Structured credit shift instigated by AlbaCoreleads to the manifestation of the "see-saw impact"
In the ever-evolving world of structured credit, AlbaCore Capital Group is navigating market fluctuations with a strategic approach, guided by the concept of the "pendulum effect." This phenomenon, as explained by AlbaCore's Chief Investment Officer, David Allen, refers to cyclical shifts in credit market conditions that influence risk and return profiles over time.
According to Allen, the pendulum effect has led AlbaCore to focus more on debt tranches this year, being more selective in equity tranches. This dynamic investment approach allows the firm to capitalize on discounted valuations and more structured credit opportunities during periods of tight credit conditions.
AlbaCore's strategy is designed to position its portfolio dynamically according to where credit markets currently stand in the cycle. In periods of loose credit conditions, the firm tends to be more selective and cautious, focusing on higher-quality credits or more defensive positions. Conversely, when opportunities for higher spreads emerge, AlbaCore aims to capitalize on these discounted valuations.
This strategic responsiveness to the pendulum effect, with active sourcing and structuring of credits across the cycle, differentiates AlbaCore in navigating middle market and structured credit opportunities. The firm's approach leverages its ability to adapt to changing credit market environments—essentially "riding the pendulum" — to optimize investment outcomes in the structured credit asset class.
Allen observes that as primary market spreads have softened, the market has swung back in favour towards debt investors, a phenomenon he calls "the pendulum effect." Experience has taught AlbaCore that reaching for risk in tight markets leaves investors vulnerable to uncertainty or credit deterioration. When spreads tighten, AlbaCore's allocation "swings towards equity, as lower funding costs transfer value from debt to equity, creating an opportunity to lock in attractive financing and capture high excess spread and/or upside from loan appreciation," Allen said.
The liquid credit market presents the best opportunities to capitalize on market volatility during the second quarter of 2025, according to Allen. AlbaCore launched a dedicated senior direct lending strategy in March, focusing on borrowers with defensive profiles and strong cash flow generation in non-cyclical sectors. By June, the firm had turned its attention to the primary market due to supply weighing on new issuance spreads. Spreads have since widened, causing AlbaCore to shift focus to debt tranches.
The European collateralised loan obligation (CLO) market has had another record-breaking year, with new issue volumes reaching €30bn (£25.9bn) in the first half of 2025, up 24% from the same period the previous year. However, AlbaCore is taking a more selective approach to CLO equity tranches, having been more focused on debt tranches due to the pendulum effect in the structured credit market this year.
Allen advises caution in the current market environment due to tight spreads in public credit markets. AlbaCore avoids borrowers with potential exposure to tariff risk in its direct lending strategy. The firm's adaptive approach to market fluctuations continues to position it well in the structured credit market, as it rides the pendulum to optimize investment outcomes.
[1] Credit Market Analysis and Fund Management Practices [3] Industry Practices in Structured Credit and Fund Management
In the realm of fund management practices, AlbaCore Capital Group's strategic approach to structured credit, guided by the pendulum effect, has led to a focus on debt tranches this year, with a more selective view on equity tranches. [1]
This adaptive approach leverages the liquid credit market opportunities to capitalize on market volatility, as seen in the second quarter of 2025, while taking a more selective approach to CLO equity tranches due to the pendulum effect in the structured credit market this year. [3]
