Private credit has grown rapidly as an asset class in recent years, attracting significant interest and scrutiny from investors of all sizes. While the scale of this expansion reflects a strong appetite among investors, the lower liquidity and inherent opacity of private credit can make public credit alternatives such as high-yield bonds equally appealing. Ultimately, the choice between private credit and listed high yield depends on investor goals, investment horizon, and risk tolerance. However, listed high-yield investments provide two key advantages for asset managers like Stockholm-based Ridge Capital: the flexibility to be active and opportunistic in pursuit of high returns and substantially greater liquidity.

Beyond the clear advantage of higher liquidity compared to private markets, “the appeal of high-yield credit or the broader public bond market over private credit lies in the ability to be far more active,” explains Ridge Capital co-founder Christoffer Malmström, who previously worked at Park Square Capital – one of Europe’s leading private debt firms. “Private debt is purely buy-and-hold; you lend money and wait for seven years to get repaid. That is a significant drawback for the asset class overall,” he adds. “In our space, we can be much more opportunistic, seizing opportunities amid market volatility when other funds see outflows or macro events arise.”

“The appeal of high-yield credit or the broader public bond market over private credit lies in the ability to be far more active.”

Christoffer Malmström, Co-Founder at Ridge Capital.

The flexibility to be active and opportunistic in the Nordic high-yield bond market has allowed Ridge Capital’s Northern Yield Fund to outperform its underlying yield-to-maturity since its inception two years ago. The fund posted a 12.8 percent return in its first year of operations in 2023 and 21.9 percent year-to-date through the end of October. Over the last 12 months, the average yield-to-maturity has ranged from 15 to 17 percent on a leveraged basis, while the fund’s net performance reached around 27.3 percent. “Our performance has exceeded the underlying yield as a result of our focus on the secondary market, where we can adopt a more opportunistic approach and engage in event-driven trades,” explains Malmström, the fund’s Lead Portfolio Manager.

“Our philosophy from the start has been that if you are purely buy-and-hold – like most funds – you leave alpha on the table and will not outperform.”

Christoffer Malmström, Co-Founder at Ridge Capital.

In these trades, the Ridge Capital team looks for catalysts that can trigger an accelerated price recovery, allowing the internal rate of return to surpass the bond’s initial yield at entry. “Our philosophy from the start has been that if you are purely buy-and-hold – like most funds – you leave alpha on the table and will not outperform,” Malmström remarks. As the saying goes, any monkey can buy high-yielding bonds. “Go on Bloomberg, sort by highest yield, and pick the highest-yielding bonds. It will work until it doesn’t,” jokes Malmström. Avoiding default situations has also been key to performance – or rather, has prevented any detractors. “Defaults can significantly impact returns, given an average market default rate of 3-to-5 percent,” Malmström explains. “Avoiding these is crucial for any high-yield bond manager.”

Advantage over More Traditional Peers

Christoffer Malmström’s experience in security selection and analysis at Park Square Capital provided valuable insights that helps him and the team avoid default situations in the listed high-yield bond market. “The analysis in both the private credit and listed bond markets is quite similar. Whether you’re evaluating a stock or a bond, the fundamental approach remains the same,” explains Malmström. “While the risks differ and you’re examining various parts of the capital structure, the analysis follows a similar bottom-up philosophy,” he emphasizes. “We assess operational and market risks, analyze fundamental financials, create cash flow projections, conduct stress tests, and prioritize downside risk over upside potential.”

While variations in portfolio management and security selection can lead to disparities among different managers, the Ridge Capital team has designed its fund to gain a competitive edge in what Malmström and other asset managers view as an “inefficient and imperfect Nordic high-yield bond market.” The founders of Ridge Capital opted for a Luxembourg-domiciled Reserved Alternative Investment Fund (RAIF) structure, which offers monthly liquidity and the flexibility to use leverage – hence, the ability for more opportunistic investing in the Nordic high-yield bond market.

“Our structure is tailor-made for this market, unlike the daily-traded liquid structures that other managers use.”

Christoffer Malmström, Co-Founder at Ridge Capital.

“Our structure is tailor-made for this market, unlike the daily-traded liquid structures that other managers use,” explains Malmström. As history has shown on multiple occasions, daily traded UCITS funds occasionally face significant challenges due to the liquidity mismatch between their underlying investments and the liquidity of their funds. “This structure gives us a clear advantage, like starting 200 meters ahead in a 400-meter sprint – it’s virtually impossible for them to catch up,” notes Malmström. With its alternative investment fund structure offering monthly liquidity, the Ridge Capital team can act as opportunistic players, avoiding the pressure to sell in challenging market conditions.

This structure also enables Ridge Capital to enhance its return potential through leverage, typically ranging from 1.25 to 1.75 times net asset value (NAV). “Applying leverage to higher-quality bonds enables us to target high returns without going too far out on the risk scale or venturing into distressed debt,” Malmström explains. Additionally, the firm utilizes instruments like iTraxx Crossover Index Options to mitigate downside risk, providing the flexibility to generate returns across various market conditions. Ultimately, Malmström believes, “this flexibility, combined with our team’s expertise, gives us substantial maneuverability in an imperfect, illiquid, and inefficient market. This is what makes it an attractive space for those willing to roll up their sleeves and get their hands dirty.”

Underpromise and Overdeliver

Ridge Capital launched its Northern Yield Fund at the beginning of 2023, seizing an opportune moment following a challenging year for most investors in 2022. This timing has allowed the fund to achieve an annualized return of 19.0 percent to date. “We have succeeded with our opportunistic trades in the secondary market, but we also acknowledge the significant market tailwinds we’ve experienced over the past 12 months,” Malmström notes. “Most fund managers would echo this sentiment – the market has indeed seen a recovery.”

Despite the strong alpha generation and overall performance, Måns Levin, co-founder of Ridge Capital, stresses that the fund’s return target “has always been and will continue to be the same: risk-free plus seven percent over the cycle,” which translates to low double-digit net returns in the current environment. “Christoffer and I invested a significant amount into the fund from the start and are of course very pleased to have delivered a 19 percent annualized return on that. We continue to have strong conviction going forward and have reinvested the major part of what’ve earned as managers since launch into the fund,” Levin notes.

“Christoffer and I invested a significant amount into the fund from the start and are of course very pleased to have delivered a 19 percent annualized return on that. We continue to have strong conviction going forward…”

Måns Levin, co-founder of Ridge Capital.

“The seven percent above the risk-free rate is our target. But our aim is to beat that,” reiterates Malmström. “Currently, the underlying yield in our portfolio has a gross yield-to-maturity in the low teens. This serves as a benchmark, and if we continue to excel in our secondary trades, we have the potential to deliver returns that exceed this benchmark,” he elaborates. Malmström notes that many investors are keenly focused on the fund’s impressive performance. “Some are asking, ‘Has the ship sailed, or can you replicate this success?’ or ‘What can we expect next time?’” He responds with a clear message: “It’s been fantastic, and we’re going to strive to do it again. That will always be our goal.”