Roundtable Alternative Credit

May 7, 2025

^{This report was originally written in Dutch. This is an English translation.}

Under the new pension system, many investment categories will become more accessible. This includes direct lending and other sub-strategies. Since the financial crisis, many alternative credit strategies have shifted from banks to private lenders. At the same time, the products have become more professional, with better structures and risk management.

By Hans Amesz

Could you briefly explain which sub-area or sub-strategy you focus on?

Sachin Patel: ‘I'll start with point-of-sale loans. These are specific loans to consumers for making purchases. Their specific nature is important, because the first variant of this was the credit card, a rather blunt instrument that can be used by anyone for anything. Point-of-sale loans, on the other hand, are much more specific, allowing you to tailor the credit risk, origination and management much more precisely. They typically have very short maturities, ranging from four weeks to six months, offer high returns and are relatively small in size. The average loan amount can be as small as a hundred dollars, which leads to highly diversified and finely meshed portfolios.’

Guy Brooks: ‘Our working capital finance strategy is to provide financing to medium-sized and large companies in Europe and the United States that want to free up tied-up working capital by financing their receivables, debts and inventories. The loans we provide have a maturity of one month to one year and are inherently low correlated with other fixed-income positions. The portfolio consists of 40 loans with thousands of underlying invoices, making it extremely diversified with limited risk of default or losses.’

How do these loans differ from regular consumer loans?

Patel: ‘The main difference is the size. As I said, these loans can be as small as a hundred dollars, while a regular consumer loan can be ten thousand dollars, for example. The purpose is also different: point-of-sale loans are intended for a specific purchase. The second difference lies in the composition of the portfolio: point-of-sale loans are much more detailed, which also allows you to choose which part of the credit spectrum appeals to you.’

Brooks: ‘We provide financing against very short-term receivables and debts to companies with an average turnover of more than one billion US dollars. These are large and, in some cases, well-known names – we do not provide financing to small and/or medium-sized enterprises or to consumers.’

Back to explaining the sub-strategies.

Lalantika Medema: ‘Starting with residential credit. These are loans secured by residential properties. We focus on assets in both the United States and Europe. These assets have performed well in terms of risk/return. We guarantee them a yield without leverage in the mid to high single digits. With leverage, you end up with low to average percentages. In terms of securitisation, this is an asset class that investors are very familiar with. We are one of the market leaders in securitisation. We have completed approximately 160 securitisations of residential mortgage-backed securities (RMBS) and often act as sponsor ourselves. This offers many opportunities to capitalise on the illiquidity premium in the private market and later realise this in the public market. As for other sub-strategies, consumer credit covers a wide range of underlying assets, from student loans to car loans and credit card receivables. We are active in buying up legacy holders – usually banks – and also work with originators and servicers to acquire new assets. Finally, aviation and equipment financing includes assets backed by physical collateral. In both segments, we see that originators – often airlines using an asset-light model – prefer not to keep the assets on their own balance sheets.’

Leticia Ferreras Astorqui: ‘My team focuses specifically on private credit strategies in emerging markets. The sub-strategy I would like to explain is blended finance. The idea is to give institutional investors access to emerging markets, but with risk mitigation, so that the investment opportunities are in line with their investment grade risk appetite. Blended finance works with a vehicle – for example, a fund – in which capital from the private sector (often institutional investors) generally takes a senior position and benefits from a first loss layer of credit risk protection. This first loss layer is financed by public parties such as development banks or multilateral institutions (e.g. the World Bank, the African Development Bank or FMO in the Netherlands). These institutions absorb the first losses from the underlying portfolio, so that private investors in the senior tranche are better protected against the underlying credit risk. The idea behind blended finance is that institutional investors gain access to emerging markets in a risk-free yet attractive way, while at the same time creating a positive impact in target markets. These solutions provide them with portfolio diversification without exposing them directly to the full risk of emerging markets. Thanks to the blended fund structure, including the first loss layer, institutional investors have exposure to a risk profile that corresponds to investment grade.’

Blended finance provides institutional investors with portfolio diversification without exposing them directly to the full risk of emerging markets.

Paul Henriot: ‘I'll start with RCF, or Revolving Credit Facilities. This is a form of direct lending, but specifically focused on these revolving facilities. To put it simply, it's similar to a bank loan for companies. They are given a credit line that they can use flexibly: drawing down and repaying as needed. The companies in our portfolio have EBITDA of between 150 million and 2 billion, so we are in the large cap segment. In terms of risk/return, we focus primarily on senior secured financing for companies with a single B rating. We are currently around 15% net IRR for this strategy. An important point is that almost 50% of our IRR comes from the original issue discount (OID). We purchase these loans at a discount in a highly illiquid market – banks want to sell, but there are few buyers. Our second strategy is NAV lending, i.e. fund-level financing for private equity. We focus on a low loan-to-value ratio at inception – 10% to 20% – for funds with ten to fifteen underlying participations. We then provide a loan at fund level, with the assets as collateral. It is important to note that we only provide NAV loans, the proceeds of which are reinvested in the fund and not paid out to the LPs. This is crucial for us: we want the LPs, GPs and ourselves to be aligned.’

How do the different strategies fit into an LP's portfolio? How do you convince investors to get on board?

Kevin Simons: ‘There are clear differences among Dutch investors in how far they have progressed with alternative credit strategies. Small and medium-sized pension funds in particular are only now starting to engage in direct lending. The Wtp transition is expected to create more scope for alternative investments, and direct lending can benefit from this. For the broader alternative credit segment, I see a little more reluctance, or rather caution. Smaller investors often wait to see what the larger investors do, partly due to limited track records or lack of experience during periods of crisis. To convince investors of something, knowledge sharing is crucial. Make sure everyone knows what is available, how it works, what the risks are and how it fits into a portfolio.’

The pension reform is expected to create more scope for alternative investments. Direct lending could benefit from this.

Patel: ‘When talking to LPs, we don't really try to convince them. We mainly present our solution to a problem that they themselves recognise. Our clients are long-term investors: insurers, pension funds, foundations, sovereign wealth funds. They usually already have exposure to mid-market direct lending, and they are satisfied with that. The problem is that their entire private credit allocation consists of corporate lending in all its various forms. Even ‘special situations’ are often just another variant of corporate lending. Our solution is products with higher returns, shorter durations and no correlation with corporate credit risk. This allows LPs to diversify their private credit portfolio in two ways: away from corporate credit and towards shorter maturities.

A typical commercial loan has a maturity of five to eight years. These often have bullet repayments, which means you only have full insight into the credit risk at the end. In specialty finance, our average duration is 18 months, and the loans are amortising – with interest and principal repayments every month. So you have high-yield assets with shorter maturities, which means less risk. What's more, because we receive monthly repayments, we can continuously reinvest the capital. We are one of the longest-standing specialty finance funds, having started in 2017. Many of the sub-strategies discussed were previously held on bank balance sheets. Until the financial crisis. Since then, they have moved to private lenders. At the same time, the products have been professionalised, with better structures and risk management.’

When talking to LPs, we don't really try to convince them. We mainly present our solution to a problem that they themselves recognise.

Has the shift from banks to alternative lenders and the increasing need for diversification among LPs significantly increased interest in these strategies over the past five years?

Medema: ‘Definitely. But I wouldn't say that we are replacing banks, rather that we are working together. Banks are still strong at what they do, they want to maintain customer relationships and have the infrastructure to originate loans. What they can no longer do is keep these loans on their balance sheets. Most customers already have a well-established direct lending portfolio. They don't want to sell their direct lending investments, but are looking for something to complement them. Asset-based finance offers that flexibility through multiple sub-segments. Asset-based finance or speciality finance often conjures up the idea of something complex, but it's really about financing the real economy. So we spend a lot of time on education: explaining how we acquire those assets, how we assess them, how we manage them. That gives investors a clear picture of the risk they are taking. When it comes to track records, it's not just about how long we've been active as managers, but about the historical performance of the underlying asset class. For some strategies, that history is short (five years, for example), and that period was relatively quiet economically. So we always look at how long the data history is. For example, we use 40 billion data points on consumers.’

Brooks: ‘The asset classes of trade finance and working capital finance are no different from other private credit strategies, where banks’ requirements to hold more capital for non-investment-grade loans after the financial crisis have led them to focus more on investment-grade loans, creating a financing gap. The use of trade finance by institutional investors has really taken off in recent years. Acceptance and approval by some of the largest consultants has helped this process considerably.’

Leticia, you work with Emerging Market Debt (EMD). How do LPs position this: within private credit or within EMD? How do you convince them to take steps with regard to this sub-strategy?

Ferreras Astorqui: ’When we talk to LPs, we usually hear two objections. Firstly, the perceived risk: many investors see emerging markets as very risky. They often have a conservative profile. In most cases, these are insurers and pension funds with 97% of their balance sheet in Europe or other OECD countries. Secondly, accessibility. For those who do want to diversify into emerging markets, the question arises: how? Outside capital market indices, there is often little direct access to emerging markets. When positioning blended finance, we emphasise two things: the risk-mitigating measures in place that ensure an attractive risk-return profile, and the advantages of working with public sector institutions when it comes to origination and local knowledge. We also highlight the low correlation with other EM exposures and the fact that the portfolio is highly diversified. Because blended finance funds often do not have an external rating, it takes more work to talk to investors about risks, performance and the strength of the data, which can sometimes be a challenge when attracting a broad pool of institutions. However, for investors with sustainability ambitions, such as climate or net zero targets, this strategy helps them to actually deliver on these commitments. More and more investors want their investments to have a positive impact, but with clear KPIs and in the context of existing sustainability regulations (such as Article 8 or 9). A major challenge is where to place this strategy in the portfolio. Some institutional investors have an impact bucket, which is a good fit for blended finance. But many do not. In practice, it usually falls under the fixed income segment or the alternative credit section.’

How do Dutch LPs position these types of strategies within credit?

Simons: ‘That depends very much on the structure of the portfolio and which buckets already exist. Many pension funds have an EMD bucket, so blended finance would fit in there logically. But in practice, it is often very different from what people are used to. Although it seems logical at first glance, it often proves difficult in practice. It is somewhat easier for larger investors, especially if they have an impact bucket, which is becoming increasingly common. But small to medium-sized pension funds still have a lot of work to do to broaden their fixed income segment. They are currently focusing on the first step: diversification towards direct lending. Hopefully, this will be followed by more scope for the strategies we are discussing here. Foreign investors seem to have made more progress in this area. They have generally been investing in direct lending for some time, which makes expansion into alternative credit a more obvious step.’

I wouldn't say we are replacing banks, but rather that we are working together. Banks are still strong at what they do.

Medema: ‘Among global investors, private credit allocations are still dominated by direct lending. But over the past two years, asset-based finance has really become the focus. Even if a client doesn't know exactly what it is, they have read enough about it to ask: “Tell me, what do you do in that area?” Some investors are increasingly looking for a multi-sector approach, so not either direct lending or asset-based finance, but a single vehicle that gives you access to multiple private credit strategies.’

Ferreras Astorqui: ’That's a good point. Many investors don't yet have an impact-focused sub-strategy and may not be very familiar with these investments, so we compare it to something they do know. In my case, many investors are unfamiliar with blended finance. As part of our introductions, we therefore often compare the underlying assets with infrastructure debt, as many of our funds invest in infrastructure or other real assets and investors are often already familiar with infrastructure debt or even infrastructure equity. This comparison works well, as performance can be equally robust and investments in real assets are virtually the same regardless of the country, so we can establish a familiar basis and then build on the nuances of emerging markets.’

Henriot: ‘We are seeing a huge increase in knowledge among investors. Private markets were first opened up through private equity, then through direct lending. Now, during meetings, we are increasingly hearing that direct lending feels saturated, especially in the mid- to large-cap segment. Diversification is therefore a key theme. Investors are looking for different maturities, different risk profiles and different underlying assets. RCF (revolving credit facility), for example, is largely a liquidity product with less financing, while trade finance assets (such as factoring) are supported by a commercial transaction, not a financial one. This automatically creates a de-correlation with traditional credit markets. Investors find that attractive. As for the track record, yes, we can rely on it for most strategies. But for some, such as NAV lending, it is more difficult. These types of strategies have not been around for very long and there are less than ten years of reliable statistics available. That is why we use an external rating, so that investors have a framework for positioning the strategy from a risk perspective, even without long historical data.’

Brooks: ‘Our strategy can be viewed in different ways. The asset class's low default rates and improved risk-adjusted returns mean that it can complement any credit strategy by offering zero duration, low volatility and diversification. The short maturity of the underlying assets also means that it has favourable Solvency II treatment.’

How do you explain NAV loans to LPs? They often have exposure to private equity themselves.

Henriot: ‘It does require some explanation. Some investors initially think that this is private equity risk. But when we work with a BBB rating, the return is typically around 8% to 9%, not 15% to 20%. It is essentially an investment grade credit profile. Yes, the underlying assets are private equity (PE), but the enormous diversification and low LTV mean that the risk is very different. For example, a NAV loan fund has ten to twenty lines of investment (i.e. loans to a PE fund). Each of these PE funds in turn contains ten to twenty companies in their portfolio. So with ten NAV loans, you have exposure to 200 companies, with low LTVs. Even in a severe scenario, such as during the financial crisis, the portfolio is demonstrably sustainable. If a private equity company goes bankrupt, which is rare, there is often something of value left over. Even if you sell at a distressed level, you often still get 40% of the original value, which means twice the coverage on your NAV loan. That is why we usually receive a BBB rating from a reputable agency. It is simply a safe profile.’

The low default rates and improved return for the risk mean that our strategy can complement any credit strategy.

What can you say about the bad press NAV financing has been getting lately?

Henriot: ‘There are actually two types of NAV loans. The low LTV bank variant (LTV of 10% to 20%, low risks) and the deep LTV variant (with LTVs of 50% to 70%, which feels more like equity risk). Our funds focus on the former, where there is a strong alignment of interests. Fortunately, the International LP Association recently drew up clear guidelines for NAV loans, just as it did for cap calls years ago. So there are now clear rules of the game. NAV loans are a form of leverage, cheaper than funding at company level, and can potentially create a lot of value if structured properly. If a fund has already called up all its capital but still needs more to stimulate growth at portfolio company level, NAV lending is a simple and inexpensive way to inject additional capital into the portfolio companies. Everyone benefits. The lender sees that the money is being reinvested, so the collateral grows along with it. The LP may receive a slightly higher return. The GP can create more value and therefore earn more carry. The system works, and since guidelines for NAV lending have been established, the tone of the debate has completely changed. Everyone now feels much more comfortable with NAV financing.’

Much of the regulation on sustainability focuses on corporate credit and term loans, but much less on securitised consumer loans. How do you deal with this in your sub-strategies?

Patel: ‘I agree. ESG regulation is focused on corporate credit. It is not easily applicable to specialty finance and asset-based lending. But you can, of course, apply the same principles. Our focus is mainly on the S (social) and the G (governance). Yes, we apply environmental exclusions, such as no coal financing. But the real impact lies in how you grant loans to consumers or small businesses. Financial inclusion is an important theme in our portfolio. There are groups of people who find it difficult to access credit at reasonable rates. We have a portfolio company that focuses on loans to Latin American residents in the United States, who often did not receive fair interest rates. Because the lender knows this target group well, they can better assess the risk and therefore also price fairly. From a governance perspective, as with corporate loans, we look at how the company is organised. How do they treat their staff and customers? What procedures do they have in place? One major problem is that if you have a fund with hundreds of thousands of loans, it is almost impossible to report at loan level as required for Article 8. And that stands in the way of promoting strategies such as sustainability.’

Are you in contact with regulators about this?

Patel: ‘We are discussing this with regulators. They understand the problem, but little action has been taken because asset-based finance was still relatively small. But that is changing: our sector is growing rapidly and can no longer be ignored. Once investors themselves demand clear rules, regulation will follow. Demand comes before action.’

Medema: ‘In asset-based finance – whether you look at residential mortgages, consumer credit, aircraft leasing or equipment finance – you see that each sub-strategy has its own ESG nuances. So you can't use a universal framework. We therefore work closely with our portfolio managers, both in ESG and private credit, to determine which ESG factors are relevant for each sub-strategy.’

What is the role of technology and AI in the development and risk management of the sub-strategies?

Ferreras Astorqui: ‘We are still thinking about ways in which AI can help us more. It is currently mainly used for data analysis and KPI monitoring. There is often no real central database, so you first have to collect all the data and use AI for analysis and identification of trends. Apart from data, we are seeing a lot of technological progress in climate risk analysis. More and more platforms and datasets are emerging that provide insight into the climate risks of specific locations or companies. Many of these also use AI.’

Henriot: ‘At RCF and NAV, we only have twenty to thirty loans in a portfolio. AI is not really relevant there yet, because the database is limited and the information is largely private. It does become more interesting in trade finance. Think of supply chain finance or factoring. The number of debtors is often limited, but the underlying invoices are numerous. Here you see technological improvement platforms emerging that can automatically process some of the documentation, which can be particularly useful for banks. We are also seeing platforms emerging that can offer forms of trade finance to smaller companies, where banks are less present.’

Simons: ‘AI and data analytics are also valuable for smaller players, such as my consultancy firm with forty people. For example, we offer benchmarks for Dutch mortgage investments based on loan-level data. In the past, you needed a whole team of quants for that. Now we can do it much more efficiently and therefore also more cheaply.’

What is your outlook for the various sub-strategies? Is their importance growing? What trends are you seeing?

Patel: ‘Demand from LPs has grown strongly. We are now at the point where we can actually absorb that capital. If you were to build a new private credit portfolio today, you would probably not start with direct lending, but rather with asset-based finance. The United States has been leading this market for some time. Europe is now really starting to follow, partly due to regulatory pressure. Even banks are now selling ‘super prime’ consumer loans to private parties.’

Medema: ‘The market for specialty finance is huge, around twenty trillion dollars. When we talk to clients, we emphasise four things: 1. diversification, 2. complementarity with existing allocations, 3. hard assets as collateral, 4. low correlation with broader market risks. As private credit portfolios grow, this becomes a logical next step.’

Ferreras Astorqui: ‘For blended finance, cooperation between the public and private sectors is crucial. There are concerns about cuts in government support budgets, particularly in the United States, but the conclusion is clear: we need to create strategies that attract institutional capital to finance emerging markets, especially when it comes to climate change. We cannot solve the climate crisis, which affects us all, by focusing solely on Europe or North America. Interest is growing, including from insurers and pension funds. And despite political uncertainty, many investors remain committed to their sustainability goals and are exploring ways to achieve them, including blended finance.’

NAV loans are a form of leverage, cheaper than corporate-level funding, and can potentially create a lot of value if structured properly.

Henriot: ‘There is a lot of competition in the mid- to large-cap direct lending market. Margins have fallen sharply, from 5% to 3.5% in two years at the long end of the market – Broadly Syndicated Loans to TLB. This means that there is a lot of interest in diversification and differentiated origination. We are also seeing a continuing shift on the supply side. Banks are still looking to proactively manage their balance sheets due to regulation, capital pressure and the mismatch between deposits and long-term accounts.’

Simons: ‘From a Dutch perspective, the pension system reform means that the old system with risk premiums will disappear. In the new system, many asset classes will become more accessible, including direct lending and sub-strategies such as this one. But the transition will take another two to three years. In the meantime, we need to work on knowledge sharing.’

Brooks: ‘Outside the banking world, the characteristics of the trade finance asset class as an investment are only just beginning to be recognised. We believe we are at the beginning of a journey to unlock a huge market. As investors continue to seek diversification and low volatility, demand for these assets will continue to grow. We have seen a huge increase in interest over the past twelve months and have no reason to believe that this will change. The current market volatility will only benefit this growth.’