Transparency, allocation and scalability (roundtable on ‘Specialty Finance & Opportunistic Credit’ – part 3)

May 18, 2026

 

Chair: Jason Proctor, Troviq Private Markets Participants: Pascal Böni, Tilburg University   Egbert Bronsema, Aegon Asset Management   Robin Challis, Pemberton Asset Management   Lalantika Medema, PIMCO   Sachin Patel, Neuberger Berman   Srdjan Vlaski, StepStone Group

    

Are there any proactive measures the sector can take to address the major challenges that have emerged in this sector and to increase resilience?

Patel: ‘The most important thing to limit misunderstandings, such as “double piedging”, is transparency. I don’t think we would work with a company that isn’t transparent about all the different funding lines and wouldn’t show us what margin calls they have elsewhere. There are several reasons for this. Firstly, you want to be sure that you are achieving the same return as another lender who is essentially financing the same assets as you, and that there is no adverse selection taking place in the credit portfolios. The second reason is simply to carry out checks for double pledging, a more in-depth due diligence on the asset side. I think that is something that should be a new industry standard, a minimum standard for all transactions for all managers.’
 

Specialty credit currently offers an additional spread of around 150 to 200 basis points

 
Vlaski: ‘One of the essential tasks of the audit was to verify the existence of the underlying assets. In the future, asset verification and related controls are expected to come under increased scrutiny, particularly in light of the alleged fraud cases we have seen recently. We expect general partners, together with service providers, to play a more active role in driving standardisation within the sector. Overall, the market is moving in the right direction with stricter credit conditions and better oversight.’

What role should specialty finance and opportunistic credit play in an institutional portfolio, and how should investors manage risk, diversification and scalability? How diversified is the universe in practice, and at what point do capacity constraints become significant?

Medema: ‘A broader geographical spread is something that is increasingly coming to the fore when we discuss opportunities with clients. We assess opportunities from a risk-return perspective, regardless of the region. Above all, it is about whether we are compensated for the risk. In the past, there were perhaps more opportunities in the United States, and clients are now looking for ways to capitalise on opportunities elsewhere.’

Böni: ‘We need much more data to gain insight into the return characteristics of specialty finance assets, how their returns relate to systematic risk factors, and so on. One aspect of including specialty finance products in the portfolio is the question of to what extent an institutional investor actually has its own team to analyse specialty assets, as opposed to investments in standard credit assets, such as direct lending funds. But from a data and research perspective, it is too early to talk about robust scientific performance analyses. Decisions regarding asset allocation for specialty assets are inherently difficult, as we are all dealing with a limited sample. Although we now have a good understanding of the performance characteristics of funds focusing on direct lending, mezzanine financing, special situations and distressed debt, there is still very little data available on specialty finance. As a result, the true characteristics of specialty finance asset classes remain largely unknown.’

Vlaski: ‘As mentioned, we view specialty credit as an increasingly important diversification position. We also believe that this diversification is now delivering attractive, risk-adjusted returns. Following on from Boni’s comments on the availability of data: it takes time to obtain empirical evidence through data, and you need a few cycles. We are a data-driven company, and have recently launched an initiative with another firm in the private credit buy-out market to develop new fundamental benchmarks that were lacking in the past. This initiative reflects our commitment to greater transparency and improved data availability across the entire market.’

Bronsema: ‘We have our own internal models to assess the relevant data and determine what is actually happening across all kinds of different loan types, whether they involve SMEs, large corporations or consumers. Transparency is absolutely crucial for this. It is not just about the asset side; it is, of course, also about the lenders. How detailed is the data regarding the historical quality of the loans? What does their track record look like? Do they use specific underwriting guidelines, and are these dynamic? Here too, transparency is crucial.’
 

Asset-based lending is growing as a core position in institutional portfolios

 
Patel: ‘Following the coronavirus crisis, when interest rates at the short end of the curve rose, investors no longer had to lock their money away for five to ten years to generate a return. Many investors were actively seeking to shorten the duration of their private credit portfolios. If you look at the various asset classes that can deliver short-term fixed-income returns and offer a reliable fixed-income component, I would say that asset-based lending has really grown in that regard. We are seeing a shift from direct lending to asset-based credit and asset-based financing to achieve two things: firstly, to diversify away from corporate credit, and secondly, to shorten the duration of the overall private credit portfolio. Asset-based credit is, I believe, becoming a core holding in virtually all institutional portfolios.’

How scalable are the opportunities, both in terms of fundamental capital requirements and the feasibility of deploying capital with managers?

Medema: ‘We are seeing a prolonged withdrawal on the part of both banks and originators. Ultimately, I think lenders are realising that they can run more efficient balance sheets by working with private capital, whilst at the same time expanding their reach and gaining access to a larger group of borrowers. From a manager’s perspective, you have to be much more critical about where you ultimately borrow from or invest in. Specialty finance has become a structural component of private credit. I think this also points to investors’ long-term need for these types of asset classes and gives them the flexibility to switch between different opportunities.’

Challis: ‘I don’t think people want to be in funds that fail to invest money from LPs or have invested only 30% after three years. That is why opportunistic credit funds have a maximum size: investment opportunities are, by definition, limited. We limit ourselves to mid-market deals, and if you want to invest swiftly in good deals, the maximum fund size is around three billion euros.’

Pascal, could you explain why you expect a decline in the returns of private credit funds in the future?

Böni: ‘Based on the available cash flow of what is essentially a global collection of private credit funds, I have continuously analysed their quarterly figures over a very long period. Based on this quarterly return data, which you can compile using net asset values and cash inflows and outflows, I compare the time series of quarterly returns and draw conclusions from them. You can see that following Covid, the returns on private credit funds have fallen significantly. There is a trend in the market that has pushed average returns down, bringing them quite close to those of high-yield bonds. This applies only to the United States; I haven’t looked at Europe yet, and APAC doesn’t have that much data. It concerns around three hundred large US funds.’

Challis: ‘I think investors are looking for higher returns in segments and regions, such as Europe, where competition among lenders is less intense. LPs want to achieve higher returns by doing things slightly differently, such as offering greater flexibility or combining different elements within a facility, thereby enabling borrowers to achieve their objectives.’

Böni: ‘As a rule of thumb, if the average return of a credit fund falls, I would expect the spread around that average to shift downwards as well. So the difference between private credit vehicles and the liquid markets narrows. The extra margin you get becomes smaller, at least in the US market, probably due to competition between larger funds.’
 

The burden of proof that specialty finance generates structural alpha has not yet been convincingly met

  
Challis: ‘If you’re dealing with around 300 funds all chasing the same type of deals, returns will decline due to the intense competition. It is therefore interesting to look at the spread in returns between high-performing and lower-performing managers and strategies, as the larger sample size will average everything out.’

Böni: ‘Interestingly, research into the alphas and betas of mainstream credit funds shows that the alpha is both economically and statistically significant. From an alpha perspective, mainstream credit funds are very interesting and should be included in an institutional investor’s portfolio. As far as I am aware, the burden of proof has not yet been met for specialty finance and opportunistic credit. These funds have not yet convincingly demonstrated that, after deducting costs, they generate a sustained risk-adjusted alpha.’

Jason Proctor Jason Proctor is a co-founder of Troviq and a member of the company’s investment committee. Throughout his career, he has focused on investments in private market funds, co-investments and secondary markets, and previously worked at StepStone and Partners Capital.

  

Pascal Böni Pascal Böni is Professor of Practice in Finance & Private Markets at the Tilburg School of Economics and Management, and Managing Director of the Tilburg Institute for Private Markets (TIPM). He is also Associate Professor of Finance at TIAS and sits on several boards of directors, including that of the Swiss Association of Securities Firms. He obtained his PhD in Finance from Tilburg University.

  

Egbert Bronsema Egbert Bronsema is a Senior Investment Manager in the European ABS team and has been with Aegon Asset Management since 2016. Prior to that, he spent 11 years working in the Structured Finance team at IMC Asset Management. Bronsema has been active in the sector since 2005 and holds a Master’s degree in Business Economics and Quantitative Economics from Maastricht University.

  

Robin Challis Robin Challis is Deputy Head of Portfolio Management and Portfolio Manager for the European Strategic Credit strategy at Pemberton Asset Management. He is also a member of the firm’s Credit Review and ESG committees. Before joining Pemberton in 2016, he was Head of Credit Strategy for the Special Situations team at RBS. He began his career at KPMG in London.

  

Lalantika Medema Lalantika Medema is Executive Vice President and Alternative Credit Strategist at PIMCO, responsible for credit alternatives and strategies relating to mortgages and real estate. Previously, she worked in the portfolio management team, focusing on mortgage-backed securities and residential loans. Before joining PIMCO in 2006, she worked at Deutsche Bank, where she specialised in collateralised debt obligations (CDOs).

  

Sachin Patel Sachin Patel joined Neuberger Berman in August 2022 as Managing Director of the Specialty Finance team. Prior to that, he established the Global Capital Markets group at Funding Circle Holdings Plc. Before that, he worked in the Insurance & Pensions ALM Solutions division at Barclays Capital. Patel began his career in the cross-asset structured products division at JPMorgan. He holds an MPhys in Physics from the University of Oxford.

  

Srdjan Vlaski Srdjan Vlaski is Managing Director of the private debt team at StepStone, where he focuses on specialist finance credit strategies and secondaries. Vlaski holds a Master’s degree in Finance from the University of Lausanne and is a Chartered Financial Analyst (CFA).

  

Read the full report in Financial Investigator magazine