Stockholm (HedgeNordic) – In the aftermath of the 2008 financial crisis, Fredrik Sjöstrand was on a quest to develop an investment solution that would deliver attractive long-term returns with low volatility and low correlation to broader markets. He ended up partnering with Peter Norman to launch a direct lending vehicle aimed at providing slightly lower equity-like returns with low volatility and correlation for private individuals, wealth managers, and institutional investors. More than seven years into the journey, Sjöstrand has decided to step away from operational activities and pass on the reigns to a younger generation.

The Beginning

The journey began in 2010 when Sjöstrand discovered a direct lending fund in the US that had weathered the financial crisis with low volatility. Recognizing the potential for direct lending in Europe as banks began to deleverage and tighten lending activities, Sjöstrand saw an opportunity to create a similar vehicle that could deliver attractive returns while remaining uncorrelated to broader financial markets. “The development in the direct lending space in the US since the mid-90s through the 2010s was expected to happen in Europe as well, as banks were deleveraging and started becoming more restrictive in their lending activities to SME companies,” Sjöstrand recalls the early origins of Scandinavian Credit Fund I.

The implementation of the Alternative Investment Fund Managers Directive (AIFMD) in 2014 played a significant role in facilitating the launch of the direct lending vehicle as an alternative investment fund. “The AIF legalization that came in 2014 was sent from heaven to us because the idea would have been dead otherwise,” says Sjöstrand. By setting up the fund as a listed entity on the Nordic Growth Market (NGM) and offering profit-sharing loans, Sjöstrand and his team could address a retail audience in compliance with the AIFM directive.

Scandinavian Credit Fund I was launched in January 2016 to provide senior secured loans to small and mid-sized companies in Scandinavia. Within two years, the fund surpassed SEK 1 billion in assets under management, and SEK 2 billion within two and a half years. “We were planning for a party to celebrate reaching SEK 5 billion just around the onset of the coronavirus pandemic,” recalls Sjöstrand. “Unfortunately, we didn’t reach that milestone.”

“We were planning for a party to celebrate reaching SEK 5 billion just around the onset of the coronavirus pandemic. Unfortunately, we didn’t reach that milestone.”

Whereas the portfolio of senior secured loans remained resilient during the early days of the pandemic, Scandinavian Credit Fund I faced challenges due to significant redemption requests amounting to approximately one-fifth of its portfolio. To address the mismatch between the illiquidity of its investments and the sudden liquidity preference of investors, the fund implemented redemption “gates” to manage the situation. This mismatch was the biggest challenge in managing Scandinavian Credit Fund I, according to Sjöstrand.

“The big challenge is to align the investment period of three to 48 months with the monthly redemptions to can control the liquidity situation,” argues Sjöstrand. “All the way up to the Coronavirus period, where we had a market that was not so crazy, we could easily manage monthly redemptions of like SEK 30, 50, or even 100 million because we were holding about two to five percent in high-yield bonds for liquidity reasons,” explains the founder of Scandinavian Credit Fund I. The fund experienced a redemption request of around SEK 1.3 billion, leading the team to sell the entire liquid portion of the portfolio and some underlying loans to fulfill the requests.

“The big challenge is to align the investment period of three to 48 months with the monthly redemptions to can control the liquidity situation.”

“We never really recovered the full liquidity provisions after that as we also faced a couple of credit events as well, so we couldn’t keep returning between six to seven percent,” acknowledges Sjöstrand. Scandinavian Credit Fund I could return in the range of four to five percent, which “was still extremely good in that environment,” according to Sjöstrand. After being just shy of reaching SEK 5 billion under management, Scandinavian Credit Fund I holds just under three billion today.

Perfect Replacement for Sjöstrand

In 2022, Andreas Konstantino assumed the role of responsible manager for Scandinavian Credit Fund I and KredFin’s second vehicle, Nordic Factoring Fund, succeeding Kreditfonden founder Fredrik Sjöstrand. “We hired Andreas Konstantino during the spring of 2022 and I thought he was the perfect person to take over the role as the portfolio manager of the Scandinavian Credit Fund I and the Factoring Fund,” says Sjöstrand. He shifted his focus to working full-time at Kreditfonden’s sister company – Riddargatan Förvaltning – which operates as an owner company of the loans where Scandinavian Credit Fund I have realized pledged assets.

“We didn’t want to give Andreas all the workload with the companies that we had taken under our wings,” says Sjöstrand. “For a period of time, I went into that role 100 percent until we found someone who could take over that role.” After finding a person responsible for the day-to-day operations, “I felt that this is a good time to step down,” says Sjöstrand. “I really started to step down at the beginning of this year. The decision to step down became official for real this week.”

“I hope the fund can start lending because now we are back to lending rates at 10-12 percent, offering the potential for attractive returns…”

Sjöstrand hopes that Scandinavian Credit Fund I will no longer face liquidity issues and can resume lending activities. “I hope the fund can start lending because now we are back to lending rates at 10-12 percent, offering the potential for attractive returns in the range of 8 to 10 percent for investors,” says Sjöstrand. He believes that the fund’s return profile would significantly improve if it can resume lending in the current market environment. “Money is scarce now and expensive. This return to higher lending rates resembles the market conditions when the fund was launched in 2016.”