Corbin Capital

“WE ARE KEENLY FOCUSED ON LESS-TRAFFICKED AREAS OF CREDIT MARKETS, BUILDING PORTFOLIOS OF OFF-THE-RUN ASSETS WITH THE POTENTIAL TO GENERATE CONSISTENT RETURNS.”

CRAIG BERGSTROM

CHIEF INVESTMENT OFFICER, CORBIN CAPITAL

We enter 2022 with credit spreads at near all-time tights, inflation at multi-decade highs, central bank policies rapidly changing from extreme easing to potential tightening measures, and COVID variants still rapidly spreading. Considering this backdrop coupled with a less accommodative policy on the horizon, how is an investor supposed to make their target returns should we experience even minor hiccups?

Corbin continues to believe that the key to generating returns in this environment is the combination of active management and sourcing off-the-run investment opportunities. We think allocations to traditional credit are more likely to generate lackluster returns, creating meaningful opportunity costs for pension investors. In these uncertain times, we are therefore keenly focused on less-trafficked areas of credit markets, building portfolios of off-the-run assets with the potential to generate consistent returns. In traded markets, this means focusing more on special situations, such as event-driven opportunities and pockets of structured credit that still trade wide to high yield or other comparable risks.

We also see many investors moving substantial allocations from liquid credit to illiquid private credit, which offers higher return potential with less mark-to-market volatility, though the sponsor backed lending market seems very competitive to us. That said, we think there are meaningful return premiums for non-sponsor corporate borrowers, but currently think the best risk adjusted return opportunities can be sourced in areas of specialty finance, such as land-banking and non-QM mortgage origination. We believe that investors who make the leap from liquid to private credit and from sponsor-backed lending to more niche private credit strategies will benefit from positioning their portfolios for enhanced returns that will compound for years to come.

While 2021 was a year of economic recovery, which buoyed risk assets, we expect 2022 to require a nimbler approach.