Due Dilly Episode 1: Private Structured Credit with TJ Durkin of Angelo Gordon

Stewart: Welcome to another edition of the InsuranceAUM.com Podcast. I’m Stewart Foley. I’ll be your host. This one is a little different, though, because it is the first of a new podcast series we’re calling Due Dilly. And as most of you know, due dilly is slang for due diligence, which is defined as the research and analysis of a company organization done in preparation for a business transaction such as a merger or purchase of securities. Now, my background is decent in the insurance investment business, but I’ve got limitations and my background doesn’t really lend itself to going really in-depth into some of the asset classes that are most prevalent today in the insurance asset management arena, in particular private assets.

So a friend of InsuranceAUM.com, John Patin, who is the well-known guy in this space and very knowledgeable, came up with the idea to do a podcast that is a little bit more technical, a little bit deeper dive. He’s got a little time on his hands this summer. So, John, welcome to the party. Tell us about yourself.

John: Thanks, Stewart. It’s really great to be here. You’re absolutely right. I have a little time on my hands this summer, but I think this will be a great format to go through. I spent the last 15 years or so in the insurance asset management business. I was progressed from being an analyst at an insurance company all the way to my last role being a CIO of a global P&C company. A lot of my job during that time was doing due diligence on asset managers. It was both across public strategies as well as private strategies and I’m looking forward to this new podcast.

Stewart: Now, anybody who knows you knows that there’s no shortage of personality nor opinion. So we’re hoping for good things there. And we are joined today by a brave soul, TJ Durkin of Angelo Gordon. TJ, first of all, welcome, and thank you for being on. We’re happy to have you, man. I’ve got a little bit more to say there, but I just want to say first of all, welcome.

TJ: Happy to be back, Stewart.

Stewart: You are the hands-down record holder of our podcast downloads. And so when this idea of doing a podcast called Due Dilly came up, your phone rang pretty early in the process and you were very kind and very willing to go with us on this little journey that doesn’t really have a roadmap yet. So I want to say thank you very much for being on and we look forward to what you have to say today. So with that, I’m going to turn it over to John. And the purpose here is that we’re going to have a session where John is going to be talking with TJ the way that he would if he were considering making an allocation into the asset class that TJ is responsible for in Angelo Gordon. And we can talk about what that is in just a moment. But with that, John, take it away.

John: Absolutely. Thanks again, Stewart. TJ, good to see you. Here we are at the end of the first half of 2023. Today, we’ve got some pretty interesting economic data. Markets are moving around. I think you were originally on in January of ’23. So I’m looking forward to a discussion of the markets and learning more about the strategy. As a starting point, why don’t we just give a quick intro and a background of Angelo Gordon, where you’re at, and maybe you can highlight the firm’s insurance asset management expertise.

TJ: Yeah. Great, John. Thank you. Again, happy to be back. This is a really fun format for us to talk shop. Angelo Gordon as a firm, we’re about a $73 billion alternative asset manager. Two main lines of business credit and real estate, about $55 billion of credit across three main verticals, which would be distress, special sits. We have a middle market direct lending business under the brand, Twin Brook and then structure credit, which I oversee. And then we’ve got about $18 billion of real estate across value add globally and net lease as well.

In terms of insurance AUM, we certainly do a lot with the space. I think based on obviously the credit verticals that we’re operating in as well as real estate. We’ve got over 50 insurance clients just north of 4 billion of AUM from both P&C, health, life really across the globe too, US, Europe, Asia, and we work with them in a variety of different ways.

So we’ve got a lot of experience working under all the various regulatory regimes, understanding insurances, reporting requirements that may be different than a public pension. And so we like to work with them.

John: TJ, of that $4.2 billion of AUM, how much of that is within the specialty private credit or structured credit that you are managing? Can you give me a sense of with working on an SMA. Do you work with clients that have separate guidelines, use benchmarks on that? And then you have within, if they’re investing through funds, do you have a capital-efficient, and I guess you would be highlighting, a rated note feeder structure to that? Is that correct?

TJ: Yeah. And obviously, this podcast is a great forum for it. I think a lot of insurance companies are starting to really explore what they either call the private ABF, specialty finance, whatever your vernacular is. And so that’s growing within my vertical. Yes, there are different reporting requirements. Simple example would be US-based NAIC versus solvency II globally. So there’s different capital charges for some of the assets that we look at. And so we would structure around that, whether it be eligibility criteria or the packaging that we would provide to solve those really redcap needs.

John: If I think about it, the sense of if people were to look at track record, what is the timeframe for your track record?

TJ: we’ve been doing what we would call private lending or warehouse lending, especially finance, going all the way back to 2010, was our first investment, if you will. We’ve obviously been doing it ever since.

John: Well, why don’t you give me a couple of quick thoughts about the team because it seems that that would be an interesting part of specialization. Again, so maybe how big is your team? Are they credit specialists? Are they asset specialists? Are they generalists? And then maybe just following up on that, is there different levels of your team that are involved in sourcing or research that would be helpful to understand?

TJ: Yeah, absolutely. So by way of background, I’ve been at the firm 15 years to help really launch the residential mortgage and ABS strategies here at Angelo Gordon. We’ve methodically grown that over the last 15 years. We’ve got about 30 investment professionals now whether it be research analysts, traders, software developers, encompassing that, managing about $14 billion of assets today.

So the way we’ve really organized the team a high level is, I think of it in three verticals. We’ve got what we would call trading and origination. So those are folks that are covering both the private and public markets within structured credit, we’ll call it, really focused on specific sectors or industries. And so they may be talking to the investment banks as well as specialty finance CEOs, CFOs, heads of capital markets, et cetera.

We’ve got what we would call effectively the research group, which is more inward facing. And so they’re really responsible for a lot of the credit analysis, the underwriting, having the analytical tools to go through an auto finance warehouse that’s got 3,000 underlying loans. Basically, that set of analysis is needed here. You can’t do this in Excel. And then I would say you’ve got what we call asset management, which is at the tail end of investment process, which is once we’ve effectively made that revolving warehouse commitment, keeping track of the borrowing base, the eligibility criteria, where are we with the covenants and effectively that belts and suspenders of understanding our risk once we put capital out the door. And so that’s how I think about the team.

John: Got it. And you said you can’t do this on an Excel sheet. Are you guys using data science? Is there a quantitative aspect to what you’re doing here both within the sourcing and evaluation of investment opportunities?

TJ: I mean, definitely in the evaluation. I think structured credit was big data before big data was a thing. We’re looking at thousands of underlying loans. We’re using a lot of quantitative analysis to effectively do our projections on what defaults will be. There’s no such thing as, again… Go back to that auto example, there’s no such thing as an auto ABS deal with 5,000 loans and zero defaults. It’s not like corporates.

So you have to have a sense of what those risk parameters are and you’re using quantitative tools to effectively create… We would call scenario analysis. There’s going to be a base case, an upside, a downside, and then everything in between to, I would say put our heads around what the outcomes can be and how to structure a lot of these private lending agreements to protect ourselves if things do start going sideways.

John: So is it publicly available data and then you guys are doing the manipulation of data using your systems or is it something that’s proprietary to Angelo Gordon’s credit team?

TJ: So it’s both ends, right? So yes, there’s certainly a lot of public data and available sources that anybody in my seat would effectively need to subscribe to. Then there’s the proprietary data. So like I mentioned earlier, we’ve been here 15 years. We’ve been aggregating and consuming and digesting lots of data from the private transactions that we’ve been doing.

So it’s really marrying all this, and that is part of the investment process, and that’s what one of my partners that runs our research group is really in charge of not just saying the credit research but also the architecture of the data and the analytics to manage all this information.

John: So I’m assuming this gets a little bit into risk management, which we can get into, but it’s that real-time feedback loop that then you can change your various different scenarios to come up with different probabilities and looking at investment opportunities.

TJ: Exactly.

Stewart: I have a question if I can.

John: Absolutely.

Stewart: When you have that level of granular data, TJ, does that give you a good insight into the consumer more generally at a macro level that’s helpful to Angelo Gordon as well as just the deal-specific numbers?

TJ: Yeah, absolutely. I mean, I think of this, and we use this term a lot, we’re really interfacing with the main street economy versus corporate EBITDA. And so it could be consumer, it could be small business lending as an example, things that don’t hit, I call it the EBITDA world, is really getting financed by specialty finance companies. Every year that goes by more and more lending moves away from bank balance sheets. And that’s just a fundamental tailwind to the opportunity set for us unless they completely roll back something like Dodd-Frank. That’s just the reality of the situation. So the opportunity set is sort of evergreen and growing to effectively service that borrower set.

John: Yeah, interesting. TJ, we’ve been talking about various different types of opportunities, but maybe if I just take a step back and I think about if I were to think about the Angelo Gordon asset-based credit strategy from a 30,000 foot or a high-level summary of the strategy and put some parameters around it, is it primarily credit? Is there some equity risk there? Is it primarily investment grade versus high yield? Is it a diversified opportunity set? Is it securities versus loans? All of those parameters around this. How would you describe the strategy in total, even though I know you’ve mentioned a few things, but just give me a step back to give us a broad sense of the total strategy.

TJ: So again, our business here at Angelo Gordon, we’re really living in both the public and private market. So public securitizations, liquid traded securities, and then also effectively the non-security investment opportunities. Same underlying credits, asset classes.

John: Sorry to interrupt. But just let me ask you a quick question. I think it’s interesting to try to differentiate this. When you say public versus private, are we looking at completely two different opportunities sets in the sense of asset classes as far as market cap or are private opportunities just public market companies that then you come up with a structured solution? Can you kind of give us a differentiation or is there a differentiation in the public versus private?

TJ: No, it’s really the packaging. So if an issuer goes through the underwriting process of an investment bank creating securitization and syndicating those bonds out, again, we’ll keep using auto finances as an example. That’s public securities, auto ABS, most people know that and probably have that on their balance sheets. We in theory can be lending to that same auto finance company while they’re aggregating up their originations for that securitization. So it is the same underlying assets. It can be the same exact counterparty and particularly-

John: Bilateral negotiation as opposed to some.

TJ: Exactly.

John: Yep, gotcha.

TJ: And really it was very interesting in a year like 2022 where capital markets were really fractured. A lot of these companies that were regular way ABS issuers, they didn’t want to lock in that term financing. And so they used effectively private financing as a way to bridge that until markets were in theory a little bit healthier. So I think that to answer some of your other questions, yes, this is credit investing and so when I think of the private side, it’s really getting credit exposure to the same underlying asset classes that are in securitized products.

We like to say the credit doesn’t know if it’s securitized or not. So that’s the underwriting process. That’s how we’re getting our risk. It’s not equity exposure. We’re not making equity stakes. So I think on the private side it’s really lending to these specialty finance companies or I would say buying the raw materials, i.e., the loans that aren’t packaged. And you need not just a different skillset, you need the machine, the pipes to be able to do that and take advantage of that illiquidity premium that you get for not having it in sort of liquid CUSIP form for lack of a better term.

I think what’s very interesting is that in this space, particularly for insurance companies, there’s a lot of private investment grade risk out there. It isn’t just, oh, it’s because it’s private, it’s riskier. That is not the case. It’s really just that form of liquidity really that makes it private versus public. And so I think for insurance companies, yes, we’ve created a rated note structure to get access to up and down the capital structure, but there’s also ways for a lower return hurdle but capital-efficient ways to almost go up in credit quality.

John: I mean should we be thinking of this as mostly high yield type risk in the sense of the underlying LTVs or leverage in the strategy? And again, because I mean I don’t know if when you’re looking at these loans, when you say loans, I get that these are floating rate loans, very short duration, probably amortizing, but should I think about the risk more of an IG or high yield?

TJ: Well, that’s the beauty of the opportunity set. So we can find plenty of, I would say investment grade equivalent risk, all the way down to something that would be more analogous to double B type risk. What’s different here is there’s always almost all these asset classes. There’s a public market securitization equivalent. Even if it’s a smaller or newer company, no one’s really reinventing the wheel here.

You can really create a good comp or cohort too, and so it’s not even our opinion of what is investment grade. We can look at what type of collateral it is and effectively look at their public market peers and say, “Well, it’s attaching at a 75% advance rate. That’s where triple B is for sub-prime auto.” We know it. And so that’s why I don’t think you should myopically think about it as one risk categorization, it’s where do you want to go in the risk spectrum? And effectively we can customize that on different people’s risk appetites or capital needs.

John: I think it’s an overused word in our… When we talk about asset managers, this opportunistic, but I think it truly does apply here to your asset class, to the asset classes that make up your opportunity set.

TJ: Agreed.

John: I look at private being at… And correct me if I’m wrong, but I look at private being a little bit more of an income-focused. I mean given that it’s bilateral agreement, you’re coming up with certain particular coupon rates or spread to that. You’re going to just carry that and you’ll have, I would assume some parameters around what you’re going to be buying whereas public might be a little bit more total return because you’re maybe be buying on a discount. Is that a fair assumption?

TJ: Yeah. I mean listen, if you’re doing par lending, which would what we would be doing in warehouse terms, that’s exactly the point. You’re going to have thousands of underlying assets here. It’s not, again, EBITDA lending where you’re going to set the multiple day zero and then have to live and die by that. We’re going to have, to your point, a revolving nature, a shorter duration. These asset classes are generally two-to-three-year revolvers with both eligibility criteria on the way in and then performance-based covenants through the life of that.

John: Just quickly, I think I saw some news this week around I think the purchase out of a bank, and I think that’s what you’ve been highlighting, that there’s going to be this opportunity set. How do you define the supply of these assets in this market that you’re looking at versus the demand of capital coming in? I guess just take it one step further then how do you differentiate your platform at Angelo Gordon versus maybe others focusing at this space?

TJ: Sure. I mean, listen, I think what we’re seeing occur out of the banks right now is really twofold in terms of the opportunity. I think what we would say is it would appear the deposit run is over, knock on wood, but that also doesn’t mean they’re coming back. So a lot of these bank balance sheets are just too big. So it creates two opportunities for our space in particular.

One, the regional banks that were perhaps lending to specialty finance companies at a cost of capital that was probably closer to what we’re looking for are dialing back in terms of new business. So we’re able to probably lend to better credit borrowers that are now having to live under a new cost of capital. And that’s starting to work its way through the system. The second thing that’s occurring is we’re seeing asset sales.

So I think about this as very different than the GFC, what’s occurring now. Right? The GFC was really a credit problem that had to work its way through. This is a duration-induced problem. So if you think about what happened post SVB signature, the Fed came out with a new lending program that said, “Don’t worry about the discount window anymore where it’s the market value of the securities minus a haircut. We’re going to take all of your low interest rate health to maturity treasuries, Fannie two and a halves and we’ll give you 12 months at par.”

So overcapitalize the banking system in that way. And so again, if you’re a bank CFO or CEO and you’re saying, “Okay, I got to get my balance sheet smaller, I’m getting a gift from the Fed on my securities book. I’m probably not going to look to sell that.” So now I look at a loan book and I think if we look at a US regional bank. There’s maybe four big themes within a loan book. You’re going to have a CRE book. I think we all know what’s going on in commercial real estate. That’s probably not something where they want price discovered.

You’ve got a C&I book that’s probably performing well, but generally like a fixed rate duration type investment. You got residential mortgages which are performing great, low LTV’s, but again, durations have extended. And then you’ve got generally what we call consumer, which could be auto loans, unsecured credit cards, things of that nature where the duration is actually shorter.

So again, if you’re trying to get your balance sheet smaller, but also manage your earnings, they’re looking to create asset sales with the highest dollar price. And that’s really where we’re seeing opportunity in that consumer side because it’s something where they can produce a nine handle dollar price. They can sell a seasoned book of assets at one duration.

We’re able to get the yield on a risk adjusted basis that we’re looking for. So we’re seeing a huge amount of supply of seasoned loans coming out of banks because that’s where they can effectively create the highest-

John: So lower dollar price is what you’re highlighting? A low dollar price for a very short duration?

TJ: Well, high dollar price. Right?

John: High dollar.

TJ: They’re trying to create the least amount of discount to manage earnings on a go forward basis. The residential mortgages, as an example, are performing great, but it’s a 10-year duration at this point. They don’t want to take that hit.

John: They want to sell that.

TJ: That’s something where we’re seeing, but we think we’re in the very early innings of this kind of bank de-leveraging cycle.

John: It’ll roll through multiple asset classes. It appears what you’re highlighting is that this is going to be a sustained opportunity as opposed to a trade. So if someone were to think about this as an asset class, that’s going to be somewhat… It is going to just be a new asset class that they can layer into their overall portfolio construction as opposed to that, again, opportunistic strategy that people try to seem to time the market?

TJ: This isn’t a moment-in-time opportunity. This is kind of cyclical at this point.

John: Yeah. How would you define the current market TJ? I guess if I think about it, and maybe this kind of goes to your expected returns of your portfolio, I guess today is a moment in time, but how should we think about what the portfolio, what the strategy will return over a cycle versus what it is today?

TJ: Yeah. I mean, listen, I think the opportunity set today is probably slightly elevated because of what’s gone on with the banking space since, call it March. But again, I think we’re able to, in our call it ‘main products’ get mid-teen returns on a loss adjusted basis. I think there’s plenty of opportunity to also go upmarket and get less returns, but for, I think, extremely low risk opportunities.

John: And when you say upmarket, you’re talking about securitizations being higher in the cap stack. Is that what you’re highlighting?

TJ: Or just especially finance companies with much bigger balance sheets that, again, normally non-bank lenders would be priced out of is not the case today. And so it’s a counterparty upgrade as well as sort of an advanced rate concept.

John: Gotcha. So when you talk about mid-teen returns, is that a coupon of X versus then you get a little bit of appreciation in there a little bit based on some of the things that you’re negotiating? Or is that you’re loaning at a 15% coupon?

TJ: No. I would say, listen, we’re generally looking at making loans in the SOFR plus, 6, 7 range at the low end, maybe up to about 10. There’s obviously up upfront fees involved on use fees, exit fees, things of that nature that also just add some juice to that.

John: Gotcha. No, that’s very helpful. If we have a quick moment, I want to chat a little bit about your portfolio construction and how should I be thinking about when you get a full invested portfolio in the sense of the number of line items that I would expect, the number of different strategies. I don’t know if that’s the right way to discuss how you’re looking at various different things. Again, to your point about creating warehouses or buying a specific loan. Geography, can you just give us a little sense of that, how the total portfolio would look?

TJ: Yeah. I mean, I think there’s different ways to approach this space. I think there’s managers that have, I would say monoline focuses. Non-QM as an example, right? Managers that all day, every day, all they do is folks on non-QM. I think the platform that we build here in terms of scale and scope allows us to be effectively, multi-strat if you will, within specialty finance.

So we’re very focused on relevant value. Again, we think of the downside in risk management. So we want to get diversification across not just counterparties, but asset classes because things will hit the cycle at different points in time. And so I think that’s part of the value proposition that we deliver to LPs is getting a very well-balanced set of risk. If you’re focused on one strategy, the relative value might not be as obvious to you. It might be a time to pull back in, again, non-QM as an example, if the spreads really aren’t there, but if you’ve got one bullet, you’re going to be using it.

So I think that’s really what we’re focused on in terms of portfolio construction. Again, it’ll change for different clients’ needs, but generally speaking, I would say our average investment size is probably in the $40 to $75 million type range. So it’s not going to be a lot of, I would say smaller earlier stage companies where maybe they’re $10, $15 million investments. We’re not that focused on the space, but it’s also not $500 million loans either.

The cost of capital as you start moving up in scale is not linear. We like to say there’s cliff events as you get to nine-digit-type checks. And so we like to operate in that space where we’re getting paid. We think very handsomely for doing the sweat equity of $50, $60, $70 million type warehouse versus a $250 million.

John: I would imagine it’s a pretty delicate balance because you’ve highlighted that it’s going to be opportunistic in a sense across asset type and maybe it’s a little bit more consumer-focused today, and then it’ll be real asset maybe in six months. But you want to maintain that portfolio balance or you don’t want to have too much of a concentrated risk. I guess, I don’t know, do you use various transaction mechanisms to balance that, i.e., creating a structured solution where you can really define the risk and you feel a lot better about taking that concentration risk? I mean, again, am I thinking about it in the right sense with regards to portfolio construction?

TJ: Yeah, I mean, listen, I think our net, if you will, allows us to have those different flavors without forcing it. So that again, is kind of the benefit of scale. I think exactly to your point, if you think about the opportunity set in residential mortgage in 2022 was very acute because that had the most duration and convexity and the pain was being felt in the fed hiking cycle first, right? Consumer shorter duration assets, it wasn’t as acute. We’re seeing the opportunity set today, like I mentioned earlier, because now all of a sudden that short duration is filling a need for banks to be selling.

So now we’re more focused on consumer than the opportunity set we saw in 2022. So now a portfolio, if you will, over time it’s coming together in a very diversified way where we’re doing lending opportunities in 2022. Now, we’re seeing more opportunities to buy the raw assets in 2023.

John: That relative value decision is something that I think is very valuable from my perspective, if I was sitting in a seat. I don’t want to have to allocate to 18 different managers that are doing that. So again, I’m assuming you have various limits that you follow from a portfolio, diversification. Of course, if an insurance company wants an SMA, they would put their own guidelines in that and you would work with them on that.

We’d be remiss without talking about risk and talking about how you all look at risk in this particular portfolio given the diversification of assets, given the diversification of strategies. So I guess I don’t know if the right question is to ask. What is your downside expectation? How do I think about worst-case scenarios or what is the default rates or recovery rates of these particular assets? How should we be thinking about that downside?

TJ: Sure. I mean, I think the easiest way to think about this is you’re going to effectively stress things to the GFC equivalent.

John: Scenario testing each asset and what the underlying experience was.

TJ: Correct. Even if a company didn’t exist in 2008, for the most part, these products existed. And so we could find that equivalent or cohort analysis as we think about it to do that level of stressing. And so I would say that’s pretty much where you’re going when you think about a lot of these asset classes in terms of how do I quantify the downside? If you’re looking at things like maybe in CRE as an example that might not be the right approach given what’s going on today. But for most of the other asset classes, that’s where I would point to.

I think we’re generally structuring our lending arrangements to have some multiple of what, at least our base case assumptions are. It could be anywhere from as low as two to high as four times our base case. Again, I think we touched on it a little bit. If most people I think have a pretty good understanding of middle market direct lending. And so a lot of our clients are really taking the next step in private credit and coming from that base and moving to especially to finance. There’s some major differences.

I think we’re going to have a much shorter duration than those asset classes typically. I think that the big difference too is it’s generally more revolving in nature than I’m taking as an EBITDA, putting a multiple on it, and I’ve locked that in for five years. We’re going to have a dynamic borrowing base where we’ll have criteria upfront that’s set of what’s eligible to be in the borrowing base. There’ll be financial, corporate covenants that were obviously asset-based lending, but we also can put risk parameters around what tangible net worth is or liquidity in an effort to, again, if things start going sideways like our performance triggers, which would be excess spread, charge off, things of that nature, we want to be able to stop advancing first then hit it early.

John: Especially with those kind of warehousing, you have an upfront seat and you’re able to shut things down quickly.

TJ: Exactly. And I would say every deal is obviously slightly different, but if you were to think about it as three lights, the first light is to stop advancing. The second light would be to start amortizing down, take the excess cashflow, start paying down our loan, and then third would be an EOD where we could liquidate if we wanted to. And the goal is to never get there.

John: But again, it’s all those assumptions on potential loss or multiples of loss you’ve seen in stress scenarios are already there at origination. You then can shut it down as things are changing and then you ultimately can sit on that portfolio and that’s your risk management as opposed to a middle market default. They’ve got to then go through a restructuring. They’ve got to figure out what the new company is. They’re going to get some equity risk. You guys will just hold on to those loans for the duration and obviously have that protection built in.

TJ: That’s right. Again, it’s about having all of these things in place, but also having the team with the experience to navigate through that with your borrower.

John: Yeah. I got to believe that having that asset value is… And then you looking at that asset value has got to be extremely valuable in these days and maybe if it’s benefiting from inflation, I would think. I don’t know.

TJ: Well, we’re certainly seeing some of that, right, in terms of what’s going on Main Street.

John: That’s great. This has been really great. TJ, if you were an insurance CIO and you were sitting in my seat and you’re talking to yourself or as an asset manager and you’re thinking about this strategy, how would you think about pitching or how would you think about what different… What’s the differentiating factors that someone should grab onto and say, “This is why I really like this strategy,” and how they are thinking through pitching it to an investment committee of an insurance company?

TJ: Yeah, listen, I think this is, I would say emerging onto the scene of a lot of people’s radars. This is not a new or nascent strategy.

This is a way to take advantage of the illiquidity premium that you get for effectively doing it in private format. And so this shouldn’t really be new in theory. I think it’s connecting the dots for a lot of CIOs and saying, “Okay, I understand what this risk is. I’m already probably doing some form of direct lending or private credit.” This is just sort of the evolution of that book, I think being built out. And again, as we talked about earlier, this is not an opportunistic strategy in the sense of moment-in-time. This is the economy, if you will, in terms of what’s happening on Main Street versus just focusing on corporate credit in isolation.

John: That’s great. Well, I could go on for hours, but I think that it’s very interesting strategy and I think you’ve got a day job, so I’m probably going to end it there. Stew, I don’t know if you had any other questions yourself.

Stewart: That was really great. I do have one, and TJ, thanks so much. I mean, I appreciate you doing a really deep dive there and thanks for that. Let’s just say that we have an imaginary $10 billion insurance company, property and casualty, whatever, what would be an allocation to a strategy like this in terms of percentage of the portfolio? What would be a complimentary exposure and what if anything would be redundant?

John: Yeah, Stewart, I think it’s a hard question to answer because it all depends on whether or not I have $11 billion. I think, again, I could probably do a separately managed account. A separately managed account typically is $100, $150, $200 million, $250 million depending upon that. So you can do the math to think about what size portfolio that is, and a separately managed account allows you, over time, to watch the performance and learn more and think about all of these underlying asset classes that TJ is investing in.

If it’s a fund investment, whether it’s just as a regular LP or maybe there is a capital-efficient solution, it’s probably a smaller check, right? Because it’s going in as part of a potential private credit strategy. So it fills in to say that I’m going to target 10% to 12% in private credit, or maybe it’s smaller, let’s just say 5% to 8%, and maybe some insurance companies look at private credit as being a public high yield substitute, so it’s typically 5% to 8% of the portfolio.

It would probably be a lot smaller allocation because someone would look through and say, “Here’s how I want to size it based on the number of line items exposures to that extent.” If I look at the asset classes that TJ has talked about, to his comments, I think they are diversifying. They are diversifying to corporate EBITDA. I think he’s talking about residential mortgages or non-QM mortgages. We’re not really doing that in the core book. So I think it’s really, really complimentary if someone were to think about it either as being a core plus, if they could get the ratings on it and that’s a whole ‘nother process, or they could just think of it as part of a private credit portfolio.

Stewart: That is really helpful. I really appreciate you both. It’s been a great first edition of Due Dilly. TJ, you got to come back on, man. I mean, we’re all about repeat guests here. We got to figure out another way to have you back on. And John, I think your current title is CIO-at-large. You are CIO-at-large certainly here at InsuranceAUM.com. So TJ Durkin with Angelo Gordon and John Patin, CIO-at-large. Gentlemen, thanks for being on.

John: Thanks, Stewart. Thanks, TJ.

TJ: Thanks, guys. It was fun.

John: Take care. Bye-bye.

TJ: Bye.

Stewart: If you have ideas for this podcast, Due Dilly in particular, we’d love to hear from you. And if you’d like to be part of it, please shoot me a note at podcast@insuranceaum.com. If you like it, please rate us and review us on Apple Podcast or wherever you get your podcast. My name is Stewart Foley, and this is the InsuranceAUM.com Podcast.

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