Investing Between the Lines: IMCO's Evolving Approach to Global Credit

Amid changing market dynamics and a surge in interest in private credit segments, we caught up with Jennifer Hartviksen, Managing Director, Global Credit to learn more about the asset class's refreshed strategy, and how it enables the team to capture opportunities as they arise in a hot credit market.

Let's start with why IMCO evolved its strategy towards more private and high-yield credit. Can you explain the rationale behind this?

Our decision to shift from predominantly passive public credit towards private credit and different segments within private markets - including middle market loans, infrastructure, capital solutions, and real estate - is an ongoing evolution of our strategy.

We can add the most value and alpha to segments that are sub-investment grade and within private markets because that is where we see the greatest dispersion of returns and the greatest informational advantage. Manager and individual security selection are central to our strategy and the delivery of credit alpha. The Global Credit team has deep experience and a refined process for the identification of managers who can provide attractive risk-adjusted returns throughout the cycle in addition to the analysis of individual credits that will generate alpha through the cycle.

How will IMCO execute the new strategy?

As part of our refreshed strategy, we analyzed our Credit portfolio against different credit market segments (both public and private) and overlaid it with qualitative assessments to create a new target portfolio. By investing in sub-asset classes with low correlations to each other, we can assure a more stable return stream and achieve a more diversified portfolio. Our manager selection process allows us to identify partners with a similar underwriting approach and co-invest alongside them, which generates opportunities for security selection and lowers overall costs.

Our approach allows us to benefit from: portfolio diversification, cost reduction through internalized co-investments and customized security and manager selection.

There is a lot of interest in private credit now. What do clients and investors need to know and how does IMCO navigate this space?

Private credit can mean different things to different investors, and popularity has soared recently for both cyclical and secular reasons. Currently, given the interest rate and business cycle, public market capacity is reduced - pushing borrowers to the private credit market. On a secular basis there has been an ongoing shift towards private markets. As banks retrench for regulatory reasons, borrowers seek more bespoke financing solutions than available in traditional public market segments. Private credit assets tend to be less volatile because they are not subject to the same inflows and outflows as public credit. With the right manager, they historically demonstrate robust performance in times of economic turmoil with higher returns and lower defaults due to stronger documentation.

At IMCO we view private credit in a holistic manner. It ranges from private corporate credit - including direct middle market loans – to capital solutions, infrastructure and real estate credit. We currently see high demand for capital solutions credit where public and private borrowers are looking for bespoke financing solutions to get them through to the other side of the interest rate and valuation cycle. Private credit at IMCO also includes infrastructure and real estate debt opportunities, which are attractive from a portfolio construction perspective because of the diversification they provide and the ability to invest between the lines and follow deals across different segments.

Can you elaborate on what it means to "Invest between the lines" in the realm of Global Credit?

Investing between the lines refers to our ability to avoid being confined to specific silos. It is about embracing flexibility and recognizing that some deals do not fit neatly into one category or another. This approach allows us to make the most out of situations that others might overlook, to quickly adapt to changing market dynamics, and to nimbly shift to where we see the best opportunities.

We are going through a period of regime change, moving from an environment where interest rates were kept low for a very long time to something that is more normalized. We acknowledge market dynamics are always shifting and our strategy allows us to sit comfortably with it.

The structure we have allows us to follow credit deals across different segments regardless of whether they are within private equity or infrastructure, for example. Our approach takes an ongoing assessment of the changing market dynamics, and we can cross-pollinate across investment teams to understand different perspectives and seek value.

Can you address the dissonance between now being a great time to invest in private credit and loan defaults rising? How can those two statements be true at once?

Yes, loan defaults are rising, but that's part of the normal business cycle. Liquidity and capital have been inexpensive and prevalent in the market for quite some time, and a lot of companies were able to refinance their maturities through the business cycle. That has changed - liquidity is drying up and the cost of debt is increasing so it is reasonable to assume defaults may increase.

Despite this, private credit remains attractive because it is arguably better priced. The credit risk spreads remain wider than public markets, reflecting illiquidity premium and sometimes complexity premium. It is also illustrative that not all private credit is created equal, and the key differentiator is manager selection. Vintages that are currently launching are attractive compared to say, 2 or 3 years ago, because of rising interest rates and stronger documentation and protections. We are seeing lower risks and better returns for the lenders. With the higher interest costs, leverage in current capital structures has decreased and covenants and terms are often better. All at a much higher all-in coupon than 12 months ago.

We continue to invest in capital solutions and distressed credit so if default cycles pick up, we are set to capture these opportunities.

Learn more about IMCO Global Credit.