Multi-strategy manager Corbin Capital capitalises on shifting credit markets
Established in 1984, multi-strategy alternative investment manager and opportunistic credit investor Corbin Capital Partners today manages more than USD9 billion in assets across a broad range of commingled and bespoke portfolios.
Corbin invests across both corporate and structured credit, the latter spanning equity and mezzanine tranches of collateralised loan obligations, and residential and commercial mortgage-backed securities, among others.
“We partner and deploy capital in a lot of different ways – in CUSIP markets, both structured and corporate traded markets, including in RMBS, CMBS, in CLO equity and mezzanine,” Craig Bergstrom (pictured), Corbin’s chief investment officer, tells Hedgeweek.
About USD2.7 billion of the New York-based firm’s assets are invested across two opportunistic credit strategies, which share similar mandates and investment approaches, with one being managed to comply with US pension fund-focused ERISA standards.
Corbin boasts a significant presence in external fund investments, allocating to other firms’ credit offerings through its fund-of-funds business, as well opportunistic co-investing and direct trading capabilities.
“We spend a lot of our time, and deploy a lot of our capital, in between two competitive poles,” he explains of the firm’s credit market focus, referring to situations that are neither single company credits, nor fund investments with “high-quality, well-established credit fund managers.”
“There are situations where we are essentially a co-investor, where a manager needs completion capital for a deal that may be too large for their fund. It could be that they need a third-party price setter. It could also be warehousing assets, or lending – sometimes we’ll be a capital solution provider.”
Corbin did not have a sizeable focus on structured credit markets until 2007, as the then-tight spreads meant investing required hefty amounts of leverage to meet the firm’s 8-10 per cent return targets over a full market cycle.
“We’d entered that market in 2007, and as a result of some of the structural regulatory changes put in place in the aftermath of the 2008 Global Financial Crisis, the available returns in structured credit remained high enough that we stayed active there, even as economies and markets recovered in the mid-2010s,” Bergstrom explains.
“Generally, we’re looking for things in that sort of high-single or low double-digit return space – with private risk in the low double digits, and CUSIP assets in the high single digits. Our lowest expected return bucket today is probably leveraged loans. RMBS, CMBS, CLO mezz are in that high single-digit target return group, with CLO equity a little higher than that.”
Elsewhere, the firm also manages around USD200 million in closed-end capital, focusing purely on private credit. “We describe it as a ‘between-the-cracks’ strategy focused on smaller, less competitive niches,” Bergstrom notes.
A key area of interest within the private credit sphere is short duration opportunistic investing, which Bergstrom explains is also partly a legacy of the 2008 crash.
“A lot of credit hedge funds, because of their sort of 2008 experience and their client base, don’t have much room for private credit in their open-ended funds. The closed-end funds that are focused on private credit as a pure-play end up being very much focused on multiples of invested capital rather than IRR.
“We see shorter duration, private opportunities as much less competitive. Things that are on the one or two-year point on the private curve, even if they offer less risk and an enhanced return premium, are not of interest to a lot of private credit investors – but it’s a real focus for us on the private side.”
Bergstrom began his career on the sell-side, focused on equity derivatives with roles at Morgan Stanley and Salomon Brothers. He later switched to the buy-side, joining Boston-based money manager Grantham Mayo Van Otterloo in 1999 where he was risk manager, with a multi-asset focus in hedge fund product development, before joining Corbin Capital in 2002.
As talk turns to the prevailing market backdrop following the coronavirus-fuelled economic turmoil of the past 18 months, Bergstrom acknowledges a range of “headwinds, tailwinds, and crosswinds” confronting credit markets – but stresses that “this sort of macroeconomic prognostication we mostly leave to other investors.”
Vaccine progress has underpinned the swift economic rebound, in turn driving inflation to its highest level in over a decade. But Bergstrom points out that Corbin’s target universe tends not to be exposed to volatile long-term inflation, with the strategy historically less correlated to investment grade bonds.
“It’s hard to develop a super-strong edge on inflationary trends right now,” he continues. “There’s a reasonable case to be made that it’s transitory; there’s a reasonable case to be made that it’s structural. But we don’t see any sort of a tradable opportunity.”
Expanding on this point, Bergstrom believes the firm has a slight “luxury” in its portfolios having very little interest rate duration exposure
“Because of our focus on structured credit, those are overwhelmingly floating rate assets, and our fixed rate assets – high-yield bonds, for example, or occasional bridge loans – tend to be very high coupon and/or low dollar price and/or event driven names.
“We’re mostly floating rate, and what we don’t have that’s floating right doesn’t carry that much interest rate duration anyway – so we feel reasonably well-insulated from the prospect of higher rates.”
However, as spreads continue to be at, or close to, their all-time tights, despite significant ongoing economic uncertainty, that offers reason to continue to exercise caution, he believes.
“That says to us this is not a time to reach for yield,” Bergstrom observes.
“Fortunately, there still seems to be some residual pain and dislocation from some of the more significant disruptions last year. So the most liquid, deepest, most readily tradable credit markets – such as high yield, for example – have recovered. Other markets – where there are fewer standby participants, where there is more complexity and less liquidity – are still producing some reasonable risk-adjusted return premium.”
Despite this, Bergstrom acknowledges that, like other investors, Corbin remains exposed to severe GDP shock.
“We were reminded of this in a fairly painful way during 2020 – that is hard to diversify away from,” he remarks. “While we are in private real estate loans, private corporate loans, CLO, CMBS and RMBS and we’re diversified – if you have GDP drop 7 per cent in a quarter, you’re not diversified against that.”
However, he adds: “With the strength of recovery in riskier corporate credit, it does feel like structured credit has lagged a little bit and probably represents slightly better value. Clearly a lesson from last year is that if you think you’re getting value in structured credit you need to make sure you’re adequately compensated for effectively less liquidity and its close cousin more mark-to-market risk.”
“The bottom-line is that while a lot of things are at, or around, their all-time highs, we are still seeing enough flow to stay fully invested in things that offer what I believe are good risk-adjusted returns.”