Asset-Based Finance: Scaling the Opportunity Set - FEDERATED HERMES INC

Hello, hello, hello everyone, and welcome to this Pensions and Investments webinar, Asset-Based Finance, Building a Resilient Portfolio. I'm Josh Scott, a Senior Director at Pensions & Investments, and I'm joined by two fantastic panelists today, Paul Norris at American Century Investments and Martin Offeringa at Federated Hermes. I am looking forward to the discussion and digging in a little bit deeper on this asset class. It's one that, in the conversations I've had with institutional allocators over the past year, a place where a lot of people are looking to deploy capital. So I think it'll be an interesting discussion because we have two different points of view here. There's access points across public and private markets, and I think you're going to hear some good perspective here today. So looking forward to digging in. And I guess it's a good place to jump in. But before I do, I want to remind everyone at the bottom left-hand corner of your screen, there is a little box for questions. So make sure to submit any questions you have during the discussion, but also remember to submit, click submit, so we see those questions on our end so we can get to them a little bit later in the discussion. Anyway, back to why everyone's here. Paul, I want to come to you first. And I'd like to start, you know, as I kind of kicked off with talking about asset-based, asset-backed, and broad strokes, let's dig a little but deeper into how you all approach the market, at your perspective. So asset back has recently been discussed as more of a private credit opportunity, but investors have access to asset-backed exposures through public markets for decades. So how do you frame the broader asset- backed universe, and where do public securitized markets fit within that? Yeah, I think, first of all, what's interesting is you highlight a really important point. There's a lot of what I would call misallocation. Allocation is not the right word, but misguided descriptions, I think, is the right way to say it in that many people will say private credit, and then they put everything into private credit. So I think it's good to break it out. And today, we're going to talk about asset-based finance, which is substantially similar to asset-backed securities. Really, we are talking about very similar structures, very similar asset classes. it's really about, I think if we take a step back, it's about what fits best on a balance sheet and how are they putting that onto their balance sheet. So let me just say, I think from my perspective, I've been in this market for a long time. I've never seen the analogy I want to use is we've gone from, I don't want to say the ugly duckling, but I want to say the plain duckling to the beautiful swan, in that everywhere I go in the world, everyone wants to talk about either asset-based finance, asset-backed securities. And so the two common things there are really what I would call esoteric or nontraditional, right? So I think what's happened over the last few years is we've had a lot of, let's just say, regulatory arbitrage that has allowed very large insurers and others to take advantage of these private opportunities and do that in an attractive risk-based capital type of level. And I think that's really exploded the growth in the asset class. So for us, when we think about asset-based finance versus public asset-backed securities, bottom line is they're very similar. Same asset classes where we could go through aircraft, container, rail, or financing receivables, very similar structures. So I think for us, really what we're talking about today is the relative value between the two. And again, I don't think from our perspective that one is necessarily better than the other. I do believe, as we've talked off camera, that there's a place for both. And so it really is about being able to pull both of those levers within your portfolio to get the best relative value. The one last thing I'd mention is, from my perspective, public ABS is really what I would call a relative value marker, in that what we've seen is last five years, asset-based finance, private credit, they've been home runs, right? Now, given the exponential demand for asset-based finance, especially at the investment grade level, we think that's why they both deserve a place in the portfolio, because they both have similar relative value in terms of what we've seen in the last year or so. I'll stop there. That was a lot. Apologies. No, it's super helpful, Paul, too, because I think you contextualize some of the use cases or at least portfolio construction elements that a lot of folks will want to look at, which we'll get into a little bit later, too. But Martin, while we're still sort of, I guess, defining what we're talking about here, I'd be interested to hear kind of from your perspective, you know, a little bit more about your piece of the universe and how does it add to the opportunity set and then, you know, what's driving institutional interest? Sure. Thank you, Josh. And you're correct. The broader asset-backed universe is indeed a very wide and very broad one, right? So some of the better-known forms of asset-backs probably involve the securitization of large pools of a variety of underlying assets. But in reality, there's so much more to it than that, right, and asset- backed finance, when I think of it, really, I think of it as it's any form of credit financing that is extended, that is then ultimately secured by either a tangible physical asset or by contractual rights or any combination thereof. And, you know, within that kind of non-securitized form of asset-backed, you have many different silos even within that to make matters more complicated. I would say that, you know, trade finance is an investment strategy, is an asset class, right, that I'm closely related to that invests directly in loans, in syndicated loans, that essentially it's a subset of the bank loan market, right? And a lot of those loans that go into trade finance portfolios, a lot of those loans are indeed secured by a variety of underlying assets, but the difference is they don't get securitized. You don't tranche the risk and sell it off to investors, right? So trade finance portfolios, I want to be upfront here, I wanna be very clear. Those are portfolios of relatively short senior ranking bank originated loans, right, and And a key difference is perhaps what they're not is they're not leveraged loans. That's a very separate market. This is not real estate debt financing. But trade finance loans are quite unique in that each and every one of them is specifically originated to finance a tangible flow of goods or a fixed asset, right? And a lot of what we do in this space does have an emerging market's flavor to it and what's driving institutional demand for this asset class is is really quite quite obvious and i think it matches what what paul said a moment ago is institutional investors look at their full universe of fixed income options across the whole spectrum right where can i allocate to you got your your public markets your private markets and trade finance is just one of the options along that spectrum it's it's a complementary allocation to consider and and its attraction is obvious because it offers a very different proposition it offers diversification in uncorrelated returns it's nothing that you find anywhere else in fixed income yeah that's super helpful martin um kind of like paul like outlining some of the the portfolio construction characteristics, the things that allocators are going to look into. And yes, we will be circling back to that a little bit deeper in the next section. But Paul, I want to come back to you again before we do that. Because within public securitized markets, you mentioned the relative value nature of these assets. Where are you finding the most attractive relative value? I will say one of the interesting things I find about this market in answering this question is that something is always bubbling up in what we call the non-traditional or esoteric area. And one of the things that I found interesting, and I love this sector because it really is differentiated in terms of all the different slices of the world that we see, meaning all these different asset classes are affecting and coming from different industries. So in answering your question, we're really focused on areas that we think our structuring expertise, as well as our collateral expertise, can help us earn alpha. And so for the top, let me just give you a couple of examples. One is solar. Solar is quite interesting to us these days, as is fiber optic. And then I'll give you the other side of the spectrum. I think for us, we were early players in data centers three, four, five years ago, but we have not bought a data center in a long time. And I think that market is really ripe for change, at least on the asset-backed security side. They feel less like asset-backed securities than any other sector I've seen. And the other one that we stay away from, just to kind of give you the barbell, is franchise ABS, especially where you have a BBB-rated franchise deal that's anchored and serviced by a single B or triple C type of company. That just seems like corporate leverage to us, and oftentimes it's ended not very well. So to talk very briefly about solar, we've waited years to invest in solar. It had been really propped up by subsidized and by government subsidies, I should say. And some of the firms were operating, were just solely operating to do more volume, not very profitable. And so once all these subsidies were removed and the industry has consolidated over the last few years, we obviously saw some bankruptcies, but we've seen like stronger players emerge. And we do think the solar industry has something to offer a lot of folks. So these players that have survived and obviously spreads have widened on these bonds materially. materially. But the point is, now we can buy bonds at very deep discounts that offer very high single-digit yields for investment grade. These are bonds that we can basically stress test to really awful scenarios, like we're living in caves and no one's seeing the sun. And they're still mature. So these are the things that we like to see, where we're seeing deeply discounted cash flows that can withstand a great financial crisis times two. And we feel like these bonds can and will mature at par. So we like these long term. The other side I'll talk about is fiber. And one thing you'll hear me talk about throughout this is that not every sector is created equal and not every bond within the same sector is creating equal. So I think fiber is a really good example. Um, you know, what we're focused on is not the commercial fiber, but actually something a little different. It's called fiber to the home. Um, there's a couple of really wonderful issuers that play in this space. And basically the reason we like it is we're talking about fiber to the condo fiber tothecondoassociation. And this is important because these fiber contracts, um unlike a lot of us where we can call up our fiber or our internet provider and just say i'm done cancel bye-bye um these fiber to the condo go through your homeowners association and so you can't just cancel that contract so these contracts are very sticky and because they're very sticky and our bonds basically mature before the contracts do, we think these are very good credit risks. And, you know, for investment grade, again, they trade, you know, in the, I would say, sevens and eight percent type of yield. So we find that very attractive in this market. Thanks, Paul. That sounds like some pretty intense stress testing that you're doing there, too. But it's helpful, too, to hear about some of the spaces where you are seeing opportunity. And Martin, I want to ask you a similar question from your perspective where you're seeing opportunity, but I'll kind of frame it in the sense of how are banks' activities and borrowers' financing needs, I guess, influencing the opportunities that you are seeing from your perspective? Sure. That's a great question. The space that we operate is predominantly bank-driven, right, on this side of the equation. But what's the difficulty there is that the banks themselves are in quite a tough spot because, on one hand, their clients want them to continue extending leverage to them. They want more financing on an ongoing basis to deploy things like fiber or digital infrastructure. But regulatory capital constraints mean that they just are restricted in how much of this type of business they can do. And what we're fundamentally talking about here is not the disintermediated kind of private credit type of the private market, right? But this is still bank-led, bank-originated relationship lending activity. So this is kind of the core business that the banks have done since the beginning of days and want to continue doing, but for regulatory reasons, but also for policy reasons, they just can't do as much of it as they would like to or as much as their clients would like to think of for example you know financings of kind of oil and gas projects or extraction of kind of commodity raw materials in in the mining space there's you know for a number of reasons banks are are under pressure or not willing to do as many of those types of financig that they've done in the past and when that happens right the combination of kind external regulatory pressure and kind of stakeholder or kind of internal policy matters, the banks retreat, and when that happens, it creates opportunities for institutions such as ourselves for non-bank providers of capital to step in and not to disintermediate the banks, right, but to fill the gap and operate alongside them in providing the capital that kind of makes the balance whole, right? So that's from the bank's perspective. Then I think the other point of your question was what, you know, what do borrowers, how do borrowors kind of help shape the terms of some of these financing structures? I think that's a really interesting point because whereas you see in loans, in the loan market space, you see a pretty well-known trend of credit terms being watered down in commercial negotiations between sponsors, borrowers and investors in kind of leveraged loan markets, in private credit, direct lending. Those are kind of well-known teams. Whereas in the market that we operate, this kind of bank-led core relationship lending, that is not the case at all, right? These borrowers, they continue to sign up to structures that are adequately structured, are heavily contractually mitigated, risk mitigated and continue to feature heavily things such as, you know, guarantees, maintenance covenants, and other kind of lender-friendly provisions, right? So the erosion of commercial protections from a lender perspective, we're not seeing that in this market. And I think that's, in trade finance, that's partly the reason because there is just generally less available capital, and that helps shape your deal terms, right, so So the deals that we do in this space, they are very often still backed by not just real valuable collateral, but they're also over collateralized as a result of that dynamic. Thanks, Martin. No, it sounds like pretty favorable conditions, especially on the borrower side, as you outlined there. And, you know, I'll stick with you as we move into sort of a slightly different discussion and something that you both kind of spoke to a little bit in your opening remarks around the sort of portfolio construction elements of these assets. And, Martin, for you, when allocators are discussing ABF with you, what are they looking to add in some of your conversations that you've had? Is it diversification, return generation, all of the above, something else? Sure. I think allocators, generally speaking, right, they just look for diversification first and foremost, right? They look at what are my available options, and then they pick and choose how they want to balance their portfolios. And I think they look at this, at trade finance, as a highly unique part of the fixed income investing universe. And within that, they look for things that are kind of not necessarily overlapping, but things that are non-competing within that fixed income space, like private, public. And they look for a certain yield and liquidity profile, right? And those are the things that we discuss, because on the whole, this asset class is generally best described, in my opinion, as defensive of income investing with relatively low volatility returns. And because you have that kind of unique transactional nature in terms of the loans that go into the underlying portfolio, like I said a moment ago, what we finance is very specifically identified flows of tangible goods moving across the world, very specifically-identified asset expansion projects. So those kind of unique or idiosyncratic financing propositions, they just don't have any overlap with anything else in your fixed income portfolio. And that's what allocators really appreciate in what this brings. Yeah, I would echo that in that, you know, coming off an event we did last week called Convergence, where we were kind of discussing, you know, the convergence of different assets within a portfolio. there was so much discussion around, you know, 2022 and the correlation between equities and fixed income and having like a properly diversified portfolio. And what I'm hearing is some of these assets can play that role. And Paul, a question for you next, you know, in that same event last week, you know, we were talking a lot about this overlap or interaction between public and private assets. And, you know, you both sort of have been speaking to that a little bit today. But I'd like for you to expand a little bit more on how you're seeing allocators balance public securitized credit with private ABF within their portfolios, and what drives how much they allocate to each? This is purely, I would say, circumstantial evidence. But what I've found is that, let's just say over the past five years, conversations that we've had globally would often, frankly, look like this. We would talk to a client or a prospect. They're a very large institution, and they're really, really focused on all things private. So that could be the type of private assets or asset-based finance we're talking about today, or it could be any type of credit. What I find really interesting is that these same institutions, either consultants, large institutions, or others, are now willing to have that conversation with us about public, because they're seeing the same things that we're seeing in that, okay, did really great over the last five years. Now, maybe we need to have another look at asset-backed public, let's say esoteric, because it does provide us a diversified approach. And I think what folks are latching on to is that they have some of these locked up, gated cash flows, and they're looking for something that they can offset that with that's also getting them an equal return. And that wasn't true five years ago. But now the competition has really stepped up. And so we've seen this basically yields come to the very similar place. And so I think from an allocator's perspective, now they have a couple of choices that they can look into to diversify their returns that, frankly, is not going to sacrifice yield or rating or income. And so a lot of the folks we might be talking to are insurers. And again, going back to that risk-based capital concept, if we can get them a very similar return at a better rating with liquidity and not gated, we're having so many more conversations today than we did five years ago. And so you couple that with what you guys were talking about before, and that's less correlated returns with high Sharpe ratios, high information ratios. And I think now, at least in our business, we're seeing a lot of folks step up and take notice and be really interested. Thanks, Paul. And we've been spending some time, we've touched on the diversification elements of these assets across all the sort of comments that have been made. But Martin, is there anything you would add to where ABF can provide meaningful diversification? But then, I guess slightly differently, where can underlying risks overlap more than investors' expectation? I feel like we do see this across parts of like the private credit market more specifically, but I'm interested to know like how it might show up in your space. Sure, sure. I think if you look at non-securitized asset backed or credit financing, right, the primary way in which you can provide meaningful diversification is probably the absence of, a benchmark, a predefined universe of issuers in the way that you have in public markets, right? That as an asset manager that you must own or at least try and replicate. If you don't have that, what that does is it gives you the ability to choose very selectively where you deploy capital, right, and again, it comes back to whether your investment model is predicated on underwriting, you know, kind of losses on a statistical basis against large pools of risk or whether you kind of, such as is the case on our side, whether you underwrite individual transactions on a fundamental basis bottom up, right? So you look at fundamental credit value, you look at structure, you Look at collateral value, but it's not just a case of underwriting to certain loss expectations. I think what's really nice is you can see the overlap in areas where there is just, I would say almost thematically, there are secular trends where just capital is flowing in certain directions, right? A moment ago, we touched upon data centers or resi-fiber in the United States, that those are both booming markets in terms of how much capital is going into that space. Another example would be the kind of the LNG, the liquefied natural gas infrastructure that's being developed on the U.S. Gulf Coast, right, there's so much money that's being poured into that space and and as you can see that a couple of years ago those those those sponsors those operators were attracting financing in one market and as the business matures they move to bond markets they look they move to abs they they diversify their credit funding sources um what's nice is that so there is that element of overlap right because at any point in time you can have a a certain type of activity or an industry being funded by different parts of the credit markets. And I think that's really interesting. But on the non-securitized side, we still find that the lack of an index of issuers allows us to pick and choose what is effectively a portfolio of individually underwritten positions, but that are highly idiosyncratic in nature, right? So there is no programmatic investing. you pick and choose each and every one asset that you put into your book. You pick and chose that and you underwrite it. You look at it in great detail on a fundamental value basis. And I think that is, you know, the difference where you do see overlap, but the way that different sources of financing reach those markets is meaningfully different. Thanks, Martin. And, Paul, I'll ask you a similar question or from a little bit of a different angle. You know, you mentioned sort of the opportunities that you're seeing in terms of solar and fiber and, you know, how are you comparing relative value across different collateral types, capital structures and managing concentration within the portfolio? And are there potential themes or areas where there is concentration? Yeah, I think the discussion we're having today is really, I think, a witness to the amount of concentration that there is to digital infrastructure today. Five years ago, there wasn't all this concentration. And frankly, one of the reasons we're avoiding data center is that it's structured OK, but the amount of issuance coming from the corporate market, special finance market, asset backs, commercial mortgage. It's frankly obscene. And who knows when this issuance is going to stop and who knows who are the winners and losers going to be? So I think for us, you know, that's really, I would say five steps to our process. And number one is common sense. You know, I think we have to be careful in looking at what the issuence is going to look like in some of these sectors and take a skeptical view. The other thing that we do, I think, which is more quantitative in nature, I'm going to list a few things, but it's really important to our business. And that is, we start with where are BBB corporates? Our goal in our business, and especially as we call non-traditional ABS or esoteric asset-backed securities is really to beat these BBB corporates over a cycle. A lot of our players, a lot of our clients might be insurance companies who are looking for a certain bogey and are trying to diversify away from corporates. So how do we do that? First thing, we're patrolling all these different subsectors. We think that there's over 20 different esoteric type of subsectors. and so we're using a simple spread per unit of duration. How does it look? How does it compare versus corporates? I think the other thing that people would be surprised that we do is we measure volatility for each one of these subsectors in two ways. Number one, what is the actual spread volatility on the prices and spreads? Number two, equally important, is what is volatility of ratings. Again, you heard me say before that not all, especially non-traditional or esoteric ABS is created the same. So a triple B in one area is not going to be the same as a triple B In another area. And so that's really important to know going in. And I think we'll talk about liquidity at some point. That's really Important. The final two things is that I've obviously been doing this for a while. My favorite joke about myself is that I'm fully amortized now, a good bond joke. But the idea here is that we need to have time series that tell us when each one of these asset classes looks attractive on basically using linear regression z-scores, and what do they look like versus corporates? And so I have all this data, we have all this data, and then we take all that and we stress test it to their worst potential. A lot of it's a great financial crisis, could be actually COVID, or during 2015 in the Ukraine, Russia-Ukraine invasion, you get the point. So you put all these together, and you're able to find what assets are cheap, and what assets can withstand some sort of historical stress, so that you are getting paid back. And so to kind of sum it up, what we're looking to do is earn that significant premium over BBB corporates while basically ensuring that we're doing it at a higher rating point. So let's say single A and we're earning more yield, more income with less duration risk. And we've been doing this for a while and feel like that that's our recipe. Thanks, Paul. And you made some comments there that I want to circle back on in just a second. But I also want to remind folks listening in that you can submit questions still, and we're going to get to them after the next few here by typing them in that bottom left-hand corner of the screen. And make sure you click Submit because we won't be able to see them otherwise. And like I said, we're gonna get to some of the questions, post these next few that I have prepared. And Paul, you know, you were talking about sort of stress testing earlier and in your last answer there, sort of like how these assets can perform under stress. And so I want you to talk a little about what structural protections should investors be looking for that would make the greatest difference in periods of stress? Yeah, I think a couple of real life examples are really important. And so one of the most, at least in my world, one of the most volatile asset classes are aircraft. And so aircraft could be impacted by something like the Russia invasion of Ukraine or things that you can't actually hedge. So there are basically unknown risks. And what I've found is that there are certain points in that structure that break down very easily. And so I just, I don't want to like offend anyone, but what I would say is that what we found is that triple B aircraft are not equal to triple B fiber or triple B spacecraft are not igual to triple B timeshare. And what I mean by that is What we saw in COVID and a lot of these structures was that the BBB basically took on a lot of losses because of the structural nuance of these aircraft bonds. And so my point is simply that you must understand what you own. You must rely on your manager to understand what they own. And this is why stress testing is so important, because you want to understand what is going to drive success for that bond in periods of stress. And so to be frank, that's why we don't do certain triple Bs. We think that they're structurally weak, that when volatility comes, and it will come, that these assets are probably best served not being on your balance sheet until, here's a good example, until you can buy them when they're at their wides. So the example here would be, can you buy aircraft at 50 cents on the dollar for a BBB? That might be a great time to buy aircraft. But buying aircraft BBBs when they're at 120 over treasuries might not look so good when the world is in a stressful situation. Martin, I'm interested to get your thoughts on a similar question too. But also, could you talk us through things that investors should be looking for and a manager's underwriting approach to manage some of that? Sure, sure. There's a couple of things to watch out for there. So if we continue on the example of aircraft finance, we can, in this format, also finance certain types of aircraft activity, right? So instead of the securitized format, we would look for the asset values. We would look at, additionally, the corporate airline purchasing a new aircraft, the quality of that corporate airline, right? And we would looked to – we've done some transactions in the past where we get full recourse to the corporate airplane. You get full recurse to the purchase contract with the manufacturer. you get a sponsor guarantee and you get a pledge over the existing operating fully functional aircraft in the rest of the airline's fleet and that picture as a whole forms for us on a fundamental basis the underwriting perimeter so it's not purely on basis of the asset but it's the asset itself plus the whole corporate recourse perimeter and I say that example because I think it exemplifies the fundamental approach to credit, to secure credit that we take in this part of the market. And there are other approaches. I think the one that probably is the most common is kind of more programmatic investing approach where you build underlying portfolios with thousands of granular line items with predetermined asset eligibility criteria. that's a different approach of investing that managers can adopt. We choose not to do that, but it's that kind of programmatic versus fundamental analysis value bottom-up credit investing. Thanks, Martin. And Paul, I'll come back to you because you mentioned in your earlier comments around sort of liquidity and how these assets, whether they're public-private, sort of function within an allocator's portfolio, what role they can play. And, you know, in some of these periods of market stress that we've been talking about, what's your experience during those periods as it relates to liquidity that investors can realistically expect? Yeah, I would say, you Know, to go back in history a little bit, I think it's important to frame the world basically pre-Dodd-Frank and the GFC and then post. And one of the reasons I bring that up is thinking back to pre-GFC, large broker-dealers, the banks, used to run ginormous balance sheets. You could have $50 billion of mortgages. You could Have $60 billion of corporates. Liquidity was deep. they could provide liquidity for you anytime. Post-Dodd-Frank, my experience is that liquidity correlation across markets has become substantially similar. And mainly because these balance sheets have dwindled and now you have ETFs, people are all going in the same direction many times. And so my point here, and I'm going to use COVID as an example, a very real example. I remember during COVID, we were trying to sell two bonds. It was two corporate bonds, a Budweiser and a JP Morgan Chase bond. We couldn't get any liquidity on those bonds. Then we tried to sell agency mortgage-backed securities. And at the time, let's say that Fannie five and a halves were trading at par, the only liquidity we could get on agency mortgages was going to be below where they should be trading. In other words, a point difference from where they could have been trading. Then we go to non-traditional and esoteric ABS. Of course, liquidity there is going to get worse. The only thing that we could sell there is very, very short assets. Conversely, what I'll say today or a few weeks ago, liquidity is great. Um, we could buy and sell 50 million in a day of esoteric ABS, anything that's investment grade, very highly liquid. And so it's very similar in terms of the way I view it is an off the run corporate is non traditional ABS or esoterics going to be as liquid as a JP Morgan bond? No. But is it going to be as less liquid as high yield? No. So it's somewhere in between. So I would say for us, if we're talking single A or triple B, non-traditional ABS, you're talking bid-offer spreads of a couple of basis points, maybe a little bit more. And so on a normal day, liquidity is plentiful. But if we go back to COVID, it's zero. So honestly, it is somewhere in between. And we build our portfolios with that COVID experience in mind to make sure that we've got liquidity for folks that need it. Definitely a great example of a stress period. And Martin, I wonder if you would agree with what Paul was talking about there, you know, like different types of structures, assets, like the different liquidity profiles for each. Again, like how much liquidity is there in practice and does it vary across the different types? Yeah, I actually fully agree with Paul's comments there. It varies is the not so helpful answer. But what we do on the whole, right, is the type of financing that this provides is always short duration financing, right? So these are not kind of six, seven year bullet type loans with no amortization relying on some sort of public market event to be repaid or refinanced. What we do is kind of short and amortizing loan exposure right so the portfolio what that means is the portfolio constantly recycles cash and that's a key feature of of how this market operates some are shorter than others it depends on how the manager approaches it's part of the of the market but the common denominator is that in trade finance these these portfolios constantly and organically come back into cash. You're talking about portfolios of loans that have a weighted average life of around about up to two years, I would say in our case, but some other managers in this space are even shorter depending on the type and the type of industries that they choose to finance themselves. There is a secondary market for loans. Like I said, what goes into these portfolios is a subset of the bank loan market, but it's safe to say that it is it is different from kind of securities markets which have which have much more options in that regard it varies from deal to deal yeah i feel like that um it's just uh there is no one-size-fits-all approach to a lot of this stuff um so you kind of have to look at it on an asset by asset basis as kind of a very um you know honest answer to of those questions. And I like to pause from it and the sort of questions we had prepared and go to some of the audience Q&A that has come in. And there's one for each of you here. Paul, question here is, rates are likely to stay higher for longer. How does ABS perform in this type of environment? And are there parts of the market that are more vulnerable than others? um the answer is yes um no i would say you know one of the reasons again we love asset-backed securities is that there are many different markets within this this market so we've got commercial asset-packed securities uh which could be container rail car things like that i think you know those are those are fine um obviously if we were to have such a huge spike in rates that we caused a recession. That's not great. So that's something that we're mindful for or mindful of. I'd say the other response is, you know, one thing that we have to pay really close attention to are those consumer-based, non-traditional asset backs. And we've seen basically a resurrection of subprime credit cards. We've seen a resurrection of consumer finance receivables that I think what was originated in the past is okay. But if you have consumers having to pay $4 or $5 a gallon, or God help them if they drive a diesel car or truck and they're paying $9 a gallon. I think that ultimately could impact some of these consumer-related receivables down the road. So we are being cautious there. We're just minding what we're doing and being really careful to underwrite these deals and watching very carefully how these higher rates will impact the economy. Thanks, Paul. And Martin, for you, this question here says, a lot of investors already have exposure to private credit through direct lending. What does trade finance bring to the table that they're not getting elsewhere? Right. The key feature here in which we differ from things like direct lending is that this has that lack of overlap that I was talking about earlier. This is not credit by way of general balance sheet leverage, but you get a unique, a very transactional exposure in these portfolios. So we're not just buying leveraged loans, we're buying into loans, syndicated loans that finance a very specifically identified flow of goods. Quite often, for example, commodities or assets such as trade-related infrastructure. Think of logistics infrastructure. When you do that, each and every one of these transactions is kind of a unique standalone exposure in and by itself. And you don't really get that in a way where when you're buying into, say, a sponsor leverage recap, like a dividend recap or a leverage buyout of a mid-market asset, we're looking to back companies that are by far the most common characteristics that they have is that they are national champions and leaders in their industries. But like I said at the start, a lot of what we do has an emerging market flavor. That is in great part where a lot of our obligors and trade flows have a linkage to. Global trade is increasingly denominated by parties that are either on one or both sides of the trade domiciled in an emerging market jurisdiction. And that's where a love of the commodities are. And I think that has pros and cons, but that is something that we actually quite like because we pick our national champions, our best-in-class credits in those places that are relatively large, large balance sheets, large P&L structures, long operating records. So if you pick who you want to back and you then pick for those borrowers the transactions that you want To help them with funding for, right? So rather than, again, general balance sheet leverage, You help them build, say, a brownfield expansion of an existing copper mine, or you want to build a brown field expansion of a plant or, you know, a reserve-based lending structure where you finance kind of the extraction of oil offshore. Those are unique structures that are very different than just kind of corporate balance sheet leverage. You don't get that anywhere else. Thanks. Let's go back to the, you know, discussion we had had before this call and prepared some questions from and, you know, particularly around, like, managing exposures and how allocators can evaluate managers. And, you Know, Martin, once you've invested or once an allocator has invested, I guess, in how do you monitor performance and respond to challenges in the portfolio? Yeah, I would say on a non-securitized portfolio, that's relatively straightforward. This is actually a key difference to kind of securitize asset-backed. You know, you don't really have that here in the same way. On the non-securitized side, you know each and every loan asset that you put into these portfolios. You know them inside out when you put the trade on, right? So each financing has its own loan agreement, and each and every one of those agreements has certain prescribed information disclosure obligations on the borrower's part. So you know the trade inside out, not just the borower, but also the financing structure itself, and once you're in the deal, you monitor by way of that periodic reporting that they mandatorily must make available to you, you monitor the credit quality on a periodic basis, name by name. It's a fair bit of work, but that's a very well-established process. Thanks, Martin. And Paul, public and private asset-backed assets can report very different levels of volatility, how do you look beyond reported marks to compare underlying risks? I was going to say, for me, the best example is really probably not securitized, but it's a very clean way, or not securtized, not necessarily esoteric ABS. Yes, but the clearest example of the way we can look at some of these things is actually through CLOs. And it's one of the ways that, as an example, that we can see different market values. And I'll try to define a complicated concept really quickly. But in CLOs, there's the concept of MVOC. And that's just simply market value of collateral, right? And so every single month, the collateral is marked to market. Actually, every single day, the CLO collateral is mark to market, and you've often heard that many private credit funds are getting redeemed or things are happening, and they're still marked at par. So basically, what we've seen and why this matters to us in asset-backed securities is that what we see on the private side, and of course, this doesn't equate to us on this call today, but really on the Private Credit side, we see the marks on CLOs that have substantially similar assets to these Private Credit deals are marked down in the 80s, right, as an example. Um, and then that same loan that's in a private credit deal, um, that is not marked to market daily is still marked at par. So our view is that there is substantial, whether we're talking technology or SAS, um loans, there's substantial mismarking. And we want to be careful of that because it does have ramifications on where we think some other assets could be marked. And so we want to make sure that we're taking a healthy view because there's such a discrepancy in some of these private assets. We want to take a healthy discount to where someone says that collateral is to be marked, so we trust but verify, and so we're verifying when was the collateral marked. For example, we might be looking at a data center or a Fiber, because we're not doing data center, but let's say we're looking at a Fiber deal, and the collateral was evaluated and put a dollar amount of worth on, and it was done eight months ago. Well, that doesn't seem right. If we're buying a deal and the transaction was based on marks from eight months to a year ago, the world has changed. Those marks must be updated or we need to pass on the deal. So it's all this information that comes in, whether it's from CLOs, and CLOs are our window into private credit. It's all these different pieces of information that allow us to assess the market globally and understand where we think general pricing trends are for all of these different types of assets. Hopefully, that made sense. Yeah, definitely. Um, and, uh, you know, we're kind of, I mean, the hour has, uh. Flown by, I feel like there's a lot that we've covered already. It's still a lot, that we could discuss and digging in a little bit deeper into some of your, um, answers, but, you Know, I want to, um. Wrap things up with sort of a, um I guess sort of broader question for each of you, uh For folks to take away from the call today, at least. What is the most, Paul, I'll pose this to you first, what is the most important risk institutional investors should examine before increasing their allocation to this space? Oh, wow. I think there's a couple of things. One is there's the know your manager. Know what they do well. Know where they're taking risks. and, you know, take an institutional approach to how are they taking risk. And one of the things I really appreciate when we're talking with different folks, whether it be a consultant or an insurance company or a pension, is when they really kick our tires about how do we manage risk? What systems do we have in place that allow us to manage risk uniquely? And how do we ensure that when things go sideways, what is our plan and how do we, you know, ensure that they're being protected? Those are conversations I love having, and I think they're really important that those questions get asked of the different, from the allocators to the managers. Thanks, Paul. No, it's a good point because I feel like we've done a lot of discussion here around all the opportunities and risks in this space, but, you know, I feel like what it comes down to a lot of times in this place is just that relationship between the allocator and manager and having an open dialogue around those things. So it's helpful to hear that context. And Martin, for you, you now, if we were to look, I mean, I'd like to keep a, you, know, institutional long-term perspective here. So let's say five years. If you looked five years ahead, what do you think allocators will wish they had understood better about building an ABF allocation today? I think the space is changing, right? As we discussed a moment earlier, there's so much different capital flowing into different pockets of this market. I think what's really key is, again, your manager selection and what the specific underlying is going to be. How does the investment process work? I think that's going to be the key factor to look at when you look back in five years as this space continues to grow. I think the nuance between different managers, different mandates is going to Be key. Short and sweet, Martin. I love it. And I want to thank you both for taking the time to be here with me today. It was a great conversation. I feel like we covered so much from starting out with sort of defining the space, the opportunities that exist, the risks to look for, and how to even monitor investments once they're made. A lot for folks to digest as the space continues to grow. I'm sure there will be many more of these types of conversations. I want to thank everyone for watching as well. We look forward to speaking with you again soon, but again, Martin and Paul, thanks so much and hope to speak with you again soon. Thank you.