The current interest rate market has put more pressure on banks to lend, but private credit managers are sourcing greater opportunities with more to come on the risk/reward side for the asset class, according to LibreMax Capital.
LibreMax’s Greg Lippmann, managing founding partner and chief investment officer, and Kevin Tyler, head of ABS, are finding niche investments across both securitized products and asset-based financing.
Lippmann founded LibreMax in 2010 with an eye on a spectrum of debt that had yet to be sourced by much of the market. Previously, he led all non-agency RMBS, ABS and CDO trading globally at Deutsche Bank — a role that led him to be immortalized in The Big Short as one of the key investors in the subprime mortgage that preceded the Global Financial Crisis.
Tyler was at Credit Suisse prior to joining LibreMax, serving as a director in Structured Products, Student and Marketplace Lending from 2015 to 2018.
Today, LibreMax oversees roughly $10 billion in assets on behalf of its clients. In this conversation, both seasoned credit investors outline for Alternatives Watch the current state of the market, what’s on the horizon, and how data and analytics benefit their brand of private credit.
AW: Private credit is typically thought of as traditional corporate direct lending. How does LibreMax define private credit and how does its private credit investing strategy compare to traditional corporate direct lending?
Lippmann: Given LibreMax is a structured products specialist, we are solely focused on securitized products and asset-based financing. As such, private credit for us is different than traditional private credit, which generally consists of direct lending to middle market companies. Our lending is all secured. Typically, we’re looking for investment opportunities that are pre-securitization from issuers where we would likely have bought their bonds in the secondary market.
Tyler: As a result of higher rates and tightening lending standards at banks, companies which might have gone the middle-market loan route, or pursued some other type of financing, are increasingly seeking to pledge assets in asset-backed arrangements, which are typically non-recourse but legally isolate the credit risk of the assets from the sponsor or originator. These assets include pools of financial assets, such as credit card receivables, mortgages, car and other vehicle loans, and personal loans, among other forms of collateral.
AW: How does LibreMax source and execute these often off-the-run, niche investments?
Lippmann: A number of the members of LibreMax’s investment team came from senior roles at banks. We understand that strong banking and originator relationships are invaluable in sourcing assets and seeing opportunities given private credit is a pure over-the-counter product as opposed to an exchange traded product. These strong relationships established over many years, coupled with the size of the overall firm and the amount of trading that we do in the secondary market, make us an important player in private credit.
Ultimately, our singular focus on — and flexible mandate within — structured credit creates a flywheel effect, in that we’re important to banks and finance companies throughout their lifecycles in a way that a firm which is purely private credit or purely secondary is not.
Tyler:As a nearly $10 billion asset manager, we have a big footprint. Our ability to source attractive investments is related to the fact that LibreMax is an active participant in the public securitization markets with significant asset experience and a variety of funds which, while all structured products focused, have very different mandates and thus types of assets. Whereas some capital providers are more narrowly focused on just private credit or just public CUSIPs, with perhaps a primary focus on either investment or non-investment grade securities, we are able to build lasting relationships and serve as a relevant capital provider across a company’s lifecycle and securitization capital structure.
Ultimately, we focus on finding creative ways to problem solve for partners so that each party accomplishes their objectives. We have executed a range of deals across disparate asset types, which has a lot to do with us not having the constraints of ratings or regulatory capital constraints. If a bank determines a deal is unattractive from a rating-based capital framework or due to other onerous capital requirements, we have the flexible capital required to look through that and understand and price the true economic risk.
AW:Can you speak to LibreMax’s approach to structuring private credit investments?
Tyler:When we refer to structuring, we mean understanding asset cash flows, how those cash flows should be paid to different holders of risk under different circumstances, and what legal rights we need to maintain to protect our investment. We consider ourselves asset experts given our decades-long historical experience. Our process entails looking at, for example, a pool of consumer credit and asking questions like what is the plausible range of potential outcomes or what will these cash flows really look like in a period of higher stress? We then combine those historical experiences with our technology team’s predictive modeling to inform how we structure deals, while also asking ourselves, “what might be different this time?”
There’s also a component of negotiating complex legal agreements. As Greg mentioned, we have a team of investment professionals with extensive experience working at banks and negotiating these facilities with the borrowers directly and other lenders.
The other piece of the structuring puzzle is keeping perspective on how our private, asset-based finance deals compare to the public market equivalent. Sometimes banks choose to execute a structure that creates a good return on capital, but to a spread that’s tight of where similar assets or risk are trading in the secondary market. A private market-only specialist might see an opportunity as attractive and not realize that the same or better risk is actually trading cheaper in the public market.
The intersection of these aspects — a pragmatic approach to risk, a deep understanding of structuring, technology enhanced analytics and predictive modeling, and a relative value framework — characterize LibreMax’s approach.
AW: How does LibreMax leverage data and analytics in its investment and risk management processes?
Tyler:We have invested a significant amount in data and analytics and have a dedicated quantitative team, many of whom have PhDs in technical fields. From an underwriting perspective, this data enables us to look at granular asset performance and act quickly when evaluating new opportunities.
On the surveillance side, we’ve built analytics to help us dig deeper into performance data and understand what’s happening with our investments in real time. We receive macro, industry, and company specific data, and in some instances, we’re getting daily reporting on how these loans are performing. It all comes down to understanding the assets in which we’re invested. Data and analytics help us do that efficiently and comprehensively to leverage the real-time data from our current investments and make us smarter about pursuing future ones.
AW: What excites you most today about LibreMax’s flavor of private credit investing?
Tyler: A year or two ago, a company might look at the capital markets and feel that they may be readily available at any time they want to issue or borrow. Today is very different. We’ve observed this sentiment change and many companies are keenly focused on securing liquidity to finance their businesses with high confidence, even if they have to pay more and at better terms to lenders.
Lippmann: The combination of widespread high base rates, the regulations that have been implemented post-GFC, the retreat of banks in the wake of SVB, and general deposit challenges for banks given the competition from money markets, creates an environment where there are high base case yields, and we are able to negotiate strong triggers. Particularly as public markets have become more volatile, we’re seeing even more structure and spread concessions and we are getting exponentially better risk reward from the lending that we’re doing. It’s an exciting time and we’re excited about the opportunities for our business.