A New Fund Targets Higher Yield with Less Credit and Duration Risk
The First Eagle Credit Opportunities Fund (FECRX) takes an intensive, research-driven approach to income-oriented opportunities available across the alternative credit spectrum—including both private and public investments—in an effort to deliver current income while providing long-term risk-adjusted returns through a focus on senior-secured assets. Further, the Fund’s selective, flexible process enables it to take advantage of changes in credit markets over time by actively allocating to what the portfolio managers believe to be the most attractive risk-reward opportunities across the alternative credit space.
On August 11, I spoke with Andrew Park, the senior alternative strategies director at First Eagle, and Christian Champ, a co-portfolio manager of the fund and a managing director at First Eagle.
Last year, First Eagle launched its Credit Opportunities Fund. Tell me about the fund's objective and its approach. Why did you launch this fund now? What was the opportunity you saw?
Andrew Park: If we roll back the tape and think about why we created this fund, we launched this fund because we saw it as an opportunity for investors to extract an illiquidity premium from the private markets. But what's important about structuring a product around that access is creating a limited-liquidity structure in order to enable our portfolio managers to go into those illiquid investments and our end clients to draw down from them in an attempt to create attractive returns relative to traditional fixed income. If you look at the offering set for products, you have daily-redemption products, such as high yield bond ETFs or mutual funds, and senior-loan ETFs or mutual funds. They're all generally under-yielding. Advisors and clients have gotten blue in the face waiting for yields to normalize, and they're just not normalizing as of today.
Then the other side happened, where you saw large, institutional credit managers, like us, come out with products like private business development companies (BDCs)—which have super-limited liquidity structures, significant amounts of leverage, and generally more attractive target returns—to balance out the equation. Investors could historically get 4% in high yield daily redemption or 8% in illiquid private credit. A yield of 6% is three-times target inflation, which is what everybody's trying to solve for.
We decided to take a simpler approach. We wanted to take the core competencies of our platform, which is direct lending and opportunistic credit within the bank-loan space. We can blend those together in an interval-fund structure that, from our perspective, takes a more balanced approach to extracting an illiquidity premium while better managing the illiquidity risk that's associated with that.
We believe that the timing of this fund’s launch was fortuitous. In some ways, we intentionally waited. We started talking about this fund in January of last year, and we waited to seed this fund because of the disruption in March and then the reopening of our markets in September. Ramping this up in September was an attractive opportunity for us to create what we believe are good, strong foundational investments in the portfolio that should be beneficial to our investors for the long run.