Alternative Credit Strategies for Multi-Billion Euro Portfolios
An executive analysis of how a multi-billion euro family office allocates capital across alternative credit, private equity, and hedge funds. The discussion covers the shift from direct lending to asset-backed strategies like music rights and aircraft leasing, the importance of capital efficiency in evergreen structures, and the strategic rationale for excluding non-productive assets like gold.
Strategic Shift in Alternative Credit Allocation
The management of multi-billion euro portfolios is undergoing a significant structural shift, moving away from traditional direct lending toward diversified alternative credit strategies. Christian Wienkamp, Chief Investment Officer at Perpetual, outlines a portfolio architecture that mirrors a classic 60-40 equity-to-fixed-income split but executes it through private markets. The core thesis is that traditional private credit often fails to offer sufficient risk premiums because private equity sponsors dictate terms, leaving lenders as price-takers. To capture true alpha, the strategy pivots to asset-backed credit classes such as music rights, aircraft leasing, and legal asset financing. These sectors offer stable cash flows with distinct risk profiles that do not correlate with the growth strategies of private equity portfolios.
The Case for Evergreen Structures
A critical operational insight is the preference for evergreen fund structures over traditional closed-end funds. Wienkamp argues that internal rates of return (IRR) are misleading metrics for private markets because they ignore the opportunity cost of capital sitting in cash during deployment periods. By using an evergreen structure, the fund can continuously deploy and recycle capital, allowing for a fairer comparison of total returns against public market benchmarks like high-yield bonds. This approach ensures that the fund's performance is measured by its ability to generate consistent annual returns, rather than the timing of capital calls.
Asset Selection and Risk Management
The selection of alternative credit assets is driven by liquidity and asset specificity. For example, in aircraft financing, the strategy favors narrow-body jets like the A320 because their standardized specifications ensure high liquidity and value retention, even if the lessee enters bankruptcy. In contrast, long-haul aircraft are avoided due to their customized nature and lower resale value. Similarly, in music rights, the focus is on established catalogs with stable streaming revenue rather than speculative hits, treating the assets as bond-like instruments with long-term cash flow potential. This disciplined approach to asset selection mitigates the risks associated with illiquid private markets.
Alignment and Exclusion Criteria
The portfolio explicitly excludes non-productive assets like gold and cryptocurrency, as they do not generate cash flows and cannot be valued through discounted cash flow models. Instead, the strategy focuses on productive capital that generates returns. In hedge fund selection, alignment of incentives is paramount, favoring multi-strategy funds where management invests alongside investors and pays pass-through fees. This ensures that the fund's performance is driven by genuine skill and cost efficiency rather than fee structures. The overall strategy emphasizes a long-term horizon with annual reassessments of capital market assumptions, balancing tactical adjustments with strategic consistency.
Key insights
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Traditional private credit often lacks attractive pricing because private equity sponsors dictate terms, making lenders price-takers. Alternative credit assets like music rights and shipping offer better risk premiums and diversification.
Impact: Investors can enhance portfolio returns by shifting from direct lending to asset-backed alternative credit, reducing correlation with private equity exposures.
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Evergreen fund structures provide a more accurate measure of performance than traditional closed-end funds by accounting for capital efficiency and opportunity costs. This allows for fairer comparisons with public market benchmarks.
Impact: Adopting evergreen structures can improve capital deployment efficiency and provide clearer performance metrics for private market investments.
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Standardized assets like narrow-body aircraft retain value and liquidity even during borrower distress, offering downside protection and rapid re-leasing opportunities. This contrasts with customized assets that lose value in stress scenarios.
Impact: Focusing on standardized, liquid assets in credit portfolios can reduce tail risk and improve recovery rates in default scenarios.
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Alignment of incentives in hedge funds is critical, with a preference for multi-strategy funds where management invests their own capital and pays pass-through fees. This ensures cost discipline and genuine performance.
Impact: Selecting hedge funds with strong alignment can reduce fee drag and improve net returns, enhancing the overall portfolio performance.
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Non-productive assets like gold and cryptocurrency are excluded from core portfolios because they lack cash flow generation and cannot be valued through discounted cash flow models. Physical gold is reserved only for extreme tail-risk hedging.
Impact: Excluding non-productive assets focuses the portfolio on cash-generating investments, potentially improving long-term returns and reducing volatility.
Action items
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Diversify credit exposure by allocating to alternative asset-backed credit classes such as music rights, aircraft leasing, and shipping, rather than relying solely on direct lending to private equity sponsors.
Impact: This reduces correlation with private equity risks and captures higher risk premiums from specialized asset classes.
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Evaluate the use of evergreen fund structures for private market investments to improve capital efficiency and enable fairer performance comparisons with public markets.
Impact: Evergreen structures can reduce opportunity costs and provide more accurate performance metrics, enhancing investor confidence.
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Prioritize standardized, liquid assets in credit portfolios, such as narrow-body aircraft, to ensure value retention and rapid re-leasing capabilities in stress scenarios.
Impact: This strategy mitigates tail risk and improves recovery rates, protecting the portfolio from severe downturns.
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Select hedge funds with strong alignment of incentives, where management invests their own capital and pays pass-through fees, to ensure cost discipline and genuine performance.
Impact: Aligned incentives can reduce fee drag and improve net returns, enhancing the overall portfolio performance.
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Exclude non-productive assets like gold and cryptocurrency from core portfolios, reserving physical gold only for extreme tail-risk hedging, to focus on cash-generating investments.
Impact: This focus on productive capital can improve long-term returns and reduce volatility, aligning with a disciplined investment philosophy.
Quotes
“Wir sind ganz klar ein Investor, der einen langfristigen Horizont hat, aber trotzdem unsere Kapitalmarktannahmen auch jedes Jahr wieder hinterfragen”
“Das macht dann das Feld des Alternative Credit auf, was wirklich sehr, sehr breit ist. Und das geht von Flugzeugfinanzierung, Musikrechte. Legal Asset Financing”
“Wir benutzen IAA auch, um zu bewerten, wie ein Manager im Vergleich zu anderen Managern agiert und dafür ist das auch total wichtig und sinnvoll”