There is a wide variety of sub-strategies (Roundtable Alternative Credit - part 1)

May 15, 2025

How does Alternative Credit differ from regular loans? What sub-strategies are there? And how do they fit into the portfolio? In part 1 of this Roundtable, six experts discuss this highly diverse asset class.

By Hans Amesz

This is part 1 of the report. Part 2 will be published on Monday 19 May and part 3 on Thursday 22 May.

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 $100, resulting in 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 mentioned, these loans can be as small as $100, while a regular consumer loan can be $10,000, 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 securitization, this is an asset class that investors know well. We are one of the market leaders in securitization. We have done approximately 160 securitizations of residential mortgage-backed securities (RMBS) and often act as sponsor ourselves. This offers many opportunities to capitalize on the illiquidity premium in the private market and later monetize it in the public market. In terms of 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 purchase new assets. Finally, aviation and equipment financing include 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 (such as 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 to give institutional investors 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 directly exposing them 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.'

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 debt for companies. They are given a credit line that they can use flexibly: drawing 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 investments. 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 involved?

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 room 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 will do, partly due to limited track records or lack of experience during periods of crisis. Knowledge sharing is crucial to convincing investors. Make sure everyone knows what is available, how it works, what the risks are, and how it fits into a portfolio.'

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

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 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 portfolios in two ways: away from corporate credit and toward shorter maturities.

A typical commercial loan has a maturity of five to eight years, often with bullet repayment, 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 amortizing—interest and principal are paid each 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. That was until the financial crisis. Since then, they have moved to private lenders. At the same time, the products have been professionalized, with better structures and risk management.'