Summary
The purpose of the Pool is to provide access to a diversified portfolio of illiquid, and often private credit (non-government bonds) investments, primarily in the US and Europe, that provide attractive relative value versus the Public Benchmark, as defined below, where the additional return should compensate for increased (credit) risk, complexity and illiquidity.
The Pool seeks alternative credit investments that offer superior returns versus credit investments that are traded on public markets, which is proxied by the public market benchmark (i.e. Risk Benchmark), as defined below. The risk-return profile of these alternative credit investments is additionally driven by non-traditional risk factors like illiquidity and complexity. The increased illiquidity and complexity is mostly driven by the instrument type, which can range from private (non-listed) debt exposures to fund investments with external managers. The additional return should be an adequate compensation for increased credit risk, illiquidity and complexity.
In order to provide access to a broad and diversified portfolio of alternative credit investments the Pool targets a maximum allocation of 35% of the Net Asset Value to each of the strategy segments stated below, except for the alpha-driven credit strategies which targets a maximum allocation of 10% of the Net Asset Value.
The strategy segments are defined as follows;
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Specialty Finance; Involves strategies that typically invest in securities or loans backed by various forms of collateral, which require a high degree of sector-specific origination or underwriting experience. The majority of strategies involves collateral types secured by ‘mainstream’ assets such as residential properties, commercial properties, infrastructure assets and consumer credits. However, it can also involve strategies backed by ‘niche’ types of collateral (leasing, trade finance, shipping, and aviation) or strategies that provide (senior) financing on portfolios, assets or financial instruments. This strategy segment is referenced against the Investment Grade part of the public market benchmark.
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Private Credits; Special situations in which debt is offered to the Manager in a private, often bilateral, manner where the Manager can exploit its competitive advantages. These can be structured credits or corporate credits. Private corporate credit opportunities are currently not in portfolio or in scope for the near-term but the ambition is to grow this segment in the long run, subject to internal approvals. Structured credits include (synthetic) securitization tranches that expose investors to the most junior credit risk (e.g. first loss and residual tranches) of the underlying collateral portfolio. This does not include any securitization exposures that are government- guaranteed (i.e. US Agency mortgage-backed securities) which are, as such, not exposed to credit risk. This strategy segment is referenced against the High Yield part of the public market benchmark.
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Direct lending; Private loans originated exclusively by one or a limited number of lenders with terms negotiated directly with the company. In this case the loan is not broadly syndicated by a consortium of banks to a wide group of investors but instead bilaterally negotiated between one or a limited number of investors/lenders and the company/borrower. Although these mandates can include subordinated/junior exposure, the majority is directed towards senior debt exposure. This strategy segment is referenced against the High Yield part of the public market benchmark.
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Non-performing loans Non-performing loans are loans that are in default or can reasonably be expected to enter default. Typically, non-performing loans bought at significant discounts (to par) after which a dedicated manager/servicer recovers as much principal value as possible. Strategies include often exposures to granular portfolios of consumer-related loans but can also involve loans secured by commercial real estate or other assets. This strategy segment is referenced against the High Yield part of the public market benchmark.
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Distressed debt & special situations; Involves strategies that primarily invest in debt (securities and/or loans) of companies, local authorities, or countries that are in or near bankruptcy. Typically, distressed debt is bought at a significant discount (to par) with the intention to recover as much principal value as possible. The most common distressed debt securities are bank debt, bonds, trade claims, and common and preferred shares. This strategy segment is referenced against the High Yield part of the public market benchmark.
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Alpha-driven credit strategies; Relative value strategies where the Manager aims to exploit mis-pricings in specific alternative credit segments. These strategies exhibit limited market beta and focus on alpha generation using credit-related investments where leverage is typically being used to increase returns. The underlying fixed income instruments or the strategies as a whole can be characterized as illiquid and complex. The Pool targets a maximum allocation to this sub-segment of 10% of the Net Asset Value.
Portfolio construction and diversification of return drivers drive the investment process in which external manager selection is an important element. The portfolio construction is the product of a bottom-up, opportunity-driven, investment process where investments should provide attractive (relative) value versus the Risk Benchmark. Given the private and illiquid nature of most alternative credit investments active management (relative to its benchmark) is limited, with a buy-and-hold investment style allowing for longer investment horizons.
The Pool should be seen as having higher (than investment-grade) credit risk with a 5 year investment horizon. Investment decisions are based on in-house research and analyses supported by research and analyses from external managers.
The Pool will not seek active duration or currency positions versus the Performance Benchmark.