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The credit markets are constantly evolving, and CLOs are no exception. As hopeful new managers enter, less successful platforms fall away. This keeps the market healthy, says Napier Park’s global head of the CLO management platform Serhan Secmen. But what makes a manager successful?
In this week’s episode of Cloud 9fin, Serhan joins our own global head of CLOs, Tanvi Gupta, for a granular look at mezzanine and equity tranches, how to evaluate CLO positions and how shopping for CLOs can be a lot like buying a new car.
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Every CLO double b looks really shiny, and they look very much alike at time when they are issued. Yet, just like a new car, when you look at that car in 2, 3 years down the road and you compare those cars next to each other, they're not nearly the same.
Speaker 2:Hello, and welcome to Cloud 9 Fin, a podcast which is all about debt capital markets. And today, we will be covering a not so beginner's guide to CLO investing, in particular, mezzan equity tranches. We're gonna dive into how effectively to evaluate CLO positions and liquidity based on various factors. So we're gonna go in deep and we're going technical. Technical.
Speaker 2:So strap in. I'm Tamir Gupta, and joining me to share his expertise in the subject matter is Sarhan Teshman from Napier Park. Sarhan, if you'd like to formally introduce yourself to the world. Sure.
Speaker 1:Thank you very much for having me here. Again, my name is Serhan Sejban. I'm the global head of the CLO platform for Napier Park. I am in charge of investing CLOs in in the US, and particularly focus on the lower part of the capital structure, mezzanine, and equity.
Speaker 2:Perfect. So let's just jump straight in, shall we? Let's start with mezz as that's something that's always gets left behind while AAA and equity positions take the limelight. Suhan, what's your favorite type of trade down in the cap stack since you said that's your expertise?
Speaker 1:So if I start with my favorite, I think the mez, lower mez has always been an underappreciated part of the capital structure. And therefore, it continues to provide value for new and and seasoned investors. I think that when you look at the the relative value between an underlying credit, let's say a double b loan versus a double b seller, and you compare the historical loss rates, you would find that you're overcompensated for about 200 to 300 and certain times, maybe up to 400 basis points over for holding a double b CLO as opposed to owning a underlying double b loan. And the same goes with the single b tranche versus the single b loans. And that is probably maybe the main reason why I can just coin my thought about why I see as a good value to invest in the capital structure.
Speaker 1:That being said, obviously, markets are semi efficient. I wouldn't qualify them as fully efficient. So that there is an argument why there is a, let's say, 200 to 300 basis points of excess spread that one is receiving while investing in this double B tranches. And it is related to the volatility. So our asset class on the CLOs tend to be quite volatile relative to other asset classes.
Speaker 1:And to the extent that you have capital that is able to withstand this type of volatility, it will pay you a smartly over the time. When you look at capital structures through place through, let's say, double b, and I don't think that there should be any credit concerns investing in anywhere single a and above. There's never been any principal losses on investing in any of these tranches due to credit events. And even at the triple b level, it is extremely rare and some technical issues that had caused some triple b's lose some principle, but not on the credit. It takes a lot of talent to lose principle on a triple b level, and I haven't met anybody who was talented enough to be able to do that.
Speaker 1:When you step into the double b's, that's where the inflection point shows its face. I think a good majority of the double Bs can be considered safe in terms of principal return. Yet your mark to market volatility will vary based on the the quality of the managers' portfolio, the perception in the market, technicals, as well as some fundamentals that rise in there. Here, actually, I'd like to open and close a parenthesis on the technicals. You could take some investment professionals and wipe out the manager name and then show them 2 portfolios, 2 double Bs, without them knowing the manager, analyzing anything that they want on the underlying asset, the structure, and so forth and so on.
Speaker 1:They often come to a conclusion that might be different than the market pricing. Meaning that with a closed eyes, there are some managers that should price wider, and there are some managers that should price tighter, or some portfolios that should price wider or tighter. And that introduces, again, the premium that you are getting paid is based on the liquidity. And some managers have better liquidity than the others, and that is reflection of the price when you look at investment in the double b space.
Speaker 2:So if we're looking at because you mentioned manager name, and that is something that we see throughout the stack. Like, this year, we've been talking about benchmark levels. Every other week, there's a new benchmark triple a that gets priced, and it tends to be the same managers. So when you're saying that some managers offer more liquidity, is that based on, like, past performance or is it the size of the firm or are there other factors? And does that affect, say, the mezz liquidity as you said?
Speaker 1:So there are several factors that comes into it. First, if you are a newcomer to this space, there are a lot of things that would attract you to this market. Obviously, when you're coming with a fresh view, with a fresh capital, what would you do? A normal course of action would be to look at this market and then try to focus on the higher quality part of that market. So the managers that are known to be conservative, the managers that are known to have cleaner portfolios tend to attract new capital more than the seasoned investors out there.
Speaker 1:And that is one factor. So cleaner managers tend to bring in a lot more attention and a lot more liquidity. And the second is the size of the platform. People would like to investors would like to have some kind of exit liquidity in the event that they no longer want to be invested in that manager. So let's say a manager that is 5 CLOs under their belt versus 25 CLOs under their belt, there are a lot more investor base that has been doable for a larger manager as opposed to a smaller And it's understandable that there is, again, another preference from a newcomer to come in and be attracted into larger managers.
Speaker 1:So we've established the size and the cleanness of the portfolio as two factors that affect the liquidity of a manager, and that is maybe measured by the newcomer's perspective. Even for a seasoned investor, these factors play into their ability to rotate the portfolio when they need to. Our market is rightfully so volatile when the broader markets become volatile. And seasoned investors are wary of these as well, and they would like to rotate out of paper when there's a a pocket of volatility that they can turn over their portfolios and produce better returns for their investors. So it's an interesting asset class in the event that when you look at it from the fundamentals perspective, there's a lot of values that one can come up with.
Speaker 1:On the other hand, the technicals tend to be quite choppy at certain times. And that might be a good opportunity for certain investors to be attracted to this asset class. Yet the investor who is coming in here with a rather flimsy liability structure, a lot of softness on their liquidity that they are providing to their investors, they might find themselves into a difficult position if they stretch themselves too far into these mezzanine asset class. Especially if one is using leverage. Leverage is quite attractive at times when rates are near 0 and spends are very tight.
Speaker 1:You're getting mid to high single digit returns. That may not be enough for some investors. And they might just try to juke that with some leverage. And as long as it is done in a responsible way, meaning that you're not levering all the way up to the maximum limit that the structure allows, and you're having some excess liquidity to be able to posting requirements, then it might be positive. But in the past, I've seen it in COVID.
Speaker 1:I've seen it in oil and gas crisis that there are people who overextended their leverage, and therefore face some issues. Yet all being said, investing in a double B tranche is in this market is giving you low to mid teen returns without leverage. And it's quite attractive given the backdrop. Even at a time where the rates are, again, back into very low levels and space go tighter, you are going to be outperforming a broader credit markets by 200 to 300 basis points measured over the lifetime of the investment, let's say, 5 to 7 years.
Speaker 2:So we're we're talking about double b's, which seems to be a favorable trade at the moment. But if we're if we're thinking about maybe our audience are thinking about investing in double b's or we have CLO managers who are listening to us talk about that that tranche as well. But what particular factors when when you're making that trade decision, what factors are you looking into? So you're looking are you looking into the portfolios? And then do you go into the weeds of, like, the the portfolio analysis in the sense, like, the triple c bucket?
Speaker 2:Or are you looking at other factors as well? Because obviously, triple c is something that everyone's talking about right now. But how deep do you go in your analysis when you're picking different double b tranches?
Speaker 1:There are several ways that one should look into analyzing a double b, and I will go through a number of them. So first, you should look into both the manager, and their past track record. And I will hint in some ways and way that we we'll be looking at. And also one should look into one should look at the managers and their track record, as well as you should look into the underlying portfolio. And looking at the underlying portfolio, you can look at it from a top down or bottom up.
Speaker 1:You can do both. But I'll go through a few ways that one should consider looking at a CLO while, you know, considering investing in 1. The first thing is on the manager analysis. When you pick up a new car from a dealer, every one of them looks very shiny. Every one of them is great, smells like the new car.
Speaker 1:You get into the driving seat. Everything is beautiful, clean. And whether that's a cheap car, medium price car, or an expensive car, they all have that great smell. They have that great feeling. Buying a new issue, sale of BB is like buying a new car out of a lot.
Speaker 1:You some of them are expensive, some of them are cheap, some of them are medium priced, but they all have that great mEOC coverage that is the same. They have the great near zero triple c bucket. Every CLO double b looks really shiny, and they look very much alike at time when they are issued. Yet, just like a new car, when you look at that car in 2, 3 years down the road and you compare those cars next to each other, they're not nearly the same as they were 2, 3 years ago. Some of them have deteriorated much faster.
Speaker 1:The others are still shiny and carrying their glitter with them. The same goes with CLOs as well. And it is not really difficult to look at it as what is a good way of analyzing the deterioration rate. One way to look at it is to see how much does a manager's double b tranche deteriorate over 1, 2, 3, 4, 5 year period. Given that the, let's say, the manager has multiple issues, you can go back into the history of their issues and look at what would be the break even level for that CLO to start eating the Double B's principal investment.
Speaker 1:And the way to look at it is let's say that you look at a CLO portfolio. You highlight, let's say, the triple c's and then circle them up for default candidates. And then you look at how much extra default is necessary for you to lose your 1st dollar principal in your double bid tranche. Let's call that as your breakeven loss level. And that level obviously starts similar for all the managers, and it decreases over time.
Speaker 1:For some managers, that decrease is very fast. For some managers, that decrease is very, very slow. So it's very important when you're investing and analyzing a manager for the BB investment, you look at how fast do their cars deteriorate over time. How much cushion is there left after 1 or 2 years? What is the likelihood of you eating into all of that cushion that exists on day 1?
Speaker 1:So that's one way to analyze these managers. When you plot them, almost all the managers are quite linear in the way that they are deteriorating. And not surprisingly, some managers are steeper than the others. And it has something to do with their initial setup of their portfolio, conservative managers versus risk taking managers. And also how active they are in turning over their portfolio.
Speaker 1:How well do they avoid issues as those issues are developing as opposed to they sit through it and then just hope that everything will be fine? So that's one way of looking at the manager's platform as under double b tranche. Another way to look at it is to look at the portfolio from a top down analysis. If you have a credit team and that credit team has an opinion about industries, whether a healthcare or a business services or utilities or defense or travel, any industry have a projected default rate or the next cycle. If you have a team that comes with such a view, it is possible to take the loan universe, let's say 1500 issuers, segregate them by industries, And make that simple assumption that the default, let's say, on a technology firms in the next, let's say, 3 to 5 years is going to be X%.
Speaker 1:It is only plausible to assume that that default is going to be happening in an orderly fashion and will not start from the tightest name. It will start most likely from the widest names. And if you put a little bit of a buffer zone on that x percentage and then assume that over time, you know, this percentage of those industry is going to be gone. And you can label every industry that way. And therefore, you have your default candidates for the next cycle mapped out from your view coming from a top down, industry based approach.
Speaker 1:And you can use that name. And in CLO, you see, apply that because you have the names as you have tagged, and apply that default vector on it, and then see what percentage there is extra cushion left after we apply that view. Meaning that if your view holds, how much of a room do you have for error before you lose your first principal dollar? And that's another way of measuring and looking at a silo. 2 of them right next to each other.
Speaker 1:Let's say that they are at the same end of reinvestment period. They have the same life. And let's say that they have the same MAOC. And you may not be able to differentiate anything other than this MAOC and the vintage. And therefore, you think that they should be pricing on top of each other.
Speaker 1:But if you look at from this perspective, one would look different than the other. And that's when we find ways to be able to extract relative value on seemingly similar bonds, yet our view differentiates them apart. And and that's another way of looking into a double B tranche.
Speaker 2:Do you think, I mean, based on the the deep level analysis that you just mentioned, do you think not having a credit team is a barrier to entry for lower mezz or equity investing in CLOs? So if if if a firm doesn't have or doesn't want to invest in a huge credit team who are going through, say, industry level analysis or individual names, is that, is that a barrier to entry, do you think?
Speaker 1:I think all the way up to triple B level, it's a macro trait. Anything below BBB level, you are exposing yourself to lever the outcome of a below investment grade asset class. You are a leverage provider, BBB and above. You are the leverage user, double B and below. And therefore, I think that it is really important to have a team that can look and analyze and form an opinion on a portfolio or sometimes even on a manager.
Speaker 1:And that, in my opinion, it is crucial. It's not a barrier of entry, yet it is it's a very important element.
Speaker 2:Mhmm. Okay. That makes sense. We're also seeing a lot of split triple b's and double b's coming in, which is basically investors making use of the risk return appetite, you know, at the cost of perhaps liquidity. You know, the the junior double b's might not be as liquid names.
Speaker 2:But how do you come up with, like, the perfect spread for the perfect subordination? Is there, like, your particular way of going about it?
Speaker 1:The fair question is, how much should you get paid? When you're investing in a certain subordination level and certain risk, what's a good way of determining whether you're underpaid or overpaid? As I stated right at the beginning, I think that there is quite a bit of spread that you are receiving to get compensated for the volatility that you're exposing yourself. But from the credit perspective, when you look at the triple B tranche, it's almost perfectly tracked the underlying loan portfolio spreads over decades long of data. You look at it all the way from 2,004, 2005, 6, the triple b spreads has always been very close band relative to the underlying portfolio spread.
Speaker 1:So anything below that, now you're getting compensated beyond that. But then there's a certain level that you should be okay to get compensated. And that's actually where I would like to introduce the equity tranche to this conversation. Because from understanding this concept of what is the right level to pay for your leverage comes into play rather than how much should I get paid as a double b master. The question is the other way around.
Speaker 1:How much should I pay for my double b borrowing given that, you know, I'm expected to receive X% return on my investment. So if you look at it from the equities perspective, you're basically borrowing all the capital stack. And you don't care whether there's junior double b or senior double b or how many tranches there is above you. You're basically borrowing a lump of capital, and it is among the debt holders. They rearrange themselves as different classes and who's exposed to the 1st loss and the 2nd loss, the 3rd loss when you are eating into the principal that the debt.
Speaker 1:But from the equities perspective, you should not be borrowing any incremental dollar that is going to be diminishing your return. Meaning that you wanna make sure if you're borrowing and issuing a double b, your return on the equity as a result of that double b issuance should be higher, not low. And if you look at the equity performance on most sellers, I would say, a good chunk of them, the performance of the equity, you should compare to the performance of the double b. And for the most of those equity investments, you would find that they underperformed their double b platforms, which means that they, would have been better off if they had not issued that double b tranche. And the amount that they should have paid should be tighter, either one of these cases.
Speaker 1:But obviously, you need to find people who would be okay to receive that tight level to the extent that you can't. Then instead of issuing it, you should basically issue it and then buy it yourself, meaning that you need to maintain a thicker equity tranche that involves both equity and the double P. And that level, varied stance. Market eventually going back and forth on pricing with amount of supply, with the amount of demand. That's determined by market dynamics, whether it should be retained by the equity or should be issued.
Speaker 1:I mean, the past performance of some of the managers suggest that they shouldn't have issued the the double b, which basically brings the topic is is the CLO equity right instrument to invest for a newcomer, for somebody who is not really familiar with this market. There's a lot of factors that price into the CLO equity. Performance is driven by a lot of factors. They cannot be simplified into a single number like arbitrage. I know that it is very fashionable for equity investors.
Speaker 2:I was gonna ask you, give 200 is still the the figure that we aim for.
Speaker 1:Yeah. I I I find it I think this is very fashionable to complain about lack of arbitrage. I think there's it's a competitive sport among me and my my peers. We we love complaining about lack of arbitrage. Yet when you look at the past arbitrage levels and the performance of equity during those times, there's not a a strong correlation between the arbitrage, spread arbitrage, and the the performance of the equity.
Speaker 1:If anything, there seems to be a negative correlation if one can Would
Speaker 2:that I do you mean, like, the day 1 arbitrage or, like, throughout
Speaker 1:the life? Definitely. Day 1 arbitrage is the investors love it in, let's say, 2021, and it was pretty great. Then you look at the 2021 vintage versus 22 in terms of the platform. As far as the 22, the arbitrage was not as handsome as it was perceived by many many investors, but it's a deceiving one.
Speaker 1:Day 1 spread arbitrage is not a good way of looking at whether a CLO is going to do well or not for multiple reasons. The number 1 is SPED arbitrage does not reflect all the aspects of a CLO equity as complexity. If you can source your assets at, dollar price that is cheaper, arbitrational most does not matter. I'll I'll give you a hypothetical example. Not that this is the norm, but it is one way of thinking it.
Speaker 1:Let's say that you can source your assets at 90¢ on a dollar. And then let's say that you only need 90% of the capital structure is debt, meaning that you only need 90¢ on a dollar to be raised. And since you are able to buy all the assets at 90¢ on a dollar, you don't have to put any equity dollar to print a deal. I mean, obviously, this is a exaggerated example to illustrate the effect or the impact of the dollar price. In reality, this doesn't exist that way.
Speaker 1:But the whole point that I'd like to emphasize is that there are factors like the price of the portfolio that is far more important to the success of a CLO equity performance than it is just the spread of the the initial day 1 spread arbitrage. Another thing is most likely in a place where the loans are trading at a discount, it is likely that the liability levels are wider than normal. And it is the option to refinance the liability stake in 1 or 2 years down the road, it is more likely that you're going to be in the money, and that is going to be monetized. And on top of that, most likely, your rating agency is going to ask higher subordination, let's say 10, 10 and a half percent on your double piece as opposed to more benign times the that number is 8%, which means that in 1 or 2 year time, you can reset the deal and then flush all that additional capital back to the equity. Again, a huge victory for the equity.
Speaker 1:None of these are captured. None of these mechanics are captured by day 1 spread arbitrage. And therefore, it is, important to look at multiple angles while you're going into an issuance in day 1. And we haven't even spoken about the managers and their performance yet, but just purely on the structure. There are so many nuances.
Speaker 1:And bringing the topic maybe use it as a segue to talk about the managers. There are about 140 sales managers out there. Give or take between 6 to 8 managers are introduced every year. And I think there is maybe an extinction rate that is slightly lower than that as well, that the managers who are able to keep on printing. And it's a healthy turnover.
Speaker 1:I think that the market needs to come up with new managers. Fresh blood should come to the market. Yet on the other hand, the managers who are not performing well should be readied out over time. I think I find that it is very healthy exercise. Yet as I mentioned, investing in the equity, I think one should be very, very selective on finding the right manager.
Speaker 1:And it is 150 metrics that a manager can lay out about what is it that they are doing, whether they have lower triple c backers, they have better trading, they have lower war, higher diversity. You name it. There are so many metrics that goes into silo that every manager picks up one that every manager picks up 1 or 2 that they think that it is great story for them to tell to the investors, and they bring up all that noise in front of a a broader sale investor base, and then present them, look, we're worthy of your dollars to invest in our equity because of XIC. It it's very, very easy to get confused with that, you know, tons of information, tons of data that is being thrown at investors.
Speaker 2:What are what are the winning metrics for you? So if we wanna win Sahand's money, what what what would the managers pitch?
Speaker 1:So I'm an engineer. Once an engineer, I'm always an engineer. What is engineering mean? Engineering means taking a complex problem and being able to divide it into simpler sub problems and solve those problems and then combine these smaller answers together to get the answer to the larger problem, otherwise seemingly complex problem. And I see your question no different than any engineering problem.
Speaker 1:So now that we confuse ourselves with so much metrics out there, how do we choose it? It's very simple. This is an investment vehicle. The purpose is to make more money with the money that you put in to your investment vehicle. So one should look at, okay, what is your performance like?
Speaker 1:Show me that what you have done in the previous deals, very better or worse than your peers, and very better or worse than an index. Well, I find it interesting that even something as simple as this question could be a lot confusing, even for very seasoned investors. The reason is when you look at CLOs, the equity tranche, the notional of the equity tranche is an arbitrary number. There is no standard on it. There's almost a standard that is being posed by, let's say, triple a investors.
Speaker 1:We can have as low as 36. We can have as high as 40% subordination. And therefore, on a $400,000,000 deal, you know what the size of your triple a ticket. Yet when you look at your equity notional, on a $400,000,000 deal, you can see notional ranging from 32,000,000 to 57,000,000. That is absurd.
Speaker 1:And then if you take the performance, if you try to measure the performance based on the number of points that this manager is paying to to its investors, you might be mistaken that some managers are outperforming others and vice versa. Because you at the end of the day, you measure that points relative to the size of the equity notional, which is an arbitrary number. So you need to find a way to normalize that equity size or equity ticket. And we find that it is not that difficult to do. We can look at in 1 or 2 new issued deals, and we can calculate what is the ticket.
Speaker 1:The dollar ticket is the thing that really is important. Doesn't really matter the notional or the size of the the, equity tranche. It's just like how many dollars do you need to pay to issue, let's say, a $400,000,000 deal? And you can come up with that number on any market condition. It can range between 8 to 9% of the collateral balance depending on the market dynamics at that time, the the average loan price of, portfolio at that time.
Speaker 1:So with that, you can come up with, well, I don't care how many points it pays on par or on notional. I care how much it pays on the dollar invested. So now you can measure the performance of the equity on the dollar invested in your equity. And therefore, you can compare a manager's performance not only to itself, but also to its peers that has been issuing at the similar time frame, give or take, let's say, a month time. You can find Snabers and then can say that, okay, how is your performance relative to to your peers?
Speaker 1:And you can measure this over different cycles. There are some managers that are known to do well in bull markets. There are some managers that are known to do well in bear markets. So that's one way that I think one should simplify the question, what is your past performance relative to your peers? Number 1.
Speaker 1:Another way, again, a very simple way of looking at it is, are you a good manager? Are you a good credit manager? What if this was not a sale? What if this was a fund? This was like a closed end fund.
Speaker 1:Somebody gave you $400,000,000 You bought loans. That loans have spread that it generates and IO that it generates. It also has a, PO value, and that PO value fluctuates over time. So what is your return on a monthly basis if you measure your return, on IO and PO? And how is that compared to an index?
Speaker 1:Because you can measure the index PO and IO returns over time. And you can see whether this manager plotted against an index. Are they higher beta or lower beta? Are they positive alpha or negative alpha? That is really easy to measure.
Speaker 1:And that will give you the answer whether this manager is a good credit picker, good credit manager or not. Obviously, the liability structure matters. There could be some managers that might look great on on this metric. Yet if they are a new manager, then it will take time for the market to appreciate their value. And until then, their liabilities could be wider than their where they should be.
Speaker 1:And therefore, the equity performance may not be great on the first few deals that this manager is doing until they establish themselves. So that is another way to to measure. And therefore, I find that it is, better to invest into a new manager's mezzanine tranche than its equity tranche. And I think a new manager should be more focused on raising equity capital more tied to their GP than the equity side. Yet I digress.
Speaker 2:Since we were talking about oh, sorry.
Speaker 1:No. No.
Speaker 2:I was gonna say since we were talking about manager styles and then also manager pitchbooks in some shape and form, something that we're seeing this year in particular is obviously when we're talking about all these distressed names that are coming in. And then we're seeing sort of, to various degrees, some managers kind of publicly well, not publicly, but I mean, like, they're making it a point that they sold out of those names as soon as they could versus some managers who are who are who are kind of announcing that there's continuing to I mean, Altice in particular. So, you know, managers have clearly taken a view on that name. Right? Either some some managers have traded out of it, some haven't.
Speaker 2:And in past, we've seen conservative managers on average have been winning in the in the last couple of years. But as an equity investor, when you have when you're hearing about, like, say, actively trading versus passive trading, is that obviously, the factors that you mentioned, that's one thing. But is that is that something that you would either consider something favorably or unfavorably in a manager?
Speaker 1:So we love changing the weather. I mean, if it is always shiny, people get complacent. And people start, you know, walking out with light clothes, no protection. And all of a sudden, there's a windstorm, wind and a rainstorm that comes in. And then you can see who's prepared and how people react.
Speaker 1:Some people run away from rain. Some people wear an umbrella. They just open it up. Some people find a place to take shelter. And until you see this rain, you're not going to be able to differentiate who is well prepared, who is not.
Speaker 1:I love situations like Altice because it creates a chasm between the managers or and, unfortunately, it creates an opportunity to differentiate the managers from each other. And take Altice as one example. But if a recurring multiple instances that happens, you can almost look for some themes that that some managers are better than the others. And how do they react at the presence of some kind of commotion in the market? There are several ways that I think managers can add value, and there's no single way of doing it.
Speaker 1:Some managers avoid altogether exposing themselves in certain types of credit. And we have a lot of respect for that, and a lot of managers build those through painful examples that they have lived through. And they can point out to their past failures and then say that, look, they're not doing that again. And that might be one way of managing your portfolio in a conservative way. You know your mistakes.
Speaker 1:You know your soft bellies, and this is not the place where you're touching it. Another way is to be actively managing your portfolio and not hoping that things are gonna work out in the end. I find that in general, managers that are active and on their toes, when they're managing their portfolios are better equipped with striations like Altice and and some other striations because they have the ability to rotate out of those names on an earlier stage. But as some others make the calculation, look, I'm gonna hold this name through this volatility. I think we're gonna be able to work it out at better value than my exit.
Speaker 1:So it's a differentiating factor. It's an opportunity to differentiate yourself from your peers. What's gonna be the positive outcome? We will see on the long run. So you can only look and measure the effects of these choices after a certain amount of time had passed because just 1 or 2 names will not give you enough information.
Speaker 1:And also the story always develops, and it always brings in new information. And therefore, you know, you need to be looking at a manager's long term track record and how they dealt with it. We like conservative managers, and we like active managers. And we tend to be finding more value in the long term from these type of investment styles rather than taking a lot of risk or being a buy and hold and not doing anything in the portfolio. Even on static portfolios, managers can be active can be actively rotating out of, names by just selling it.
Speaker 2:True. What a way to close it by you you just saying you like all managers, basically. But any other closing remarks from you, Sahin?
Speaker 1:Our market is very interesting in terms of that it is mature enough that it has been here for multiple decades, yet it is young enough that it has been still growing. And I think it is going to continue to grow. And as long as we keep it at a healthy pace, making sure that the market weeds out people who are not performing well, the issuers that are not, you know, doing well by their borrowers. And as long as we can have a pace that is commensurate with the overall credit growth that a a normal functioning economy should face, I think we're in a very good place. And it is an asset class that has been robbed with lots of misconceptions.
Speaker 1:And a lot of people still think that the CLOs are the main reason or CDOs are the main reasons behind the GFC. And therefore, it's, quote, unquote, a weapons of financial destruction. So I I I think that there is a lot of value in our asset class. And I think that there is going to be still a healthy growth that we're going to be seeing in the in the short term for the rest of the year. Next year, things maybe, will slow down.
Speaker 1:But overall, I I welcome anybody who is trying to explore this market. Yet I caution them that there are a lot of nuances that one should consider And looking underneath the hood, meaning they've analyzed underlying credit, is a very important factor if you're going down to the double b, single b equity level.
Speaker 2:Great. I mean, growing market is always great. But I would implore if everyone could just pick 1 week and we all take a holiday, that would be great because covering 40, 50 deals a week is not is no longer fun. So yeah. But no.
Speaker 2:Thank you so much, Sahana. I think it's always great to understand how different people analyze the market. So thank you for that really interesting discussion.
Speaker 1:Thank you very much for having me here. I truly enjoyed it, and, I wish you guys future success. Thank you
Speaker 2:so much for listening. If you have any feedback, we would love to hear from you at podcast at 9fin dot com. See you next time.