Keerthi Raghavan, Partner and Head of ABS Strategy at Waterfall Asset Management, joined Julie Cooling, Founder and CEO of RIA Channel, at the CAIS Summit to discuss private and public investments in structured credit.
Credit can be categorized as corporate credit or asset-backed structured credit. Waterfall doesn’t lend to corporations but lends to pools of assets such as consumer loans, credit cards, consumer loans, residential or commercial mortgages. Waterfall’s investments are repaid by the cash flows generated by the pools of loans.
Many of the structures that Waterfall invests in have a duration of two to four years. Advisors typically invest in structured products to generate income from their alternative investment allocation. After the 2022 increase in interest rates, credit strategies can be seen as an alpha driver, generating total unlevered returns of 8% to 11% or higher. Yields can be higher in stressed markets, such as commercial real estate.
Waterfall’s strategy combines more liquid and transparent public market assets, such as ABS and CMBS, and less liquid and transparent private market assets, such as loans. As such, the liquidity sits between the corporate high-yield bond market and private credit. Both private and public loans report on borrower performance on a monthly basis. Investors should expect to remain invested in Waterfall’s strategies for one to two years.
While publicly-traded corporate bond credit spreads are near the tightest levels since 2021, spreads on structured credit and private debt have not narrowed nearly as much, making the latter a stronger relative value than the high-yield bond market.
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