and assumptions and actual results which could differ significantly from the statements. As such, do not place undue reliance upon such forward-looking statements. All opinions and commentary are subject to change without notice and are provided in good faith without legal responsibility.