Corbin Capital ceo Tracy McHale Stuart and cio Craig Bergstrom answer SCI's questions

Q: How and when did Corbin Capital become involved in the securitisation market?
TMS: We’ve been involved in the securitised markets for roughly 13 years.

In the early 2000s, the returns in structured credit were so compressed and we didn’t like the leverage profile required to generate our expected return targets, so we kept away. Then in 2007, we started to see managers in our fund of funds business significantly expand their exposure to short subprime residential mortgages, which piqued our interest.

Our first more granular foray into the space was at the end of 2008 in a portfolio of auto loans, which was a material driver of our returns that year on the short side in our multi-strategy portfolios.

Securitised markets became our primary research focus around 2008 and we’ve been active in them since. In 2009-2010, we were active in non-agency RMBS. In 2012, we added exposure to vintage CLO 1.0 risk. And, as the CLO market reopened, we started participating actively in CLO 2.0.

Q: What are your key areas of focus today?
CB: Today, our key areas of focus within the securitisation market are CLOs (we own about US$550m of CLO equity and mezzanine debt), new issue non-QM RMBS and CMBS.

We also have smaller exposure to some more niche parts of the market, like unsecured consumer lending, student loan refinancing and land banking.

Q: How do you differentiate yourself from your competitors?
TMS: One of our key differentiators is our hybrid model. We have significant experience, analytical and execution capabilities to trade in-house, but also a long history identifying talent and a willingness to partner with external managers. That hybrid model allows us to work with other managers on interesting opportunities and creates a broad and differentiated sourcing network.

Q: What is your strategy going forward?
TMS: Unlike many market participants, we aren’t running daily liquidity vehicles and we aren’t ratings-constrained. Because we don’t need to supply daily liquidity, a significant part of our strategy is to pursue meaningfully complex and illiquidity premia available in some less liquid assets, though we tend to focus on shorter WAL situations.

Q: Which challenges/opportunities do you anticipate in the future?
CB: Although we see better value in structured credit than other parts of the credit markets, the current risk and reward for investment in many corners of the credit market looks poor. Right now, many parts of the credit market are priced richly; quantitative easing and a hyper-extended credit cycle have driven up credit asset values, making it challenging to generate riskadjusted returns.

However, we think complexity and illiquidity premia are relatively rich in the current credit market because much of the bid comes from strongly on-the-run assets, which can produce a meaningful return premia for the smaller, more complicated and less liquid assets.

An often overlooked example of this is land banking. There aren’t many active financing providers in the space, but we believe yields across the sector represent a premium to comparable risk because of the low multiples of investor capital involved (SCI 28 October).

Corinne Smith