IMCO's Global Credit Invests US$1 Billion With Loomis Sayles and Beach Point
Investment Management Corp. of Ontario, a money manager for public pension funds in the Canadian province, is handing $1 billion to two credit managers to pursue opportunities as debt prices sink.
The Toronto-based firm is allocating $550 million to Boston’s Loomis Sayles & Co. and $450 million to Beach Point Capital Management to run actively-managed portfolios of public credit.
The managers complement each other, with Loomis taking on broader mandate and Beach Point having a more concentrated focus that will include stressed credit, Jennifer Hartviksen, Imco’s managing director of global credit, said in an interview Thursday. The mandates include investment-grade and high-yield debt, structured credit and leveraged loans, according to an Imco statement.
Credit markets have seen historic volatility this year as inflation soars, causing the worst US bond-market rout in at least a half a century. US Treasury yields jumped and stocks fell again Thursday after the Federal Reserve increased rates by 75 basis points, the biggest increase since 1994.
The current selloff will create investment opportunities in credit just as previous periods of disruption have, Hartviksen said. “We are beginning to see some opportunities is in what is broadly described as a capital solutions space,” she said, referring to securities that have some of the downside protection of fixed income but also may include an equity-like component.
Imco’s global credit portfolio managed C$6 billion ($4.6 billion) and returned 2.9% last year, around double the benchmark. The firm’s credit strategy, which is expected to grow to C$8 billion by 2025, is evenly split between the public and private market, with the latter being managed internally, she said.
“We are excited to offer IMCO’s clients exposure to diversified sources of income and attractive risk-adjusted return potential through our team’s active approach to multi-asset credit investing,” Loomis Chief Executive Officer Kevin Charleston said in a statement.
There are definitely nice opportunities presenting themselves in the credit space as yields blow up and high yield is getting hammered hard (pay attention to credit, it leads stocks):
Anyway, that's a discussion for my market comment tomorrow.
Earlier today, IMCO put out a press release announcing a US$1.0 billion Global Credit investment with Loomis Sayles and Beach Point:
The Investment Management Corporation of Ontario (“IMCO”) today announced it has invested approximately US$1.0 billion with two leading global credit managers, forming the foundation of IMCO’s allocation to actively managed public credit, and enhancing our access to the structured credit and leveraged loans markets.
IMCO is investing US$550 million with Loomis, Sayles & Co. (“Loomis Sayles”) and US$450 million with Beach Point Capital Management (“Beach Point”). Together, the two complementary managers will enable IMCO to increase its active allocations to investment grade debt, high-yield bonds, structured credit, and leveraged loans.
“We’re excited to offer our clients a range of public and private credit investment opportunities under one roof, across the full risk spectrum,” said Jennifer Hartviksen, IMCO’s Managing Director of Global Credit. “Our global credit strategy allows us to be flexible in response to market opportunities, and the expertise of Loomis Sayles and Beach Point will make our program even more nimble and agile in pursuit of superior client returns.”
Loomis Sayles and Beach Point each offer seasoned investment teams and rigorous approaches to portfolio construction, sector allocation, security selection, and risk management.
“Loomis Sayles is honoured to bring our longstanding expertise in credit investing, deep research capabilities and integrated risk analysis to this new partnership with IMCO,” said Kevin Charleston, Chief Executive Officer of Loomis Sayles. “We are excited to offer IMCO’s clients exposure to diversified sources of income and attractive risk-adjusted return potential through our team’s active approach to multi-asset credit investing.”
“We are thrilled to partner with IMCO, a leading Canadian asset manager we have long admired, to provide its clients with access to differentiated multi-sector credit investing capabilities,” said Sinjin Bowron, a Portfolio Manager at Beach Point Capital Management. “We look forward to bringing our expertise across high yield, leveraged loans and structured credit markets to IMCO’s platform and utilizing our flexible mandate to capitalize on the rapidly evolving opportunity set across these markets for the benefit of IMCO and its clients.”
IMCO’s Global Credit portfolio invests across a range of public and private credit market segments, including corporate bonds and loans, real estate and infrastructure debt, off-balance-sheet financing, emerging markets debt, high yield bonds and leveraged loans to generate higher risk-adjusted returns than traditional fixed income, adding diversification benefits to a total portfolio for IMCO’s public sector clients. The Global Credit program is differentiated by its broad approach to portfolio construction, making strategic allocations to liquid/illiquid securities and geographies across the risk spectrum. Our team has decades of diverse experience investing across credit segments, geographies and at all stages of the credit cycle. As of December 31, 2021, IMCO’s Global Credit portfolio had CAD$6-billion AUM. The portfolio is expected to grow to CAD$8-billion or more by 2025.
About Loomis Sayles
Since 1926, Loomis, Sayles & Company has helped fulfill the investment needs of institutional and mutual fund clients worldwide. The firm’s performance-driven investors integrate deep proprietary research and risk analysis to make informed, judicious decisions. Using foresight and flexibility, “You know, we are a long-term investor. What I mean by that is our objective is to build a resilient portfolio that can withstand a recession you are describing. I don't think you can plan your strategic asset allocation based on a recession because that is a shorter-term event. However, you need to withstand the recession and what I mean by that is you need to ensure you have the liquidity to weather it. I think our portfolio is in a good position to weather a recession if it were to materialize. What we are positioning for is we believe inflation will remain elevated for mid to longer term (10 years) and we will consider whether our current strategic asset allocation makes sense for that environment. We think inflation and rates will be higher than they were in the last ten years" looks far and wide for value – across traditional asset classes and alternative investments – to pursue attractive, risk-adjusted returns for clients. This rich tradition has earned Loomis Sayles the trust and respect of clients worldwide, for whom it manages $335.9 billion* in assets (as of 31 March 2022). MALR#029036
*Includes the assets of both Loomis, Sayles & Co., LP, and Loomis Sayles Trust Company, LLC. ($38.4 billion for the Loomis Sayles Trust Company). Loomis Sayles Trust Company is a wholly owned subsidiary of Loomis, Sayles & Company, L.P.
About Beach Point Capital Management
Beach Point Capital Management is a Los Angeles based investment manager specializing in credit-related investments. The firm employs a flexible, value-oriented and risk-controlled approach and focuses on complex and less followed opportunities. As of March 31, 2022, Beach Point manages $16.7 billion in AUM on behalf of sophisticated global institutional investors and has over 140 employees across offices in Los Angeles, New York, London and Dublin.
The Investment Management Corporation of Ontario (IMCO) manages $79 billion of assets on behalf of its clients. IMCO’s mandate is to provide broader public sector institutions with investment management services, including portfolio construction advice, better access to a diverse range of asset classes and sophisticated risk management capabilities. IMCO is an independent organization, operating at arm’s length from government and guided by a highly experienced and professional Board of Directors. Follow us on LinkedIn and Twitter @imcoinvest.
These are another two great strategic partnerships for IMCO's Global Credit team.
Last May, I discussed how IMCO invested half a billion with Ares to scale its global credit portfolio.
In October, I discussed why IMCO invested US $500 million with Antares Capital, a world class player in middle market private debt owned by CPP Investments.
At the time, Jennifer Hartviksen, Managing Director, Global Credit at IMCO stated this:
“Private debt lending provides stable returns and aligns well with IMCO’s tolerance for illiquidity and our long investing horizon. Antares has a 25-year track record investing across markets and industry cycles, and our new direct lending program will benefit from Antares’ broad suite of lending capabilities.”
Antares is a private debt credit manager and a leading provider of innovative financing and investment solutions for its PE-backed borrowers and investors.
In a discussion with John Graham, CEO of CPP Investments who used to head up Credit, he told me: "Antares only focuses on PE sponsored private debt in the mid-market space, that's all they do, they don't deviate from this strategy, this is what they've been doing since the beginning and they're really good at it."
In another discussion with IMCO's CIO, Rossitsa Stoyanova going over their 2021 results, she shared this:
"[...] in Credit, the mandate is all the way from public investment grade to private structured credit. I think that's the right setup for strategies because it gives the investment team the opportunity to cover the whole spectrum of investments with in their strategy and also pivot as market opportunities change and also create a very resilient portfolio. That's true for private equity too where we are doing mostly leveraged buyouts and growth equity but we do everything from directs and co-investments in between. So, I find the way the strategies were set up, our setup, is the right way to do it and IMCO is on the path of getting more active and more internal which is really important for private asset classes because access to privates is difficult for our client son their own. Another thing, at IMCO, we are looking for strategic partners in every asset class, so are we are not competing with our strategic partners, we choose them and then invest alongside them."
She added this on Credit and strategic partnerships:
"For Credit, the big investments we made among many smaller ones is we committed US$500 million with Ares Capital and also US$500 million with Antares Capital, the CPP Investments' platform for mid-market lending in the US. With Credit what we are doing is investing alongside our partners and the focus on the future is to grow our private credit portfolio. Our Credit mandate is very wide which allows us to move in many market segments as opportunities arise. Right now, we are pivoting to floating credit, so we reduced the duration of our credit portfolio in anticipation of interest rates rising. Floating-rates are typical for the leveraged buyout transactions (floating-rate debt to hedge against rising rates)"
In that discussion, Rossitsa also shared that they believe inflation will remain elevated mid to longer term:
“You know, we are a long-term investor. What I mean by that is our objective is to build a resilient portfolio that can withstand a recession you are describing. I don't think you can plan your strategic asset allocation based on a recession because that is a shorter-term event. However, you need to withstand the recession and what I mean by that is you need to ensure you have the liquidity to weather it. I think our portfolio is in a good position to weather a recession if it were to materialize. What we are positioning for is we believe inflation will remain elevated for mid to longer term (10 years) and we will consider whether our current strategic asset allocation makes sense for that environment. We think inflation and rates will be higher than they were in the last ten years"
Interestingly, I found out later that Rossitsa used to work with John Graham at CPP Investments so she knows Credit very well.
Why am I sharing this with you? So you begin to understand how IMCO's Credit department is building strong strategic relationships with top managers in the space to enhance its credit platform, offering its clients better risk-adjusted returns across the credit spectrum.
In this latest deal, IMCO is investing US$550 million with Loomis, Sayles & Co. (“Loomis Sayles”) and US$450 million with Beach Point Capital Management (“Beach Point”). The press release states that together, the two complementary managers will enable IMCO to increase its active allocations to investment grade debt, high-yield bonds, structured credit, and leveraged loans.
The Bloomberg article quotes Jennifer Hartviksen as saying the managers complement each other, with Loomis taking on broader mandate and Beach Point having a more concentrated focus that will include stressed credit.
On Linkedin, Jennifer states this: "The Global Credit team is thrilled to be partnering with such leading managers in the public credit markets."
Keep in mind, IMCO’s Global Credit portfolio invests across a range of public and private credit market segments, including corporate bonds and loans, real estate and infrastructure debt, off-balance-sheet financing, emerging markets debt, high yield bonds and leveraged loans to generate higher risk-adjusted returns than traditional fixed income, adding diversification benefits to a total portfolio for IMCO’s public sector clients.
It's all about diversifying the Credit portfolio, partnering up with leading managers with strong track records, to offer higher risk-adjusted returns than traditional fixed income.
If you take a closer look at IMCO's portfolio, you'll see Global Credit accounted for C$6 billion of total assets (7.6%) as at the end of last year:
With this announcement, Global Credit is growing to over C$7 billion, accounting for more of total assets.
IMCO has stated the portfolio is expected to grow to C$8 billion or more by 2025. It looks like it is well on its way to surpass that figure.
I am not sure what the target allocation for Global Credit is but it's obviously a very important asset class at IMCO and for good reason, it offers important diversification benefits and higher risk-adjusted returns.
Let me take a step back here and revisit a recent comment where I discussed why BCI is doubling its allocation to private debt.
I made a mistake of stating that 16% of CPP Investments' total assets are in Private Credit.
I subsequently corrected it to 16% of CPP Investments' total assets are in Credit (public + private) but a huge chunk of that 16% is private credit:
When I discussed Credit Investments with Andrew Edgell, Senior Managing Director & Global Head of Credit Investments at CPP Investments, I remember reading this from another article:
At CPP Investments, the credit investment business is highly diversified, providing debt-financing solutions across the entire capital structure. About 80% of its strategies are private, and a large chunk of that is corporate leveraged buyout [LBO] finance.
Just how important is Antares to CPP Investments overall Credit? It's very important.
Consider this from page 59 of CPP Investments' Fiscal 2022 report:
In fiscal 2022, CI’s net return of 7.4% was largely driven by operational outperformance from Antares Capital, strong performance in consumer credit exposures, and recovery of the underlying real estate portfolio. CI experienced slight losses in the Asia Pacific region driven by broad market volatility, as investors navigated through regulatory tightening in China’s real estate sector, but still delivered value-add returns relative to its benchmark.
It's not the only reason why Credit Investments performed well in fiscal 2022, but outperformance from Antares definitely helped them last fiscal year.
Anyway, why am I bringing this up?
Because I agree with BCI's push to double its allocation to private debt and I agree with what IMCO is doing in its credit portfolio, properly diversifying it across public and private credit.
Christian Hensley Senior Managing Director, Equities and Credit, Jennifer Hartviksen, Managing Director, Global Credit and the entire credit team at IMCO are ramping up Global Credit, partnering up with the right partners, working alongside them.
They are writing big tickets, roughly half a billion each time, but they are doing their due diligence and properly diversifying this portfolio by manager, strategy, geography, etc.
It should be noted that writing sizable tickets allows the Global Credit team to scale into the asset class nicely (at a lower cost as they negotiate better terms) and it also allows them to capitalize on these relationships to benefit from knowledge transfer and co-investment opportunites.
As stated in the Bloomberg article above, Global Credit returned 2.9% last year, around double the benchmark. The portfolio is expected to grow to C$8 billion by 2025 and is evenly split between the public and private market, with the latter being managed internally.
And if you talk with Bert Clark, IMCO's President and CEO, he will tell you diversification, teaming up with the right strategic partners and scale are all critical to IMCO's long-term success.
So, to conclude, I like what IMCO is doing, it makes a lot of sense to me and I wish them a lot of success.
Below, Matt Eagan, portfolio manager and co-head of the Full Discretion Team at Loomis Sayles, discusses rising rates and building a resilient portfolio (May, 2022).