Institutional level diversification in private debt

Asset manager explains how they created a truly diversified solution for HNW investors, offering institutional quality exposure to niche private debt strategies

Institutional level diversification in private debt

The COVID-19 pandemic has taught us a few key lessons about portfolio construction and the role of fixed income. We’ve learned that the public bond market isn’t as liquid as we thought. We’ve learned that now those bonds aren’t yielding enough to meet many investor goals. We’ve also learned that alts provide essential diversification for post-COVID portfolios. These lessons all point to a rise in private credit as a key solution for investors, offering higher yields and protection from volatility for less of a liquidity trade-off than previously thought. However, accessing high quality private credit solutions is often difficult and costly, especially at the level of sophistication HNW investors should be seeking. The Alternative Income Fund from Bridgeport Asset Management delivers this institutional access at a level of sophistication and diversification unmatched in the Canadian private credit fund space.

The Bridgeport Alternative Income Fund offers a truly diverse set of asset-allocated alternative income strategies to individual investors. Bridgeport’s team has pulled from their experience in private markets and multi-manager alternatives, sourcing best-in-class managers across several traditional and niche private market income strategies. For a small team, they are able to take an “endowment-model” approach by partnering with institutional asset management firms that have excellent track records and a deep understanding of their particular markets. Bridgeport is aiming to provide a level of investment sophistication that an individual investor would not only need tens of millions in investable assets to access but also the significant time and skill to properly research and manage.

“This fund does not just, for example, invest in retail investor-oriented, Canadian private corporate and real estate lending strategies”, Bridgeport President and CEO John Fisher says of his fund’s differentiators. “The Alternative Income Fund allocates capital to many different types of income generating portfolios across several geographies backed by numerous forms of asset collateral.”

The fund blends private income strategies as diverse as traditional private corporate debt, venture debt, commercial and residential real estate credit, distressed debt, preferred private equity, factoring and aircraft leasing in a single ticket, RRSP eligible solution. The Fund is also currently contemplating allocations to strategies focused on tax credit lending, vessel finance and music royalties.  For the investor, Bridgeport’s fund functions like many other asset-allocated strategies, allowing them to ‘set it and forget it’ as the fund’s partner managers drive consistent performance.

The Bridgeport Alternative Income Fund partners with specialist third-party fund managers. Fisher and his team select best in class firms for each subsector, based on several quantitative and qualitative characteristics. They look for institution-grade managers with long track records managing pension and endowments assets, partnering with well-established players like Carval Investors, 17 Capital, Bridge Investment Group and Bain Capital. They also look for managers with skin in the game. Fisher and his team all invest their own personal capital into their funds, and when they look for asset managers, they want to see the same degree of confidence and accountability.

“In such specialized and inefficient markets, the active decisions of the managers can add or detract a lot of value,” Bridgeport’s Director of Business Development and Investment Strategy Michael Harber says. “A manager’s process, philosophy and consistency is going to be the best credential they have in terms of an ability to produce desirable results going forward.  The amount of dispersion between individual managers in these markets can be massive, so it is important to select the right partners.”

Fisher manages the fund with Boyan Lepoev, a Vice President at Bridgeport.  Together, they undertake extensive due diligence on each manager before investing.  Fisher built his career in private equity, and knows how to find private market opportunities many investors might not even be aware of. Bridgeport’s first foray into multi-manager alternatives was with a closed-end litigation finance fund, investing in a highly lucrative yet entirely uncorrelated asset class that few would typically consider. Based on the success of that first fund, they’re planning the imminent launch of a second. 

While they take an institutional approach, the Alternative Income Fund was designed with private clients in mind. Unlike most private market offerings, this fund is RRSP eligible, available on Fundserv with a relatively low minimum investment and offers investors a quarterly liquidity option that rarely exists in private debt structures.

While it is generally true that adding a single manager allocation to private credit can yield some diversification benefits, it also comes with a higher degree of risk as a single strategy likely has a narrow scope and a fairly concentrated portfolio. 

“You wouldn’t dedicate your entire equity allocation to a single manager’s approach and geography, say Canadian value for example, you diversify across styles and geographies,” Harber says. “Why would you allocate any differently in the private credit or any other asset class for that matter?”

Allocating across several strategies and managers, even within an asset class, can reduce overall risk without necessarily giving up return. Harber says that this is especially true when targeting niche strategies that have non-overlapping exposures, something Bridgeport has prioritized in the construction of its portfolio.  

While liquid alts have proliferated widely in the past half-decade and continue to grow, private market opportunities for HNW clients are still in their nascency. As public market alternatives have become an important allocation to in HNW portfolios, Fisher and Harber believe that private clients will soon feel that private market exposure is just as essential, particularly since many of these strategies can offer investors lower volatility.

“We think clients will increasingly be asking their advisors about private asset alternatives and advisors need to be careful in terms of how they're allocating to those strategies,” Fisher says. “They should look to allocate with best in class managers in a diversified fashion. They're going to want RRSP eligibility, and ideally an open-ended structure. For an advisor, managing all of the due diligence, tax structuring and administration, creates a lot of issues and detracts from their highest value-added activity which is managing the client relationship and the higher order portfolio management decisions which is why we think our Alternative Income Fund is a great solution”.