Global Alternative Credit Investment Leader

Chris Conway

Hello and welcome to Livewire Market's Alternatives in Focus series for 2025.

My name is Chris Conway. Today I'm sitting down with Adam Nankervis from Oak Hill Advisors. Adam is a portfolio manager and partner, and he's going to be talking to us about the opportunities in the global private credit space.

Adam, thanks so much for sitting down with Livewire today.

Adam Nankervis

Thanks for having me, Chris.

Chris Conway

Adam, what's your assessment of the backdrop as a credit investor, and perhaps we start with, Outlook for rates given the floating rate exposure that you have.

Adam Nankervis

On the floating rate component, look, the market's pricing in for cuts over the next year in the US and that's the market we're focused in.

We sort of view that as somewhat balanced and in agreement. We do think there is sort of the chance of rates staying higher for longer, in that regard. You just haven't seen a couple of components flush through the economy.

One is, the pricing impact of tariffs to begin with, and the other one is the immigration policy.

We're also seeing companies perform pretty well and the overall consumer in total feel pretty reasonably well resilient. That said is we're not trying to take pointed views on rates.

We're trying to sort of take credit views and get portfolio companies that we find attractive in that regard. The floating rate exposure is just as much as an output of sort of the opportunity we've set when we look at the company by company investments we're making.

Chris Conway

Adam, you referenced it there, but your assessment of where we are in the credit side. And then, you know, is there anything that you're cautious about in that space at the moment?

Adam Nankervis

We're always cautious. We're investing in sub-investment grade credit. We're doing it for over 30 years and you've got to have that lens always.

The environment feels, looking at companies, looking that we're following, results seem, seem good and to OK, and they're forecast to.

Similar going forward. Now, when we're investing in instruments that are coupon paying and you're paid to be invested in the market, that is a good environment for credit.

I do think we're trying to be sort of cautious on the evolution of business risks and the underwriting process, and we have a private credit style underwriting to the credit markets.

And what you've seen in the last few years is sort of evolution of risk to an extent, where COVID really put the spotlight on supply chains and we're seeing tariff put another spotlight on supply chains.

And so the question for that is do your businesses have real pricing power? And if they do, they can live through these type of environments.

We used to debate a lot about stroke of the pen risk and it used to be largely in the healthcare businesses we would underwrite.

You know, the last year that is broad. Anything that touches the government in the US, you've got to really debate those revenue streams, are they robust, will they be in place? You know, is there a stroke of the pen risk?

The next component is cautious of is just how does AI develop over time and and business risks from a credit lens.

And so what I mean by a credit lens is, how sticky are you in your customer base?

Because the cost to produce a lot of these businesses has come down, and it really is important to be sticky with your customers. And there's also components of AI here where we see growth in the economy, but it doesn't necessarily translate into jobs on the backside of it. Of the productivity function going up.

And so in those regards, we're really cautious of what are we underwriting, keeping the standards really resilient and making sure that, you know, getting things wrong, the margin of error is even smaller than it was I think 3 or 4 years ago.

Chris Conway

So you do have the ability to invest across a range of markets, so where are the best risk-adjusted returns that you're seeing right now?

Adam Nankervis

Look, if you asked me that a couple of years ago, I would have said, you know, the direct lending market was the majority of our incremental deployment.

We still see that as quite an opportunistic way to deploy capital. Still 50% equity checks behind those loans being made.

If you asked me that in April of this year, I would've said liquid credit markets, but that was really short-lived.

But at the moment it is quite a broad asset base that we're deploying within credit.

Direct lending which I mentioned, you're seeing special situations tick up.

There's more defaults within the syndicated market on the margin and more time and opportunity for bespoke capital solutions, and then the asset backed market is really evolving, lots of capital chasing that in in data centres, in fibre buildouts, cell tower construction, transportation.

We're sort of picking the best opportunities across those markets and it really is balanced in our deployment, the opportunity set.

Chris Conway

Just one thread I want to pull on there, Adam, so yeah, you said lots of capital chasing those opportunities. Is there more capital than there are deals to be done, and then again, how do you go about making sure that you don't move up the risk curve and chase the deals that are less appealing than what you would like to see in the portfolio.

Adam Nankervis

It's always a question of the opportunity sets there and that's the supply, and then what's the demand component of that.

And the demand component is all, you know, can be out of the control, it'll be hard to predict at that point.

And so a lot of our funds, we give a multi-strategy approach to investing. And what that means is if markets get crowded, we can then pivot to another opportunity set within credit.

Now, it is a large market, we're talking about the US market that's private credit's $2.5 trillion.

If you add in the liquid markets, it's another multi-trillion dollar market. And so there's lots of places to move.

Now, are any of them. Getting crowded, private credit spreads have come in, but you're still getting a really attractive premium from that regard.

They've gone from great to what is a good profile at the moment.

Chris Conway

Adam, here in Australia, ASIC has raised some concerns around issues in the private credit market. They include concentration in the property market, disclosure of fees, and the terminology relating to certain investments.

What's your take on some of those issues?

Adam Nankervis

Look, I think they're all really valid for a few reasons.

One, I think transparency is really important for the health, vibrance and growth of the local Australian credit market.

Also the, the concerns that they raise are real, and I think they should be addressed.

What I mean by that is we're focused on US and developed Europe and they operate under a different regulatory, rules and regulations in that, in that regard.

And so what I mean by that is there's very different components of all fees that flow through, whether it's underwriting fees, whether it's special purpose vehicle fees, whether it's default fees.

It's all capital that we're investing for our investors and their returns for the investors.

We don't like the perception of conflicts of interest or a conflict of interest to begin with.

There's a requirement for us to publish in certain of our funds, quarterly positions and the absolute marks we're taking on those. There is an independent board of our wealth channel funds.

Right, so very different components that ASIC is trying to address and it's sort of a very different component in the US in that regard.

Chris Conway

Your investment strategy, it's described as being nimble and all-weather.

Just talk to us about what that means and why it's important.

Adam Nankervis

It's sort of important to the point that you brought up earlier. It's hard to predict the supply demand and the opportunity set. And so by being really opportunistic on the next asset that goes into the portfolio, we're looking, you know, this fund will be a best idea across Oak Hill's platform.

So $98 billion US billion dollars of assets, and they need to compete for the next asset among the whole platform that's going in.

And what that means is if one part of the credit market gets tight, we can then pivot to something else.

It's also really difficult to predict what parts of the credit market are going to get opportunity.

So, If you just go back through how COVID evolved, initially high yield and IG bonds were a great opportunity set to get Alpha. Then there was rescue financing that came out of that.

We had the development of large cap private lending, and it was sort of nimble multi-strategy type capital that took advantage of that where there was excess spreads and not as much demand for the paper.

Right, we saw volatility through rates, through 22 and 23, and now the evolution recently more in special situations and asset backed.

And it's unclear, it can be hard to predict where the shocks are going to be.

Being nimble in what you're going after, you can take advantage of the opportunity set as it presents.

So most importantly, you have the flexibility.

Chris Conway

Talk to me, Adam, about how you manage the allocation between public and private. Always an interesting conversation.

Adam Nankervis

It is, and it's sort of something we have as portfolio managers every day and with our industry teams also.

Ultimately we're trying to get the best risk adjusted return, whether it's public, private, secured, more junior, corporate lending, or asset-backed.

Now at the moment with high yield spreads sub 300, it's hard to look at that market and say we should be putting, you know, beta high yield risk on.

And that's sort of a similar perspective of the leveraged loan market.

That said is it's a $2.5 trillion dollar market and so we've got 120 investment professionals going through those markets and there's always going to be idiosyncratic opportunity sets there.

So there's idiosyncratic opportunities within the public market, but we're not necessarily looking to put holistic risk on in those markets.

There will be moments of that though. You go through, you know, 23 when double B bonds were 8%, you go through COVID, you go through April of this year, and you know that can flip pretty quickly.

And they're the moments that you want to be nimble and use your liquidity to take advantage of those markets.

Chris Conway

Yeah, so another lever that you can pull when you need to.

Adam Nankervis

Absolutely, yep.

Chris Conway

I understand you've done some stress testing in the middle market versus larger borrowers.

What were the key findings and what's the important takeout for investors?

Adam Nankervis

On the large cap side of things, so you know, we've grown up over 30 years in the syndicated markets, the stress markets, and then evolved as private lending has moved into the large cap space as well.And what we've found is larger businesses, they have a lot of substance to them.

What I mean by that is they're more relevant to the ecosystems they operate in. They have more pricing power with their customers and suppliers, the management teams are deeper, and so when you get things wrong, there's just more moves you can make in order

to restructure and get your dollars back.

Because the capital markets on the equity side are more open, there's more debt markets that are open, there are trade buyers potentially of assets. If part of the business has had a shock, it may be diversified enough where it doesn't impair, or impact where the debt is at that point.

And so takes similar resources to restructure small businesses versus large business. It's just large businesses have more relevance to the world they're in and also gives you a lot more restructuring opportunities on the back end there.

And so that's what we've seen is the recovery rates are ultimately higher and more attractive in that regard, and that's what you're trying to harvest.

It is loss rates, minimizing recovery rates being as high as you can.

Chris Conway

Fantastic, Adam, thanks so much for sitting down with Livewire and taking us through that.

Adam Nanverkis

Thank you very much.

Chris Conway

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