OP Financial Group is one of Finland’s largest financial institutions, combining banking, insurance, and asset management under one umbrella. While OP has a long tradition of investing in private credit through its insurance-related balance sheets, the group has created dedicated funds-of-funds structures to allocate capital more efficiently to external private credit managers.

“We have been investing in private credit since the beginning of 2000s, and three years ago we started our annual vintage funds program, which is our main investment vehicle today,” explains Petri Lehtola, lead portfolio manager for private credit at OP. The funds-of-funds were designed to reduce the administrative complexity of allocating capital from OP’s insurance and other internal balance sheets. “At the peak, we would have needed to make up to ten separate commitments into each external target fund. By aggregating these investments through our fund-of-funds, we can streamline the process and make a single commitment to each external manager.”

The bulk of capital in OP’s three private credit-focused funds-of-funds comes from the group’s own balance sheets, while the funds also attract capital from external professional investors who co-invest alongside OP. The current allocation across vintage funds stands at about 70 percent internal and 30 percent external capital.

The Role of Private Credit in Investor Portfolios

With Lehtola and his team allocating capital to private credit for both OP and external investors, he emphasizes that the role of private credit depends on each investor’s portfolio and objectives. “There are a couple of different approaches,” Lehtola explains. “You can think of private credit as an extension of your public market book.” In this context, investors aim to capture liquidity or complexity premiums available in private markets. “You also get slightly different industry diversification, and often higher-quality loan documentation and stronger controls than in the public markets. That’s really the main advantage of private credit versus public credit.”

“The idea of investing in private credit is to generate more stable cash flows, rather than the capital appreciation you typically see with private equity.”

Petri Lehtola, Senior Portfolio Manager at OP Financial Group.

Other investors, however, view private credit as part of a broader alternatives allocation. “You might have your private equity portfolio, and then complement it with infrastructure, real estate, and private credit,” Lehtola explains. “The idea of investing in private credit is to generate more stable cash flows, rather than the capital appreciation you typically see with private equity.”

Focus on Corporate Credit and Manager Selection

While the private credit universe has expanded into areas such as NAV financing, asset-backed lending, structured credit, and distressed debt, OP remains focused exclusively on corporate credit. “We don’t really do much in asset-backed lending or structured credit,” Lehtola confirms. “For us, it’s really all about corporate lending.”

One reason for this focus is OP’s strong historical experience and the transparency corporate lending provides. “We’ve had positive results from the past, and being able to see position-level risks and other details is really only possible with corporate lending,” says Lehtola. Broader asset-backed lending, by contrast, does not fit OP’s approach. “It feels like a hot marketing theme at the moment,” he adds. “We’re not interested in financing consumer lending portfolios, auto loans, or student loans. Those simply aren’t areas we want to play in.”

“It feels like a hot marketing theme at the moment. We’re not interested in financing consumer lending portfolios, auto loans, or student loans. Those simply aren’t areas we want to play in.”

Petri Lehtola, Senior Portfolio Manager at OP Financial Group.

When selecting the managers, OP tends to avoid the largest private credit funds but also prefers to avoid start-up funds. “We’re not particularly drawn to the mega-cap managers in the space, i.e. the $10 billion-plus funds. We’re seeing more value in the mid-cap space,” notes Lehtola. Given their size, he also worries about whether these mega-cap managers can deploy capital effectively in every market environment. “On the other hand, we don’t want to take start-up risk by investing in very new or very small managers,” he emphasizes. “We try to find the sweet spot somewhere in between.”

In this middle ground, OP favours global platforms that are large enough to offer flexibility but not so large that they lose discipline. “We like these managers because they tend to be quite flexible in both strategy and platform, which allows them to navigate different markets and opportunity sets,” he explains. “That flexibility makes it possible to deploy capital effectively in any market environment.” OP may then complement these exposures with smaller managers who have well-established positions in their areas of expertise.

The OP team focuses on identifying strategies and teams with strong market positions, where competition isn’t solely based on price. “Then it’s about understanding the team, the quality of their leadership, their experience, track record, and how incentives are aligned,” explains Lehtola. He stresses the importance of seeing managers invest their own capital alongside investors to ensure alignment. 

“It’s important to see that they have the capability to navigate situations when things don’t go right. That ability to manage challenges effectively is quite crucial.”

Petri Lehtola, Senior Portfolio Manager at OP Financial Group.

Lehtola pays close attention not only to a team’s experience but also to how they have handled investments that didn’t go as planned. “It’s important to see that they have the capability to navigate situations when things don’t go right,” he explains. “That ability to manage challenges effectively is quite crucial.”

Managing private equity-focused funds-of-funds also gives OP an additional perspective on the investment opportunities in sponsor-backed private credit funds. “When we meet with private equity sponsors, we try to find out which credit managers they are using to finance their portfolio companies,” Lehtola explains. “By looking at both sides, we gain valuable insight that helps strengthen our investment conviction.”

Market Dynamics and the Rise of Evergreen Models

Looking at the environment in which private credit managers operate, Lehtola notes that conditions have become more challenging in the higher interest rate environment. “M&A volumes have been down, which has made capital deployment more difficult,” he explains. This is where a manager’s flexibility becomes crucial. “That’s why we look for mandates that are as flexible as possible,” he adds.

Strong returns in private credit have continued to attract capital, compressing spreads relative to public markets, particularly in the large-cap segment. “That’s a natural development as the asset class grows and takes market share from banks and public markets,” he explains. “From our perspective, however, this makes the large end of the sponsor-backed market less appealing, as there’s not as much spread premium left to capture.”

“[Compressing spreads relative to public markets] That’s a natural development as the asset class grows and takes market share from banks and public markets.”

Petri Lehtola, Senior Portfolio Manager at OP Financial Group.

Lehtola also highlights the growing adoption of evergreen structures, which he views as a positive evolution. “The evergreen model is clearly taking market share,” he says. “The institutional evergreen structure, where liquidity is typically only available through maturities, often provides quick access to an already diversified portfolio.” While semi-liquid evergreen formats can be more questionable in certain cases, he sees potential if expectations are managed properly. “That model is emerging too, and it’s here to stay. If the sales process is handled properly and liquidity isn’t overpromised, I think it can work effectively as well.”