Building on the track record of three previous credit funds, Swedish alternative credit specialist Ymer SC AB is preparing to roll out its fourth vehicle: the Ymer European Structured Credit Fund IV. Like its predecessors, this closed-ended fund aims to capture illiquidity and complexity premiums in the European Collateralized Loan Obligation (CLO) market.

“After having successfully launched and managed three funds, we are proud that the strategy and mandate of the fourth fund is identical to that of the first fund,” says Stefan Engstrand, co-founder and CEO of Ymer SC AB. “The strategy is designed to harvest the illiquidity and complexity premia available in the asset class,” he points out. “As a large and long-term investor in structured credit, we provide our investors with superior access to transactions at very competitive terms.”

“As a large and long-term investor in structured credit, we provide our investors with superior access to transactions at very competitive terms.”

Stefan Engstrand, co-founder and CEO of Ymer SC AB.

Credit instruments such as CLOs pool portfolios of corporate loans into bonds with varying risk and return profiles, appealing to investors with different risk appetites. “Alternative credit markets such as CLOs generally offer higher returns than more liquid credit investments, like  corporate bonds, due to their somewhat higher complexity and lower liquidity,” explains Engstrand. He notes that the opportunity in CLOs is structural, not cyclical. “Investors that can take a long-term view and lock their capital will be better positioned to capture the yield pick-up available in our market,” he adds, underscoring the rationale for structuring Ymer’s fourth fund as a closed-ended vehicle targeted at institutional investors.

“Alternative credit markets such as CLOs generally offer higher returns than more liquid credit investments, like  corporate bonds, due to their somewhat higher complexity and lower liquidity.”

Stefan Engstrand, co-founder and CEO of Ymer SC AB.

To capitalize on the opportunities in CLOs, credit managers like Ymer must assess where within the CLO capital stack – equity, mezzanine, or senior debt – the most attractive risk-adjusted returns can be found. “We have continuously been able to find attractive relative value in securitised markets and CLOs in particular. The question is where in the CLO capital structure that value is located at different points in time,” notes Engstrand. At present, the Ymer team sees the greatest value in CLO equity. “Currently, a CLO equity investor can lock in historically cheap CLO debt levels, which allows such investor to benefit from future loan market volatility while earning annual cash payments in the 20 percent area,” Engstrand adds.

In addition to a strong track record in terms of risk and return, CLO investments offer diversification and a payoff profile that complements many other alternative investments, notes Engstrand. “CLO equity, for example, generates cash flows that are both high and front-loaded,” he explains, meaning investors can expect relatively large distributions early in the life of the CLO. “This is the opposite of other alternative investments such as private equity, direct lending, or real estate,” he adds. “From a portfolio construction point of view, the asset class should definitely warrant serious consideration.”

Ymer’s credit funds have delivered an annualized net return of approximately 14 percent since its launch in 2018 – a performance target that CEO Stefan Engstrand believes is realistic for the upcoming Ymer European Structured Credit Fund IV.  “Our first three funds have generated an average net return of around 14 percent per year after fees since 2018, so I would say that is a realistic return expectation going forward,” Engstrand says. 

“To benefit from this volatility and avoid being forced sellers at the wrong time, we structure our funds with a five-year lock-up.”

Stefan Engstrand, co-founder and CEO of Ymer SC AB.

He notes that the market Ymer operates in can be both volatile and illiquid – factors that contribute to the return premium over more traditional credit investments. “To benefit from this volatility and avoid being forced sellers at the wrong time, we structure our funds with a five-year lock-up,” Engstrand explains. “This has been important historically and has allowed our funds to deploy capital during periods of market stress, such as during the Covid crisis or the 2022 sell-off.”