Roundtable 'Specialty Finance & Opportunistic Credit'

May 13, 2026

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

In many cases, specialty finance serves as a good complement to traditional core allocations. This asset class encompasses a wide range of investments. Transparency towards investors and regarding the product is of the utmost importance.

By Hans Amesz

How do you define ‘speciality finance’ and ‘opportunistic credit’, and how do these categories differ from one another? To what extent do they differ from traditional private credit in terms of risk, return, liquidity and complexity?

Lalantika Medema: ‘When we compare speciality finance with other asset classes, I think the underlying risk is much more diverse. The category allows you to benefit from a wide range of segments – whether mortgages, car loans or credit cards – and from thousands of underlying loans, rather than a single company or property. To assess all those loans properly, a significant amount of data is required. In specialty finance, on an unlevered, loss-adjusted basis, the return potential averages in the high single figures, and with leverage it reaches double figures. In opportunistic credit, the leverage effect can also boost the return potential to double figures.’

Egbert Bronsema: ‘Thanks to this diversification in specialty finance, a portfolio with a wide range of opportunities can be constructed. This does not necessarily mean that there is no idiosyncratic risk, but nor does it necessarily imply a loss of return. Without leverage, stable returns can be generated that are generally higher than those of traditional assets, such as corporate bonds or direct non-bank lending. Furthermore, liquidity in specialty finance can be better than in direct non-bank lending and opportunistic credit.’

Srdjan Vlaski: ‘We define specialty credit across a range of sectors and structures, with a focus on lending secured by hard currency, financial assets and selected corporate loans, such as in healthcare, software and venture lending, where value is primarily driven by intangible assets. This encompasses a wide range of credit activities in the economy, including consumer credit, NAV loans, transport finance (including aviation and shipping), equipment finance and leasing – in short, all forms of lending secured by identifiable collateral. Generally speaking, private credit refers to more traditional, cash-flow-based corporate loans, whilst specialty credit is characterised by asset-based underwriting, structural protection and risk mitigation focused on collateral.’

Robin Challis: ‘When people think of opportunistic credit, they often think of distressed assets. These are bonds or loans traded at 50% of face value, but the opportunistic credit market is much larger than that. In times of stress, we look at loans in performing companies where syndication has failed and we may be able to take over the loan at around 90% of face value. In addition, in stable markets we look at loans to companies that need a flexible solution, for example by combining a first lien with an equity position. We seek the best relative value across the cycle. If you were to look only at distressed assets, there would also be long periods when there might be nothing to do.’

Are there sectors in specialty finance or opportunistic credit that have become mainstream in the institutional investment world, or are they set to become so?

Bronsema: ‘You see that more and more institutional investors are embracing the market (again), simply because of the nature of the financing: namely that of the real economy, i.e. the financing of small and medium-sized enterprises and consumers. Moreover, the financing can also be specifically tailored to their ESG policies, where the financing is directed at specific companies or specific sectors within their ESG framework, for example impact loans. This has become more mainstream.’

Pascal Böni: ‘Financing based on intellectual property rights is, I believe, on its way to becoming more established, alongside insurance-linked financing and litigation financing. These are broad forms of specialty finance. What I also see emerging is data centre or digital infrastructure financing, driven by the significant AI demand for infrastructure. It is very difficult to assess the risk of these financing transactions, as there is very little data available. When it comes to the systematic risk of credit funds – that is, their exposure to benchmarks – we have only recently begun to understand the returns of private credit funds a little better. More empirical research is needed.’
 

The opportunistic credit market is much larger than just distressed assets

 
Sachin Patel: ‘Most of the assets mentioned have been mainstream for a very long time. Loans have been granted to consumers, to small and medium-sized enterprises, for cars, and so on, for decades. For the most part, these are very common asset classes. The only real structural change is that the banks were the institutions that held the origin of these assets and financed them via their balance sheets, from which they have now disappeared. So it is not the case that a new type of credit product has been created that never existed before. I think the majority of the assets are very mainstream. Only a minority would I classify as a new type of investment, and these include data centres, simply because there is a lack of track records. The structural trend whereby assets are shifting from banks’ balance sheets to non-bank lending has continued at a steady pace, driven by regulatory constraints. At the same time, the banks have changed their approach. Now you see the major banks buying entire loans based on future cash flows, almost in direct competition with non-bank lenders, although they focus strongly on the prime segment of the market. Broadly speaking, I think the assets are very standard and traditional; for the most part, they are not particularly exotic or new. But the investor base has evolved, from opportunistic to what I believe is now very mainstream.’

What kind of returns can investors expect from opportunistic credit or specialty finance, and why are borrowers willing to pay more for these types of loans?

Challis: ‘For our more opportunistic funds, we aim for returns over the cycle of 10–14% without leverage. But it varies from case to case, depending on the approach you’re trying to follow. For distressed debt, the return target is higher. The other point to look at is how leverage is applied, as that can significantly influence the return. Borrowers may be willing to pay perhaps 3% more on average if you give them the flexibility for about a year to do something that adds value, for example in rolling out a growth strategy.’
 

In specialty finance, the underlying risk is much more diverse than in traditional asset classes

 
Vlaski: ‘Generally speaking, specialty credit investments currently offer an additional spread of around 150 to 200 basis points compared to a traditional direct lending strategy. For clients entering the specialty credit sector, this premium is attractive because it also offers meaningful diversification away from portfolios of corporate loans and can serve as a partial substitute for private equity exposure. Borrowers are willing to pay higher spreads due to the scarcity of capital available for specialty credit transactions and the complexity involved in assessing these bespoke, asset-backed and structured deals.’

Where are the most attractive risk-adjusted opportunities currently, and how has the range of opportunities changed over the past twelve to eighteen months?

Medema: ‘One of the key considerations is that we do not have fixed allocations to the various sub-segments. So, if we see opportunities shifting, we have the flexibility to react fairly quickly and adjust our approach from a sector perspective. We are positive on residential mortgages, particularly in the United States, where we believe the fundamentals in that market remain strong. In the area of residential lending, we believe there may be opportunities to benefit from low Loan-to-Value (LTV) ratios, a strong consumer base and the dynamics of limited housing supply coupled with strong demand. As regards mortgages, the focus has shifted from new mortgage lending to second mortgages and bridging loans. Borrowers with a first mortgage at a low interest rate want to stay in their home, but also gain access to some of the equity they have built up to refurbish or renovate their property. The areas we are further focusing on on the consumer side include student loans and Marketplace Loans (MPLs) for consumers.’

Patel: ‘In the past, about three or four years ago, there was a significant difference in returns between different sub-asset classes and parts of the capital structure. But because a flood of capital has entered the market, those differences have virtually disappeared. This has led us to move away from core asset classes and look more towards opportunistic deals. However, given the macroeconomic backdrop and the political environment, this is changing. I think managers will become more selective, they will price in risks more effectively, and we should see the spread in returns return. So I am fairly optimistic about the coming twelve months.’

Challis: ‘We see opportunities in companies that currently have a syndicated loan, where it can be more difficult to renew those loans in more volatile times. As lenders, we are looking for companies with positive cash flow, so that they can actually repay the principal and the interest due. There has been a lot of talk recently about the software sector, where money has been lent without the necessary cash flows being in place.’

Vlaski: ‘What is often overlooked is that identifying opportunities in the present and allocating capital to funds does not mean that the same opportunities will be available in the next twelve to eighteen months. That is why flexibility in portfolio management is essential. We typically offer our clients two options for reallocating capital. Firstly, we can reallocate commitments and, secondly, we can reposition portfolios via the secondary market, which has become increasingly liquid, particularly in private credit. This flexibility enables investors to actively reposition portfolios and adds an important tool to the investor’s toolkit for capitalising on new opportunities. It represents a more dynamic approach to portfolio management in private markets.’

Patel: ‘We focus on opportunities with very short durations and high returns. We therefore deliberately steer clear of mortgages and infrastructure. Nor do we engage in property, which makes up a large part of what so-called beta managers do, as that is how many larger funds in this sector are managed. We are highly opportunistic and focus on individual assets and individual transactions that make sense in their own right, and will therefore switch dynamically between sub-asset classes to protect the high returns of the underlying assets. We are focused on where we see the best relative value in the very short term.’

Bronsema: ‘Generally speaking, I believe that within specialty finance there is a diverse range of investments that may or may not be suitable for different types of investors. This also means that they must be offered in an instrument capable of providing the desired liquidity to the investor. Transparency towards that investor and regarding the product is of great importance in this regard.’
 

Without leverage, stable returns can be generated that are generally higher than those from traditional assets

 
Medema: ‘In many cases, specialty finance is a good complement to traditional core allocations. I believe that the combination of cash flows with shorter maturities, backing by physical assets, and ultimately differentiated cash flows stimulates investor interest in this asset class.’

Does the current oil situation affect the markets you target?

Challis: ‘The oil price certainly has major consequences, but I do think these can be quantified quickly within portfolios. You can contact all your borrowers, work out how much of their cost base consists of oil, and so on. You can calculate the direct impact of energy costs fairly quickly and see how they are hedged. I think it will take longer for the secondary impact to manifest itself – everything to do with consumption, pressure on consumers and that sort of thing. The question now is: how severe is the damage and how long will it be before prices fall again? Once there is more clarity on that, there will be clear winners and losers, because some countries will perform very well thanks to the high oil price and others will perform poorly. The same applies to companies, depending on their specific sector. We are keeping a close eye on how the situation develops and what the outcomes are, because I think there will be plenty of investment opportunities.’

Medema: ‘Much of what we do, whether in the United States or Europe, is really underpinned by a significant amount of data, stress tests based on a number of different factors, and ultimately by being very careful and disciplined in our approach. We have seen that during periods of extreme stress, everything is ultimately much more strongly correlated than you might expect. From that perspective, having a more diversified pool of collateral is an advantage. Finally, leverage can increase the potential for returns, but it must also be handled with care.’

What is your view on leverage?

Bronsema: ‘In the current market, where interest rates are expected to rise, financing may have become too expensive. If, at the same time, several parties have financed the same assets with debt, there may be forced sales, and that will naturally put pressure on the prices of those assets. As the maturities of assets and liabilities may differ, it is important to align them as closely as possible. So it really depends on the type of asset you actually want to finance with debt. You have to be very careful, not only with regard to lenders, but also by looking at what others are doing in the markets, because you can reach a point where everyone is rushing through the same door, and their collateral, which has been financed with debt, starts to be sold off.’

Are there any proactive measures the sector can take to address the major challenges that have emerged in this sector and to increase resilience?

Patel: ‘The most important thing to limit misunderstandings, such as “double piedging”, is transparency. I don’t think we would work with a company that isn’t transparent about all the different funding lines and wouldn’t show us what margin calls they have elsewhere. There are several reasons for this. Firstly, you want to be sure that you are achieving the same return as another lender who is essentially financing the same assets as you, and that there is no adverse selection taking place in the credit portfolios. The second reason is simply to carry out checks for double pledging, a more in-depth due diligence on the asset side. I think that is something that should be a new industry standard, a minimum standard for all transactions for all managers.’
 

Specialty credit currently offers an additional spread of around 150 to 200 basis points

 
Vlaski: ‘One of the essential tasks of the audit was to verify the existence of the underlying assets. In the future, asset verification and related controls are expected to come under increased scrutiny, particularly in light of the alleged fraud cases we have seen recently. We expect general partners, together with service providers, to play a more active role in driving standardisation within the sector. Overall, the market is moving in the right direction with stricter credit conditions and better oversight.’

What role should specialty finance and opportunistic credit play in an institutional portfolio, and how should investors manage risk, diversification and scalability? How diversified is the universe in practice, and at what point do capacity constraints become significant?

Medema: ‘A broader geographical spread is something that is increasingly coming to the fore when we discuss opportunities with clients. We assess opportunities from a risk-return perspective, regardless of the region. Above all, it is about whether we are compensated for the risk. In the past, there were perhaps more opportunities in the United States, and clients are now looking for ways to capitalise on opportunities elsewhere.’

Böni: ‘We need much more data to gain insight into the return characteristics of specialty finance assets, how their returns relate to systematic risk factors, and so on. One aspect of including specialty finance products in the portfolio is the question of to what extent an institutional investor actually has its own team to analyse specialty assets, as opposed to investments in standard credit assets, such as direct lending funds. But from a data and research perspective, it is too early to talk about robust scientific performance analyses. Decisions regarding asset allocation for specialty assets are inherently difficult, as we are all dealing with a limited sample. Although we now have a good understanding of the performance characteristics of funds focusing on direct lending, mezzanine financing, special situations and distressed debt, there is still very little data available on specialty finance. As a result, the true characteristics of specialty finance asset classes remain largely unknown.’

Vlaski: ‘As mentioned, we view specialty credit as an increasingly important diversification position. We also believe that this diversification is now delivering attractive, risk-adjusted returns. Following on from Boni’s comments on the availability of data: it takes time to obtain empirical evidence through data, and you need a few cycles. We are a data-driven company, and have recently launched an initiative with another firm in the private credit buy-out market to develop new fundamental benchmarks that were lacking in the past. This initiative reflects our commitment to greater transparency and improved data availability across the entire market.’

Bronsema: ‘We have our own internal models to assess the relevant data and determine what is actually happening across all kinds of different loan types, whether they involve SMEs, large corporations or consumers. Transparency is absolutely crucial for this. It is not just about the asset side; it is, of course, also about the lenders. How detailed is the data regarding the historical quality of the loans? What does their track record look like? Do they use specific underwriting guidelines, and are these dynamic? Here too, transparency is crucial.’
 

Asset-based lending is growing as a core position in institutional portfolios

 
Patel: ‘Following the coronavirus crisis, when interest rates at the short end of the curve rose, investors no longer had to lock their money away for five to ten years to generate a return. Many investors were actively seeking to shorten the duration of their private credit portfolios. If you look at the various asset classes that can deliver short-term fixed-income returns and offer a reliable fixed-income component, I would say that asset-based lending has really grown in that regard. We are seeing a shift from direct lending to asset-based credit and asset-based financing to achieve two things: firstly, to diversify away from corporate credit, and secondly, to shorten the duration of the overall private credit portfolio. Asset-based credit is, I believe, becoming a core holding in virtually all institutional portfolios.’

How scalable are the opportunities, both in terms of fundamental capital requirements and the feasibility of deploying capital with managers?

Medema: ‘We are seeing a prolonged withdrawal on the part of both banks and originators. Ultimately, I think lenders are realising that they can run more efficient balance sheets by working with private capital, whilst at the same time expanding their reach and gaining access to a larger group of borrowers. From a manager’s perspective, you have to be much more critical about where you ultimately borrow from or invest in. Specialty finance has become a structural component of private credit. I think this also points to investors’ long-term need for these types of asset classes and gives them the flexibility to switch between different opportunities.’

Challis: ‘I don’t think people want to be in funds that fail to invest money from LPs or have invested only 30% after three years. That is why opportunistic credit funds have a maximum size: investment opportunities are, by definition, limited. We limit ourselves to mid-market deals, and if you want to invest swiftly in good deals, the maximum fund size is around three billion euros.’

Pascal, could you explain why you expect a decline in the returns of private credit funds in the future?

Böni: ‘Based on the available cash flow of what is essentially a global collection of private credit funds, I have continuously analysed their quarterly figures over a very long period. Based on this quarterly return data, which you can compile using net asset values and cash inflows and outflows, I compare the time series of quarterly returns and draw conclusions from them. You can see that following Covid, the returns on private credit funds have fallen significantly. There is a trend in the market that has pushed average returns down, bringing them quite close to those of high-yield bonds. This applies only to the United States; I haven’t looked at Europe yet, and APAC doesn’t have that much data. It concerns around three hundred large US funds.’

Challis: ‘I think investors are looking for higher returns in segments and regions, such as Europe, where competition among lenders is less intense. LPs want to achieve higher returns by doing things slightly differently, such as offering greater flexibility or combining different elements within a facility, thereby enabling borrowers to achieve their objectives.’

Böni: ‘As a rule of thumb, if the average return of a credit fund falls, I would expect the spread around that average to shift downwards as well. So the difference between private credit vehicles and the liquid markets narrows. The extra margin you get becomes smaller, at least in the US market, probably due to competition between larger funds.’
 

The burden of proof that specialty finance generates structural alpha has not yet been convincingly met

  
Challis: ‘If you’re dealing with around 300 funds all chasing the same type of deals, returns will decline due to the intense competition. It is therefore interesting to look at the spread in returns between high-performing and lower-performing managers and strategies, as the larger sample size will average everything out.’

Böni: ‘Interestingly, research into the alphas and betas of mainstream credit funds shows that the alpha is both economically and statistically significant. From an alpha perspective, mainstream credit funds are very interesting and should be included in an institutional investor’s portfolio. As far as I am aware, the burden of proof has not yet been met for specialty finance and opportunistic credit. These funds have not yet convincingly demonstrated that, after deducting costs, they generate a sustained risk-adjusted alpha.’
 

Read the report in Financial Investigator magazine