Jonathan Lipton: Good afternoon, everyone, and thank you for joining us. As you all know, credit is a vast and fast-moving market, and the goal of today’s conversation is super simple. We’re going to hear directly from some experienced investors about where they’re finding alpha and where they’re actively avoiding risk. This is not about forecasts and headlines, but about how in the trenches, super smart allocators and portfolio managers are actually positioning in credit land.

My name is Jonathan Lipton, I’m the CEO of Clade. Clade builds specialized institutional-grade AI tools designed specifically for limited partners. Our AI tools help LPs source in diligence and monitor markets, and we’ve been told they save LPs an hour or two of manual work a day.

In addition to the AI tools, we also bring allocators together in a shared intelligence network, so intel and information doesn’t stay siloed. Today, as part of that network, we have an awesome panel. We have Chris Martin joining us from RBC. We have Kaylon Meganelli from West Virginia University Foundation. And we have Clark Hoover from LACERS, three very experienced, active participants in the credit markets, all with slightly different takes on the world.

To get started, I’ll ask everyone to briefly introduce themselves, and then to start us off in a little bit of a provocative way, I’ll ask each participant to just say one word of how they view the credit environment today.

Chris Martin: Sounds great. Chris Martin, I work for RBC Global Asset Management as an Institutional Portfolio Manager on our alternatives offerings. The one word I’ll go with for credit today is diversification.

Jonathan Lipton: Awesome. Kaylon, how about you?

Kaylon McInelly: Sure thing. Kaylon McInelly, I’m with the West Virginia University Foundation. I’m the Associate Vice President of investments. My one word would be PASS. To describe the credit market.

Jonathan Lipton: Okay, love being provocative, and can’t wait to dig into that. Clark, last but absolutely positively not least, please introduce yourself.

Clark Hoover: Sure, Clark Hoover, Investment Officer in the Private Markets Team at LACERS, the LA City Employees Retirement System. We’re a $27 billion pension plan. I would say my word would be complacent.

Jonathan Lipton: Excellent. So now that we see some diverse viewpoints here, before we dig into specific credit opportunities, let’s spend just a few minutes talking about the big picture of where the market is. So, why don’t I start it off with Clark? Recognizing there are lots of ways to invest in credit. Just in general, is this a market for caution or conviction?

Clark Hoover: Well, I guess I don’t really look at it that way, because we’re private credit, long-term investors, right? I mean, we’re looking at portfolios that are going to be, say, 6 to 10 years lifespan. So we’re basically about to start year three of a reboot of our private credit program. We made commitments of roughly about $650, $700 million last year, year before, about the same, a little bit higher, and this year, we’re gonna be a little bit less. But we’re trying to build out a portfolio.

If it’s cautionary, and I know I use the word complacent, which would suggest I’m worried, but also I’d much rather be in private credit these days than on the equity side of things. So there’s sure, there’s some problems, but I think it’s mainly due to the private equity quagmire and lack of liquidity there. But we’re still steady as she goes and still making commitments, not avoiding anything in particular.

Jonathan Lipton: Great, I’ll pass that kind of question over to Kaylon.

Kaylon McInelly: Certainly. So we are in the Endowment and Foundation space, have a higher cost of capital, so we take the total return approach. We do appreciate, of course, the income from these products, but when we look across all of the opportunities that we have, whenever you have an area that’s more expensive, we know spreads have compressed, etc., it’s an area that we don’t have to load up as much on.

We have followed all of this. I’ve been leading our efforts on the private credit side for over a decade here. We’ve done well. A lot of it’s due to timing and knowing when not to put on the gas pedal. We’re still active in these markets and looking to allocate, but not doing as much. Again, we’re trying to get that low net double-digit returns, especially with these, is going to be doing a lot of our illiquid budget.

And so, overall, we’ve been preferring managers who can be more flexible, have more dry powder, can stay public and private as needed, and we often, if you remember back in ZIRP area, trying to get 5-6% returns was out of the question. Now we’re just sitting back, and we can be on the short side, investment grade, we don’t have to reach into these more exotic areas. Or when we do, we’re trying to find things that aren’t as crowded.

And so for us in general, we’re sitting back, we’re watching. We did this before COVID, it rewarded us well, we did good throughout, we’re trying to do the same thing now, trying to find managers who can flex in when needed, but we’re definitely not being active today.

Jonathan Lipton: Chris, I know you think globally, you think a lot about the emerging markets, you really have a global hat on in things you’re looking at. Are spreads pricing risk appropriately today, would you say? Or if not, how not? And just some color on how risk is being priced into the market.

Chris Martin: Yeah, sure, I think you might have just hit on what Clark’s one word was, which is a little bit complacent. I don’t know the exact spread that should be priced in to choose your underlying asset class, but I think as we see the headlines come across on a daily basis of the global order is being rewritten as we’re watching it, things like that, and the geopolitical environment that we’re operating in.

I think complacency is probably a good descriptor of global credit markets at a high level, because one would think if the rules-based order is being rewritten in front of us, spreads would probably not be at all-time tights in various markets. And sure, if you look globally and you look non-US, spreads are more attractive than they are in the U.S, all in yields are more attractive than they are in the U.S.

But at the same time, you look at Europe, or some other places, and that’s probably for a good reason. And those spreads should be a little bit wider than they are in the U.S, and so, I think at a high level, Clark hit it with his one word in the intro, but that doesn’t mean that there’s not opportunities to be found if you can pick your spots.

And certainly there is some conviction out there, depending on where you want to fish, where you can find opportunities that are a lot of times being born out of the things that I just touched on, those rewriting of the rules and geopolitical environment that we’re operating in.

Jonathan Lipton: So, Clark, when managers come into your office, they sit down at your conference room or on your Zoom, and they start talking about risk and spreads, what’s their take? What are they selling you, and how are they viewing risk, and are you buying it?

Clark Hoover: You know, I’d say that, well, look, at the end of the day, when managers come to meet with me, they’re trying to sell me their product, right? So I’m not sure how… but so it’s a bit of a biased conversation, but I would simply say that I think, to piggyback on Kaylon and Chris’s comments, spreads are… corporate spreads, I think, are as tight as they’ve been since 2007, and that’s a date, a year that all of us gives us all a little pause for concern.

I think for us, as we talk to managers, the ones that we like, we gravitate towards are those that have experience navigating turbulent markets. I mean, it’s been… we haven’t really had a true credit cycle for a long, long time.

And I think that there’s just a lot of, not just the New World Order, as Chris spoke about, everything going on in Europe, Iran, threat of more tariffs on Europe. I mean, there’s just so much uncertainty right now, and you’ve got a glut of private equity portfolio companies that haven’t been sold, and marks that maybe are questionable.

I think for us, we just want to make sure that the manager has some experience navigating those sorts of bumps in the road.

Jonathan Lipton: Great. And so, just adding on to that, Kaylon, when you’re looking at spreads, and you’re looking at the world, what are you being told, and do you view policy risk to be almost as important as economic risk these days?

Kaylon McInelly: That’s good questions. When managers come through, we’re looking at a wide variety of opportunities. Again, if you’re talking to a direct lender, everything’s fine, don’t worry about it. If you’re talking to someone who’s focused on capital solutions and stress, they’re actually finding a very healthy set of opportunities. It’s really this credit underwriting that really hasn’t come around. I think the market is best described as being bifurcated now.

It’s interesting, you talk to these managers, and there was a survey recently done between the third and fourth quarter, where they surveys all these large private credit lenders. And for years, the number one concern was sourcing assets. And that was around 35% was the top concern.

This last poll in the last quarter, it fell down to 10%. It dropped to the third most important, at only 10% concern, and the number one now is an increased headwind for the stress and default risk. So you’re really seeing this bifurcation.

And so for us, when we want to talk about that, we want to understand these market dynamics, we want to understand what they’re seeing on the ground. You see the spread between CCCs and kind of that double B, single B, and on the private side, it’s starting to loosen out. So, we want to find managers, and talk to managers, and understand how are they going to play that. And again, just being able to hold on to credits, kind of buy and hold, which is something we’ve kind of gotten out of, right? We’ve gotten into the refi area.

In terms of policy risk, I think it is as important as economic risk, and it’s hard. The one big, beautiful bill switch the entire market. All of a sudden, all these projects that were on the renewable side had to be done quicker, and so if they needed the money, seeing seniors secured, some of these plays are able to get 12% coupons, 1% lender origination fee, so it depends on the part of the market. If you can find those pockets, some of these policies are attractive.

But then again, you also want to make sure that when it switches tomorrow, you’re not caught off on the wrong foot. Especially on credit, you don’t have that upside as you do in equities.

Jonathan Lipton: So you touched on distressed investing. I have a question from the field, actually, and I’m going to throw this to Chris. Chris, I know you’re very global-minded, and see policies and the bodies that be. The question is, will FedWatching be the new sport for credit investors in 2026? Is this gonna be the Credit Investors Olympics, Fed watching?

Chris Martin: I think it’ll depend on who’s at the Fed, number one, but I don’t necessarily know… I mean, we’re already in FedWatching, I guess, is what I would say. We’ve been FedWatching for what feels like 5 plus years, where the markets are anticipating every Fed not even rate decision, but just comment. Depending on who it is. And so I think, to some degree, we’re already in that mode, and that is unlikely to change, in our opinion, in the future.

And so it’s gonna depend on… it’s a lot of watching, right? It’s policy watching, there’s gonna be plenty of elections around the globe to be watching, there’s midterms here, there’s geopolitical risk between how the U.S, Canada, Europe, name your country are gonna be interacting, whether it’s tariffs, or partnerships, or broken partnerships, or whatever it may be.

I don’t think that FedWatching will become any more important than it is already. And there’s plenty of other things to watch out for as a credit investor, both on the opportunity and the risk side, as 2026 kind of evolves.

Jonathan Lipton: Awesome. So, we’re gonna dive deeper into that, and I’m not just keeping on pushing out these questions, but we got a lot to cover. I’m gonna switch a little bit now, since we’ve done, like, what are the headwinds, what are the macro? Let’s just go straight into, like, where you see opportunities these days. So, I’ll throw it over to Kaylon. Where are investors, right? Where are the managers that you see? Where are they, or you as well, where are you being paid to take risk. Like, as opposed to not being paid to take risks. Like, when you think about your risk-reward spectrum.

Kaylon McInelly: It’s a good question, and it’s hard to really find. I’ll be honest, you go through a lot, and it’s hard to find managers that you walk out and you say, I really like where you’re putting your chips.

The managers that we are most respecting, that we’re following up on, are the ones who either have sourcing differentiation. They’re really targeting on certain pockets, and you really want managers who can stick to their knitting, which is actually hard to do. Say, take asset-backed lending.

Rewind 10 years ago, and one of our managers had, call it, 7 or 8 areas that they could invest in. Today, I respect them, they’ve stuck to their knitting, and that’s only fallen now to 3 or 4. So their opportunity set has collapsed. Now, they do have good servicing, etc. So, they’re finding opportunities. I would say, also, our managers are finding opportunities on the capital solutions side. LMEs, we made a lot of money there.

But now it’s just continuing, so we have to do LME 2.0s. It’s interesting, trying to talk to these managers and what they’re finding.

This point about this bifurcation, a lot of these credits finally having to be tested, we know the cockroach statement, or garbage lending, as he calls it. Being able to find managers who can come in, do a proper workout, get their hands on, perhaps, the assets or some of these areas, I think that’s attractive. I think those opportunities are coming around.

Think about distressed and stressed. There’s a lot of money being raised in distressed. I mean, we’ve all seen their pitch books come through our inbox. Stressed, you’ve got a lot there, but if you can pick something up at 60 cents, he’s training down at 80, gone down to 60, and you can do a simple workout. Now, those are attractive.

So yeah, there’s pockets that we’re finding, managers who, again, can really have a bit of a moat, like, mining credit. You don’t have the mega-sponsors pushing into there. It’s very, very technical. If you have managers who can take the equity and run it if they need to. These are pre-production bridges called SOFR plus 8 to 1,000, 40% LTV, 1-2 times, multiples here, so they can get a royalty, and then they can hedge it out. It’s attractive. But again, we’re finding ourselves, do we want to go that niche? And… or do we just want to sit in dry powder, let our managers kind of play, and then move in when it’s attractive? Difficult.

Jonathan Lipton: Thank you. And Chris, I know you think a lot about, like, say, CLOs. Are you seeing interesting opportunities in that space as well?

Chris Martin: Yeah, I think depending on where you are in the cap structure, you mentioned being paid to take risk. I think where you are in the globe as well. I think we’re finding European CLOs are slightly more attractive than U.S. CLOs. But again, like.

I like the CLO structure if you’re worried about, if you’re worried about credit in general. would I rather be in outright loans, or would I rather be in a CLO? You have that more resilient structure, and you’re still getting paid reasonable carry.

Then, yeah, I think it’s all relative, obviously, but CLOs provide, just via their structure, a really attractive opportunity set, a really attractive asset class. Really no matter where you are in the cycle, but certainly they’ve proven to be very resilient during turbulent times in the past, and so, to the extent that you can get comparable yields in CLO land versus somewhere else in the credit markets, I think you can find some pretty attractive opportunities there.

Jonathan Lipton: Great, thank you. I’ll flip it over to Clark. What’s making you smile, if anything, out there when you see something? And what is it?

Clark Hoover: Yeah, I mean, I think non-sponsored is interesting space right now. I think anywhere that doesn’t lend itself to the big firms just quickly deploying capital. So the kind of things that have some complexity and require some bespoke solutions.

So opportunistic cap solutions, kind of in those lower space… smaller or lower EBITDA spaces, I think those are most interesting. I also think, on the asset-backed side, we’ve got some managers who kind of have a wide aperture where they can lean into, in the asset-backed space, and I think real estate is still very interesting. And so we’re looking forward to seeing where those opportunities might lie.

Jonathan Lipton: And I’ll just kind of throw it in that reverse order here. Clark, when you’re thinking about these great opportunities, what kind of returns are getting you excited on a risk-adjusted basis here?

Clark Hoover: Well, I mean, I think, too, like Kaylon said, we’re low teens, I think, is kind of where we want to be. I mean, I think one question that I think institutional investors need to think about is, when we started in private credit in 2019, right, it was like, hey, we’re looking for some kind of alternative to liquid fixed income, right? A few hundred basis points better. And then you fast forward to today, and I think it’s safe to say that private credit probably has the most heterogeneous collection of strategies under it compared to other asset classes that we deal with. So you’ve got this range of returns with private equity-like returns, you’ve got things that are much more like low or high single digits. So I think one question we have to really struggle with or think about is, like, what’s really the purpose of our private credit portfolio?

Right? Is it to get those private equity-like returns with downside protection? Or is it a replacement for liquid fixed income? And I think this, institutional investors have a really limited historical experience with private credit. I think a lot of it is TBD. I mean, I think since 2019, if I’m not mistaken, like, the private credit market has, like, nearly doubled. And that’s incredible growth.

Right? And I just think there’s a lot of learning, institutional learning, that needs to be done by all of us to kind of see what…

Jonathan Lipton: Kaylon, do you have any thoughts on that, as far as we touched on private credit, which is obviously a big elephant in this conversation, because it’s crowded. I know you often think about finding less crowded opportunities. What kind of returns do you look for in your less crowded private credit? And how do you think about that?

Kaylon McInelly: That’s a good question. I mean, our target return for, as most endowments are, are call it, like, in the 7%. And when you have cash yielding 4, and treasuries, maybe 4 or 5, you don’t have to reach as far or as much. when you have some cash, you can sit somewhat in dry powder. So when we’re looking at that, again, similar.

low double digits, or we also have the flexibility we go into hedge funds. And so we have some managers that, they’ve all loaded up on credit in the last few years. They’ve done very, very well.

A lot of its relative value. ConvertR Manager, that has performed very well this last year. Again, double-digit returns. We don’t see as much value there, so we’re moving away from that area, but… these managers that can go in and provide these returns, when we look at it.

We also want to make sure that there’s a lower correlation to equities. We’ve seen that break down a couple years ago. reduce that myth. I think there’s also a myth that, again, that private credit is divorced from public credit risk, and we’re seeing that now. And so, for us, if it’s going to be something where we have more flexibility, like a hedge fund that can do public and private, we’re okay having them return 5, 6% for a few years, knowing that if and when the markets break down, they’re gonna be able to come in, protect the portfolio, and then have double-digit, 15% returns for a year or two.

On the private side, again, for us, it’s a little liquidity situation. Denominator effects are impacting endowments. So, if you want to lock up your money in private credit, again, it’s going to be competing. You can either do a private credit, or you can do a buyout.

And so, we’re not going to be locking up our money like we once were when we had plenty of liquidity. So it really does, it’s a very different discussion today.

Jonathan Lipton: Great, thank you. Chris, I did not forget about you. I am wondering, when you’re looking at your returns and how you’re pricing things and what gets you excited, what type of returns are you finding in this space?

Chris Martin: Well, I think, building on what Kaylon just said, if you’re gonna look at private credit, and you’re gonna look at a more illiquid credit allocation, and you want to get paid for that, one thing that we’re finding interesting right now is emerging market, more illiquid loans. I think when people hear that on the face of it, they’re like, whoa, don’t necessarily want to touch that.

And then as you dig in a little bit further, you start to learn, there’s actually quite a few attractive characteristics about being there. One is there’s, if you’re looking at corporate lending in the emerging markets. There’s lower corporate leverage in general than there is in U.S. corporates. These loans are typically shorter duration, so you’re talking about locking up capital for less time, arguably, and those loans are typically self-amortizing, so you’re even, arguably a shorter duration.

It’s typically hard currency, a lot of times dollar-denominated, so you don’t have the currency risk that sometimes comes along with investing in the emerging markets, and you’re getting a significant yield pickup over what you can earn in U.S. illiquid or private credit.

And so, it’s really just, you’ve mentioned a couple times that we take a global view. Our sure, our mandate and our capabilities are global in nature, so we have a little bit of a benefit of being able to compare everything at once.

But I think a lot of people, when allocating don’t necessarily think of emerging markets or non-US private credit as being a fairly mature asset class, or even an opportunity set, and if you can just kind of spend a little time on education and dig into some of the opportunities that are not kind of right down the fairway, you can find some things that are really attractive, and that can really have a place in portfolios, either in place of or alongside a lot of those allocations that are in portfolios already.

Jonathan Lipton: Great, and just to follow up on that, since you brought it up a couple times now, these emerging market names, I would assume they’re part of the global supply chain, so it’s all not… you’re not just taking, like, local country risk. I mean, these are global companies selling into Europe, selling into the U.S. Is that true to some degree?

Chris Martin: Yeah, certainly to some degree, I think, the middle market provides better opportunities, and so those companies are not necessarily the kind of global names that you would see in the headlines, or that people might be as familiar with. But to the same degree, when you’re looking at the fundamentals of these businesses, they are still going to be involved in global supply chains, but, really, when you’re looking at a balance sheet relative to a U.S. middle market or lower middle market corporate balance sheet, and you’re comparing the two. And you look at the yield pickup that you get, the less competition in those markets that give lenders an opportunity to have better covenants and better docs in some of these loans than you can find. We’ve all heard that the cov-lite nature of some of the lending that’s gone on in more developed markets.

Kind of research and boots on the ground and digging in and spending a little bit more time can be pretty fruitful in some of these areas.

Jonathan Lipton: Cool, thank you. Kaylon, I know… Oh yeah, please, jump out on that, come on.

Kaylon McInelly: Yeah, I mean, on the emerging market side, we haven’t played it in terms of the direct lending for, actually 10 years now. But one of our top performing managers last year, our top-performing manager last year, was actually distressed EM bonds.

you have to have a stomach for it, it is high octane, but they were at 48% last year. For a long time, emerging market distress workouts just weren’t happening, it was grinding on. The market started to open up, you start seeing some unique structures that have been created, including, kind of these oil warrants.

That are tied to the countries. So things are finally moving forward, and then this last month, they were up again another 12%. And so, on the Venezuela workout. And so there’s… it’s interesting, again, this is more of a higher octane area, but, and it’s a different play, but it is fascinating. Again, these are these small pockets of opportunities if you have the risk-return approach in your portfolio that can handle it.

Jonathan Lipton: Clark, any, do you look internationally at all, or is your book mostly, North America?

Clark Hoover: We’re about, 75… the target allocation, we’re kind of… we’re basically right around there, is, about 75% U.S. and developed, Europe.

and then roughly zero… up to zero… up to 25% or 20%, rest of the world, and, and Asia. And, we’ve pretty much… we haven’t done anything in emerging markets, largely stayed away from Asia. I think, like I said, we’re… we’re… building out a program, so I don’t think that was something we were going to do in year one or year two. Perhaps, in the future, we’ll explore getting out of developed Europe and North America, but I think right now we can achieve the returns that we’re hoping to achieve right here.

Jonathan Lipton: Great. Moving to another area besides emerging markets, I’ve heard a bunch of smart allocators, including, I think, some of yourselves, are looking at credit secondaries and secondary lending. Is that a big space or a focus of yours now that the secondary market has been growing?

Kaylon McInelly: It’s an area that we’ve started to look at. There are some compelling opportunities, especially when there are some challenges, and if you have a manager that can step in. There have been a lot of funds and firms started in the last 5 years that’s focused on this space.

And there’s a lot of money chasing these areas. And so, not everybody’s the same quality. And so, it’s an area that we haven’t done a lot in, we haven’t made an allocation. Our managers have been, we have managers that we’re looking at.

But, along with the overall secondary market growing, trying to provide liquidity solutions, people have been able to make impressive returns in this area. So it’s a place that we’re focusing on, both on the debt and equity side, trying to come up to speed.

It’s also related somewhat, like, to NAV solutions, etc. Getting an extra couple hundred basis points there. So, we’re being slow and methodical in that area, but it’s here, it’s here to stay, and so we’re watching it for sure.

Jonathan Lipton: Right. Clark, is there anything else that, in that space, are you looking at more high-octane strategies at all, or…

Clark Hoover: Yeah, yeah, we have some, for sure. I mean, it’s not gonna be the bulk of our portfolio. I think finding strategies that kind of have those private equity-like upside returns with some downside protection in appropriate doses in the portfolio makes sense. I think, again, we don’t want to overreach and just be kind of tantalized by the shiny object in the room of these high returns at this moment, because I think, like we’ve all kind of indicated, I mean, it just feels like we’re due, or if not overdue, for some kind of market correction, and I think that would be healthy to some degree. I mean, when Tricolor and First Brands and all that happened, and people kind of threw their hands up.

I think there were some of us who were a little bit relieved, like, oh, great, at least there’s something coming to remind us to reprice markets, right? Because again, because of the complacency.

And I think we need that, because I think a lot of us are just getting kind of getting over our skis in terms of the overreach in private credit returns.

Jonathan Lipton: Love that, because that’s a perfect segue into, like, the next section of our webinar, which is, where are the biggest risks, right? So, like, specifically. So, I’m going to ask Chris this question. What risks are not showing up, right? What’s not being priced in, in spreads or reported volatility? Which I guess you could also say, what keeps you up at night, and how would you change it? How would you change your pricing? If you had to.

Chris Martin: Sure. Clark mentioned, Tricolor and First Brands. I don’t think that we have a canary in the coal mine, and there’s a massive issue within U.S. direct lending or private credit markets, but certainly, I completely agree with what Clark said. It seemed like there was a 5- or 6 year period where there was not a single headline or announcement of any issue whatsoever. I think that’s unrealistic, and we should expect, in a healthy credit lifecycle that you see bumps along the road, even if it’s not a full-scale credit dislocation, if you will.

I would say, so we’re… We think that there could be potential for more in terms of LMEs, workouts, other sort of capital solutions within the U.S. loan market and U.S. corporate market in the future. But I think the bigger opportunity set there, and it’s really coming off of where are the risks, is, in our view at least, in the stressed and distressed European corporate middle market.

They have had a much more active environment for stressed and distressed investing. Last year, you saw distressed really pick up there.

And that’s really on the heels of what we’ve all seen, which is relatively anemic growth relative to the rest of the world. You have energy prices still, primarily that got kicked off with the Russia-Ukraine conflict, but, Europe still has, I think, 2 or 3x the input prices for energy costs than the U.S. does. And so… and then you have, obviously, the disparate countries and policy agendas and things like that, to operate in there. And so, naturally, the output of those… of that collection of inputs is…

You know, corporates that have a hard time planning long enough into the future to fund their businesses appropriately, and so you’re naturally gonna get some middle market corporates that run into issues, and we’ve already seen that happen. Last year, it was a big year. For stress and distress in Europe, we expect that to continue. I think the kind of prevailing opinion is 2026 will actually be higher in terms of corporate, restructuring activity in Europe than it was in 2025.

What are the risks? I think Europe in general is at risk of kind of being left behind as you see this new, in our emerging market. Folks have talked about the new, kind of, Trump administration world order is going to benefit non-European geographies.

you just have this kind of culmination of factors that will feed into continued issues, at the corporate level across Europe, that I think for an astute investor that is going to play either stressed, where it’s pulled apart, or full-on distressed, restructuring, workout, multi-year scenarios.

could have a really, really attractive opportunity set on the back of, to answer your question, where are some of the biggest risks? Like, that is some of the biggest risks, but from certain risks, you can drive pretty attractive opportunities, depending on how you’re positioned.

Jonathan Lipton: Great. Kaylon, building on that, when you have managers come in right now, and if, let’s just say, you had, like, an AI brain, and you can measure the sentiment of everyone coming in, what’s the sentiment? I mean, are you hearing the same people talking about, instead of being so euphoric about, being a little bit more cautious and seeing cracks, or, is it still too early to see those real cracks?

Kaylon McInelly: I think it really aligns with what they’re trying to sell, just like Clark said. You hear a direct lender come in, or an asset-based lender, and everything is fine, you don’t have to worry about it too much, and then you have somebody who come in who is much more capital solutions oriented, and, the world’s falling apart. So, we hear it all.

I would say, for me, personally, I think it’s a little bit more believable on somewhere in between, but being positioned appropriately to take advantage of those opportunities are very important. So, for instance, say, asset-based lending.

A risk that we’re watching is that crowdedness, and so there’s been a lot of headlines that we’ve seen, the mega-sponsors, right? We’re going from $10 billion in these forward flow agreements to purchase consumer loans, in 2024 to $136 billion in last year.

So, those are typically much more higher risk, and so does that make sense, to do… are you involved with those mega-sponsors that are pursuing that or not?

I think that’s a risk. I think it’s also depending if you have a manager that’s watching where they’re out on the rates, on these yield curves. So, there is a risk, and we keep hearing this, it’s up for our managers.

Depending on who we’re talking to, that… there is a potential risk of the longer end continuing to rise up. We’ve seen the JGB, we’ve all seen the rates move up this week, but some managers are expecting 5% on the 10-year.

Maybe even 6, what does that do for your valuations? And thinking about the policy risks, you can drop, your monetary policy can drop your short-term rates, but do you have to do some kind of yield curve control, or, what’s going to happen with these long-term rates?

How is that going to impact your valuations, your LTVs, etc? So, I would say the sentiment is probably about as wide as we’ve seen for a number of years.

And again, it all depends on the manager’s style and what they’re trying to position for.

Jonathan Lipton: Thanks. Awesome. Hey, Clark, here’s a question for you. Without giving away state secrets of LACERS, right? We never asked for that, but when you’re having coffee or a beer with your allocator friends.

Do you think they’re thinking about their portfolio, their credit portfolio, being correlated? Or do they think, or do you think that, they think that each bucket, is going to act upon itself in its own way in stress?

Clark Hoover: Yeah, I think, the nice thing about the private credit space is that, as opposed to the BSL market, like, you had, you had a mismatch of duration, right, between long-term, longer duration, loans and short-term, retail depositors, right? And so.

here, I think we’ve got a bit of a better mousetrap, right? Where you’ve got private… private funds with, we’re in these funds of, say, lives of 6 to 10 years, right? And I think I feel a lot more comfortable with our ability to… work… our ability, via our managers, to work with borrowers, to find, to find solutions. So, yeah, I mean, I think…

as far as the correlation goes, I don’t… and we’re… a lot of this is, like, at the end of the day, some of these loans, it’s really pulled apart, right? I mean, you kind of know… unlike private equity, right? Like, you don’t really know what that return’s going to be. I mean.

in private credit, at least you kind of, you have a pretty good, a much more, much narrower, dispersion of returns, and so… and a timeline that’s expected.

Right, so from that… in that regard, I… I do feel like it, it, it’s… it doesn’t have the correlation that public traded securities does. With that said, the sort of, incestuous, almost, relationship between private equity and private credit, right? Where private credit is being leveraged to keep afloat some of these, portfolio companies that haven’t found buyers yet, and valuations feel like they’re still frothy and they need to be corrected, and that’s something that does concern me, because I.

I read it’s gonna take, like, 9 years at the current pace for all those portfolio companies to actually, get out of the system, and that’s how slow liquidity has been. So, so yeah, so that’s one piece that does concern me.

Jonathan Lipton: Chris, do you think, leverage on leverage? Is a systematic risk, or do you think it’s, things have been ironed out so far?

Chris Martin: Oh… I think… Maybe. I think that’s a hard one to… To truly research, underwrite, understand, and predict what the impact of… a leverage-on-leverage unwind will look like. Obviously, we have seen some of that in the past, and it hasn’t been pretty.

But we’ve also seen blips where it looked like it wasn’t gonna be pretty, and then, you look back 6 months later and you say, okay, things feel like, we’ve lived through them to some degree.

A lot of that leverage on leverage, although, can be concerning. I think speaks to, there’s… a lot of that happens in uncorrelated type strategies, which… to flip it on its head a little bit, I think is generally underappreciated, in general. Like, Kaylon and Clark have both mentioned, how those things can be attractive, and I think, in general, a former mentor of mine used to say, my clients can’t eat correlation.

they can only eat returns. They don’t feel correlation. I think that’s true, and so it’s hard to kind of quantify the value of truly uncorrelated returns, but if you can get…

if you have a strategy where you can be in liquid, investment-grade type credits and drive, a truly uncorrelated long-short, 8-10% net return.

Kaylon mentioned it before, sometimes that’s gonna be 5 or 6 during more benign environments, but when that vol hits, and you start to see, the underlying relationships and correlations break down, and you can take advantage of that, I think that has real value in an allocator’s portfolio. The problem is.

when you pitch that, or if you’re allocating to something like that, it’s very hard to quantify what that value is, even though when you… when things are falling apart, and it’s delivering that protection in that uncorrelated type return, that’s when it feels really good. It’s just hard in those more benign environments to predict how good that’s gonna feel when everything else is kind of falling apart. So, I think, underappreciated by market participants is kind of truly uncorrelated… finding truly uncorrelated returns, no matter what the underlying strategy may be.

Jonathan Lipton: Totally. Just building on that, and I’m gonna ask Chris a follow-up, and then go to Kaylon and Clark, to answer this question. We have a question from the field, which is, where do you think, I know this is a bit of a prediction, where do you think there could be dislocation opportunities. Not obviously today, but, like, if you had to look out, in the not-so-distant future, and put a crystal ball on.

Kaylon, I know you’re saving dry powder, but, let’s start with Chris. To see, kind of thinking where you would, where you’d be hunting, for potential opportunities.

Chris Martin: Yeah, I think, I touched on it a little bit, but the European middle market corporate stressed and distressed.

Although that’s kind of already a current opportunity. While I said that Tricolor and First Brands is not necessarily a canary in the coal mine, I think the size of the leveraged finance markets in the U.S. means that you don’t need to see the 8-10% default rate type full credit dislocation cycle to get dollar amounts that are very material in terms of where there could be a dislocation.

And so even just that kind of normal course, bumps along the road that we talked about, if you can pick your spots and you can be positioned appropriately, I think there could be quite a few more opportunities in the U.S. over the next 12-18 months that maybe feel like they’re more material than what we’ve seen in the recent past.

Jonathan Lipton: Excellent. Kaylon, where would you be hunting? What does your crystal ball tell you?

Kaylon McInelly: I think Chris mentioned it, but I think there are some sectors that are probably more vulnerable than others. So when you think about certain retail plays, or you think about healthcare, and trying to triangulate that based on the type of manager you have.

Are they the ones who can step in when needed, do the workout, and provide those solutions? Or are they going to be caught flatfooted? I think there’s also… I keep talking about this asset-based lending, but I think there is some risk there, especially when you have some of these mega-sponsors doing some of these higher-risk areas.

But from our standpoint, we’re trying to sit back and let our managers, the ones who can be flexible, step in when appropriate. But again, we also want to make sure that when we do step in, we’re getting paid for that risk that we’re taking.

Jonathan Lipton: Absolutely. Clark, last word on where you think there might be dislocation opportunities, and how you’re positioning?

Clark Hoover: Yeah, I mean, I think Chris and Kaylon are right. I think some of it’s gonna be sector-specific. I think you’re already starting to see some cracks in certain areas. I think the challenge is gonna be, for managers, making sure that they have the operational expertise to step in and work with these companies.

I think a lot of the managers that have come into the space over the last few years, they haven’t really been tested in terms of their ability to work through a true workout scenario. So I think that’s gonna separate the wheat from the chaff, so to speak.

And from our perspective, we want to make sure that the managers we’re with have that experience, have been through those cycles before, and can actually add value when things get tough, rather than just being capital providers.

Jonathan Lipton: Perfect. Well, I think this has been a fantastic discussion. We’ve covered a lot of ground - from the current market environment and the complacency that seems to exist, to specific opportunities in areas like European CLOs, emerging market lending, distressed situations, and some of the risks around leverage-on-leverage and the interconnectedness of private equity and private credit.

The key takeaways seem to be: be selective, find managers with real differentiation and experience navigating difficult cycles, don’t chase the shiny objects, and position for the inevitable normalization that’s coming to credit markets.

Thank you all for joining us today, and thanks to our fantastic panelists Chris, Kaylon, and Clark for sharing their insights.