Greg Singer

Good afternoon and welcome to our webinar on the Capital Group + KKR Partnership. I’m Greg Singer, Investment Director of Capital Group Private Client Services. And I’d like to welcome both our PCS clients and our Capital Group colleagues who have expressed interest in learning more about this new investment service. Our goal today is to share our content on the partnership, why we’ve developed a public-private interval fund, the nature of private credit investments, the portfolio construction process, investment oversight and risks. To help us do that, we’re excited to be joined by John Queen from Capital Group and Connor DeLaney from KKR. John is a fixed income portfolio manager who has been in the investment industry for 35 years and with Capital Group for 23 years. He is a principal investment officer for the recently launched Capital Group KKR Core Plus+ Fund. John holds a bachelor’s degree in industrial management from Purdue University and attended the United States Military Academy at West Point, where he majored in mechanical engineering. He is also a holder of the Chartered Financial Analyst designation. And John just celebrated a milestone birthday. Happy birthday, John.

John Queen

Thank you.

Greg Singer

Connor DeLaney joined KKR in 2020 as a director in Global Client Solutions. Prior to working at KKR, he was a member of the Private Wealth Solutions team at Blackstone. He went to college in my hometown, earning a BA in economics from Villanova University, which also means he can count the new pope as a fellow alumnus. Finally, thank you to all of you who submitted questions during registration. During this event, you may also submit additional questions using the text box below and we will endeavor to get through as many as possible during our time together. So John, let me start with you. One of the most common questions that we’re getting in the registration process is how does KKR fit into the Capital Group equation? Can you share a little bit more background on why Capital Group chose to partner with KKR?

John Queen

Sure. It’s a really exciting partnership for us. I think the goal is to be able to give our clients, our shareholders access to private assets. It’s a terrific asset to be allocated into, to have the opportunity for diversification, and the return bonuses versus public markets that you tend to get in private. The key, though, is it is a difficult and different asset class than we’re used to dealing in. And so we wanted to partner with someone not only who is exceptionally good at that, at managing those assets, but then also that we could work really well with. And so in KKR, we found a partner. But also shares a culture with us, we’ve discovered, in our working together, focused on client outcomes, focused on making sure that we’re doing the right thing for our clients. And so we’ve been really excited to see how that partnership comes together. I’ll say one of the benefits to it, beyond just how it works for people directly investing in private assets, is that I think at Capital Group we have as good as anyone in terms of access to public market information. Whether that’s the economy, political environment, companies and analysis of companies where we’ve got amazing investors who’ve been following management teams in companies and markets for decades. But one thing we don’t have is any visibility into private-markets. It is a large and growing part of the economy. It’s a smaller part, oftentimes more boots on the ground almost than what we might see in public markets. And so this ability now in some of our meetings and collaborations with KKR, I think, is making both sides better investors by giving them real insights into a part of the market and the economy that they don’t normally see. So, really, it’s got benefits both for these direct investors and I think to all investors that Capital Group works with.

Greg Singer

I know. Another question that came up a number of times is, there’s a report in the Financial Times that we considered buying KKR.

John Queen

Yeah. It’s one of the dangers of working with the media. Sometimes you have to be concerned about how they might misinterpret something that’s said. One of the things we’ve been clear on is from the beginning we thought this was an important asset class for our clients. The question was how do we build that access? Do we buy somebody? Do we build something internally? Or do we partner with somebody fantastic like KKR? We pretty quickly dismissed those first two options without ever exploring necessarily who we would buy. We decided we don’t think that makes sense for us — there’s cultural issues that could come up, it’s a big deal in terms of the resources needed to do it. And so it was dismissed quickly. We never considered, nor did KKR ever consider, a relationship where we were buying them. That never happened.

Greg Singer

I’d love to maybe dig a little bit deeper on the structure of what we’re going out with. I mean, private credit funds have been around for a number of years. In the early days, almost always as a limited partnership. And then over the past number of years, there’s been some dedicated private credit evergreen funds. Why did we come up with the structure of a public-private interval fund? Very, very specific and a mouthful.

John Queen

Yeah, it’s a great question. I think there’s a number of aspects that make traditional private investing difficult for a lot of investors. There’s a requirement to be an accredited investor, potentially. There’s paperwork that has to happen going in. There’s reporting in K-1s. There’s the need then to go out and find individual managers, look at the different funds, how they might fit into your portfolio. We wanted to make the opportunity to invest in private both well-vetted by Capital Group, somebody that you’re already investing with, but also as easy as possible to put into the portfolio. And so working with KKR we found, we think, a perfect partner who is a great investor in this space. And in the public-private partnership, we’ve put together a structure where it’s $1,000 minimum investment. There’s no accredited investor requirements or documentation required ahead of time. It’s a 1099 instead of a K-1 that comes afterwards. The fees are dramatically lower than they might be if you went out on your own and tried to find a private fund to invest in. It also has some benefits in management of the actual portfolio that I think would be easily glossed over. One of the things about private is they are illiquid investments by their nature. And so having a public-private partnership, and it is difficult to say that too many times, gives us a portion of these funds that are actually liquid. And so as we see opportunities to invest on the private side, there’s liquidity available to invest there. But also given the fact that those timelines for investing in private, and Connor will talk more about that, those are not always perfectly predictable, they’re lumpy. You’re not sitting waiting for that opportunity to come up uninvested. Instead, we can build a good portfolio that’s replicating many of the risks and many of the opportunities that you’d be getting in private while waiting for that opportunity to come along and think about how to invest that hole in client portfolios. So, I think both the access to private, which is really the magic here, but also then the way that we can manage these portfolio to solve a few problems makes it an even better outcome than probably we first thought as we came up with the structure.

Greg Singer

Yeah, I think it’s very interesting. I often like to think of this as we’re really seeking to offer private credit with lower fees, better liquidity, simpler taxes, and lower minimum than it’s typically historically been offered.

John Queen

Exactly.

Greg Singer

With that, let me bring Connor into the equation. We get a lot of questions on, what exactly is private credit? What are these investments? Maybe you can just give an overview of how you think about describing private credit. And I think the corollary to this is a lot of recognition is this category has grown so quickly. How do you think about the outlook for the category?

Connor DeLaney

Sure. Yeah. So let’s start and just orient ourselves and set the table and then we can go in a bunch of different directions. But we like to start by just getting clear around definitions. So what is private credit? What are we doing when we talk about KKR having a private credit business? In short, it’s a private way for companies to access debt. So everything we’re talking about is privately originated, privately negotiated loans that KKR is making to businesses. These are loans that are privately structured financing instruments or they’re just regular-way loans that are agreed to between a borrower and a non-bank lender. KKR being a lender of capital that is of course not a bank. And just for everybody’s benefit, when we reference private credit, we actually mean two different businesses at KKR. One is direct lending to corporations and one is asset-backed finance. In direct lending, we are lending money to companies. That’s the basic point to remember. We often work with other private equity firms who own companies. We are covering advisors, banks, law firms. We have a very broad funnel to go to and find as many deals as we can. Think about us as not any different than any sort of bank or other financing company that may be out there. We are covering clients or potential issuers directly and we are trying to lend them money. And then let’s talk about asset-backed, quickly. So, to be clear, half of what is going into these PPS strategies on the KKR side is that direct lending. The other half is asset-backed. When we talk about asset-backed, what we’re talking about is basically stuff in the real-world economy. Things that you really can touch. Recent deals we’ve done, just to give you a flavor, give you an idea. We buy a pool of auto loans that are originated. We bought Discover’s student loan book. We financed a bunch of loans against airplanes. We financed a catalog of music royalties. So think about this big, broad world of credit, and this is the area that’s just not corporate credit. A little bit of one minus corporate credit is an easy way to think about it. Things touching the real-world economy. That’d be your main point to remember here. And then personally, I like to start with the end usually. So, what is the punchline and what is driving that continued demand for private credit, as you mentioned, Greg. A few things to highlight just around the size of the opportunity set here as you just begin to digest our story. So, bank retrenchment is one of the headlines to call out, and it has certainly impacted borrowers and the banks themselves. Clearing the way for what we see as an exciting pipeline of deal flow in direct corporate lending as well as asset-based finance. So, one way to quantify the demand we see for direct lending is through the lens of U.S. private equity dry powder, or said another way, committed private equity capital that is waiting to be deployed. And that dry powder right now is north of $2.1 trillion with a T. And it’s hard to envision a scenario, candidly, where those alternative managers just return that uninvested capital to investors. And to put that scale into perspective, some quick numbers: If you assume roughly 80% of that private equity dry powder is financed by direct lenders and an equity contribution of about 50% on average at acquisition, that implies a financing need of something like $520 billion at a minimum. We can get more into this, but private equity firms, in our view, they will deploy that dry powder. And they’re going to keep looking to private lenders like us for these more flexible financing solutions. Different than the syndicated markets, the public markets, we can offer speed, certainty of capital, a single counterparty, structuring flexibility, and no underwriting costs or registration requirements. That’s why private equity firms like utilizing private credit solutions like direct lending for companies in their portfolios. We can be fast, we can be really bespoke versus just a typical solution you might get from a bank. So, the private equity space is a really reliable funnel of deal flow for us in that way. We don’t see that slowing down anytime soon. And then to asset-backed — this is a space that’s also been really impacted by changes to the global banking sector. So as banks either retrench from lending or they’re tightening their lending standards, non-corporate financing needs have risen to an estimated $6.1 trillion. And in the next handful of years, we think that number goes above $9 trillion. So, this is an opportunity set, to put it in context, is larger than the global leveraged credit markets and the private direct lending market combined. So, the scale of this market is actually, for a lot of our investors, it’s quite difficult to wrap their heads around how vast of an opportunity set that really is. And then just, finally, driving demand is the returns. So private credit has provided really compelling risk-adjusted returns. Just looking at direct lending as an asset class, as a proxy. It’s performed really well through periods of market volatility. So, think high yield bonds and loans, but importantly with less than half of the volatility. And we can provide more on our track record at some point, but I just wanted to be sure to also touch on the integrity of the return profile that’s also helping drive the demand. So, I’ll pass it back to you, Greg.

Greg Singer

Yeah, so we have this combination of, post the global financial crisis, increasing regulation on banks, banks don’t hold loans on their balance sheet in the same propensity that they used to. And then you talked about a lot of these are private equity sourced, but I think it’s also important to note that companies are staying private longer. The number of public companies has dropped in half, I think, since Sarbanes-Oxley came out about 25 years ago. So, as companies stay private longer and are not in the public markets for public equity, they tend to finance themselves with private credit as one of the key drivers of growth. But, all that said, I guess, we get a lot of concern that private credit, even though some elements of this are 2025-year trends, it’s grown so much in the last five years, isn’t this a fad? Do you really think it’s sustainable at these levels as more and more of these firms get into the market, more and more funds get raised?

Connor DeLaney

So, we do. I would bifurcate the private credit or direct lending markets. I think there’s been a lot of relatively recent new entrants at the lower end, the lower middle market end of the company ecosystem that you can lend to. A lot of relative upstarts in that space that may not be as well-resourced, well-capitalized, they don’t have as deep of a bench, the track record, the tenure of the teams, all of those things. And we certainly do agree that that confluence of a lot of demands, and then a lot of newer firms that don’t need to raise that much money to go prosecute some of these smaller opportunities, that certainly could create some structural issues down the line from a risk standpoint. The smaller the company is, we can get into this when we get into our direct lending business, you introduce more risks. I think there is a small handful, maybe five or six peers of ours at the top of the market, more blue chip household type of names that have long track records, really tenured teams, deep operational benches and resources that we can bring to bear in addition to writing a check. That brand, that history, that prestige associated with, I think, us and some of our peers, the size and scale we’ve been able to develop has begotten more success, which has begotten more size and scale, and it’s created this virtuous circle at the top of the market where there’s only a handful of private credit firms that can deliver with the certainty, and the speed, and at the scale that we’re able to at that upper end of the market. We can get more into that, but I just want to be clear that what we’re doing ideally lives above the fray versus a lot of the things that you see in the media around a bunch of newer names pursuing those smaller companies, doing direct lending deals to these smaller companies at the bottom of the middle market or even below that.

Greg Singer

Right. So, like many things, it’s really about how you implement, right? Saying private credit as a category is a lot like saying mutual funds as a category. How you implement matters greatly in mitigating the risk and having sustainability of the strategy. So, we’re going to go deeper on both direct lending and asset-based finance in a moment, but let me maybe come back to you, John, as the principal investment officer of the Core Plus+ fund. Can you talk a little bit more about the two new investment services that we’ve launched and how they’re structured?

John Queen

Sure. As I said, our goal is to make sure that we’re providing an easy and appropriate way to access the markets that Connor was just talking about in portfolios. And so, we wanted to pair them up with both enough liquidity to benefit and make this opportunity available, but also, create funds that already would exist in clients’ portfolios. And so, this fits easily into a broader asset allocation. So in the one case, as you mentioned, the Core Plus+ fund that I’m the principal investment officer in. The public side, the 60% roughly that’s going to be on the public markets, is going to look a lot like our Core Plus ETF. It’s built around a core component — mortgages, Treasuries, investment-grade corporates — but also have a plus component. Again, this is for a portfolio that’s looking to get some excess return and yield. And so, we’ll have some high-yield bonds and some structured credit on the public side of things in there as well, looking to have some duration, some volatility offset to credit market or equity market volatility and some excess yield opportunities there. Matches up, we think, really nicely with that 40% private component. The other fund is the Multi-Sector+. It’s going to look a lot like our Multi-Sector Income Fund or CGMS, the Multi-Sector Income ETF, where it’s a more credit-focused portfolio so to slot into a credit component to a client’s portfolio where you’ve got public credit bonds, allocating between investment-grade corporates, high-yield corporates, a little bit of EM, structured credit, those sorts of things the way we’re already doing on that public side, again, fits very nicely with this private piece that goes in there. And again, in both cases, and Connor touched on this, we’re not just looking for extra yield from this private side, but it has a diversifying benefit. It does not move next to public markets in the same direction, even, but certainly, at the same time, or with the same volatility. And so, somebody getting this Core Plus and the private, or the Multi-Sector and the private is getting the benefit of how we manage those funds already, providing excess return opportunities, paying attention to patterns of returns appropriate to those funds, and then getting a diversifier from the private component. Additionally, because you have public and private and that liquidity as we invest in the private markets as KKR does, we’re able to provide that liquidity on demand — be able to immediately be invested when those opportunities arise, and yet, stay fully invested when those opportunities might be a little bit slower. And, so, we’re always managing then the entire fund thinking about liquidity, thinking about character of return, pattern of returns, risks across portfolios, while at the same time allowing Connor and the KKR group to focus on investing in private and our portfolio managers focus on investing on the public markets that we know so well.

Greg Singer

How do we come out with 60% public and 40% private? Why that mix?

John Queen

Well, what we wanted to make sure is a couple of things. One that we had, again, a pattern of returns that we thought was appropriate to these portfolios while giving access to private. And 60/40 with a lot of simulations over time felt like it fit that very nicely. It also was important to us in this interval fund structure where there’s a bit less liquidity than you’d have in a regular daily-access, your cash mutual fund, that we were able to still build in more liquidity than you normally would get. So most interval funds have a 5% quarterly max redemption. We wanted to have more than that, and so these are 10%. And so, we were able to look at a long-term run-on-the-bank situation where funds are losing assets, people are redeeming. Could we still meet that 10% quarterly redemption even over a long period of time? And this 60/40 blend gives us the ability to do just that.

Greg Singer

Great. So let’s go a little bit more into implementation. One of the questions we got is, is there a division of labor with KKR managing the private and capital group managing the public? Or is there collaboration on the overall positioning and strategy? So maybe describe your role as principal investment officer and how that implementation comes together with us and KKR.

John Queen

Sure. I mean, the simple answer to both those questions is yes. Yes, there’s a division of labor. KKR is managing the private. That’s why we partnered with them. And we’re managing the public. We think we’re the best in the world at that. And so, we want to make sure that our clients are getting the benefit of both of those. At the same time, and I mentioned this in the very beginning, there’s real benefits to the collaboration here.

So one is, as we’re thinking about investing, we need to think about what opportunity set and pipeline KKR is seeing. How much liquidity do they need and when will they need it to be able to tap into these markets? What risks are they seeing out there in the marketplace? How might that inform what we’re doing on the public side of these portfolios? And so, there’s a lot of collaboration in managing the overall portfolio. But ultimately, there has to be one decision-maker on the structure of the fund overall. And, in the Core Plus+, that’s me as principal investment officer. Robert Caldwell in the Multi-Sector+ as principal investment officer.

So our role is to take in all this information, both from within the fund — so talking to KKR, our other portfolio managers — but also, the things we normally talk about within fixed income at Capital Group, the portfolio strategy group, and what it’s seeing in markets, and how it’s putting the pieces together. Our capital strategy and research department, looking at the economy and looking at what the political environment and how that might feed into these, what our equity analysts and portfolio managers say. So all those come into thinking about managing our individual portions as managers. Which, as all of our funds do, we manage sleeves individually.

But then, also thinking about the risks overall in the fund. So the collaboration then of sharing that information is really a critical bit of insight for me in thinking about, “Okay, do we want to be adding a little bit of high yield here, versus our structured credit? Do we want to make sure there’s plenty of liquidity available for KKR?” Because they’ve got a great pipeline that seems to be shaping up. “Where is relative value as the markets move? So how do we want to size the movements into private as those opportunities come up?” All of those things are necessarily very collaborative, before ultimately, that final decision has to be made.

Greg Singer

Is there a lot of flexibility in this 60/40 mix?

John Queen

Well, I would first say, 60/40 is a target, given the nature of two different markets. And, the lumpiness of investing and liquidity on the private side, it’ll probably never be spot-on 60/40, but that’s really our target. There certainly is flexibility to, as we think about how quickly we push money in or out to move a bit around it. But our goal would be to stay close to that 60/40. If we get big flows, naturally, that’ll fall back a little bit on the private side, because the flows will have to go into public initially. But then, we’ll build it back up on the private side. As opportunities arise on the private side, we may build it up a little higher there if they look attractive, and then it’ll come back down to 60/40 as flows come through.

We also had in place, and I’m sure we’ll talk more about this, a warehouse before the fund started, so that unlike a lot of private investments, we were more than half invested in private day one, the fund started. It also gives us an ability to tap back into those warehouses as flows come in. So we’re not totally subject to timing on public versus private, in terms of getting invested. We have some ability to quickly ramp back up as flows come through. So I think we’ve done a lot of things to make sure this is a great experience for our investors that are getting the benefits of public and private right away.

Greg Singer

Yeah. So I guess, let me ask a follow-up on the ramp up. There could be a lot of questions around that. Is the fund fully invested today or how long will it take to be fully invested toward the targets as we’re in the launch phase of the fund?

John Queen

I would say, it’s fully invested, not fully invested in private. And that was, as I said, one of the beauties of this public-private partnership, is you’re not waiting on the last bit of private to come in to be fully invested. We’re continuing to ramp up, I would say, based on what we’re hearing from KKR and Connor may have some insights into this. I would say, over the next month or two, we should get very close to that 40% target. As I say, it depends on what markets do, and how flows come through, and we might go past it. Or we might be just slightly behind it as we’re continuing to invest. But I think we’ll be pretty close the next couple of months.

Greg Singer

All right, fantastic. So let me bring it back to Connor, because there’s a lot of interest in really digging deep into these private credit sleeves. So as we talked about earlier, about 20% of each fund will be in direct lending. About 20% of each fund will be in asset-based finance. So let me ask you to go deeper into direct lending. If you could really describe direct lending in an example of what a direct loan might look like and how do you think about the associated risk-return levels for the direct lending portion of the portfolio?

Connor DeLaney

Sure, yeah. We’ll do direct lending and then we’ll do asset-backed. So in our direct lending business, we manage about $40 billion at the moment. And we are making first lien senior secured loans to larger companies like I alluded to in the upper middle market. So we are, everything in the PPS funds will fit this mold, targeting companies with proven business models, strong free cashflow generation, and with a clear reason to exist in their markets. So we focus by and large on defensive noncyclical sectors. Think about business services, health care, enterprise software. We’re not going to touch things like energy credit. We’re probably negative on consumer discretionary, just to be super clear. And in case you were wondering, because it comes up, we do not lend to any KKR private equity companies. There’s a business reason for that, because we don’t like conflicts or capital stacking, but we also manage a bunch of 40 Act vehicles and it’s forbidden.

This is also important. When we talk about targeting upper middle market borrowers, we define that universe as businesses with anywhere from, call it, $50 to $150 million in earnings or EBITDA on average. Relative to the lower middle market, to my earlier comments, Greg, these are just more scaled businesses with proven management teams, longer track records of revenue generation, more established operations, and just a more stable outlook overall. So in turn, they should be lower risk. We want to lend to companies that we feel will be able to pay us back principal plus interest. It’s not overly complicated what we’re doing if you just go back to first principles. And then, a key component of our underwriting process is to look for companies that are already backed by reputable middle market private equity firms. Now this is known as sponsor-backed lending, and this accounts really for the majority of the direct lending deals that we do.

Connor DeLaney

Integral to our deal flow there though is a deep network of relationships with, call it over 250 private equity sponsors at the moment that are basically preferred providers. These are known and repeat customers, if you will, of KKR. And about 75% of our sponsors are repeat borrowers with us. And we like sponsor-backed companies for a few reasons. Most notably, there is a committed capital partner that’s backing that company. So when we engage in a deal, for example, we typically require the private equity sponsor to contribute a minimum of 50% equity or 50% loan to value, LTV, to the capital structure. So said differently, that business would need to decline in value by 50% or more before our loan is impaired.

To say this again, we are first lien. Our direct lending strategy is primarily looking to make senior secured first lien loans. So this means we are lending at the top of the company’s capital stack and we have a first priority claim on all of the assets and equity of the business. That’s everything from goodwill to trademarks, property plant and equipment, pledge of stock, et cetera. All the loans are also floating rate. So you’ll hear people will want to juxtapose this versus high yield. Obviously that is a fixed rate product, so everything we’re doing here is cash pay, it’s all floating rate. Typical pricing, a little behind the scenes, typical pricing for these loans will fluctuate. You’ll see year-over-year changes. A lot of it’s tied to either market froth or market volatility, as you can imagine.

So over the past probably, call it 10 years, we’ve seen this asset class play in the band of 5 or 6% over the reference rate. So if the market’s really hot, it might be at 5% or maybe even tight of that. Markets are volatile, it can be north of 6% or even wide of that. And what we’re really trying to do is make it risk dependent. We’re trying to, not make it risk dependent, we’re trying to set a bar basically for credit risk that we’ll tolerate, and then the market price will fluctuate around that.

The contractual legal term maturity for these loans is usually six to seven years. But these loans have things like call protection, so they’re constantly turning. The weighted average life is usually in that three to four year period.

Now, a lot of different uses for these kinds of loans, and I’ve touched on this a little bit, to be clear, the vast majority to just help simplify is M&A focused. So it could be the primary leverage buyout of the company, could be a PE firm has bought the company, all of the add-on acquisition activity, and in some more unique cases it could be for refinancings, things like dividend recap. So it really can run the gamut.

And then finally, we get asked about risk profile a lot. I would think about this broadly as single-B risk is usually what we point to. And then another common question is recovery rates, and get asked a lot about defaults. So just to hit that quickly, in the first lien asset class for context, the industry average recovery rate is something like 70, 75 cents on the dollar. We generally tend to outperform that by at least 10 points on the KKR side. And you also can pull in interest along the way.

So we expect defaults, candidly, not many, but if it’s a single-B proxy credit asset, long-term average default rates are usually around 1%. But you have to capture a lot of your invested capital if you want to be successful. In KKR direct lending, just for the avoidance of doubt for everybody, since inception, our business has delivered a loss rate of just 10 basis points or .1%, which we feel is a testament to just our stringent underwriting standards, a hyper-fixation around risk, a negative selection bias. We’ll look at 15-, 1,600 deals a year. We might do 40, maybe 50. It’s like a 3 to 4% hit rate business with direct lending. So I’ll pause there just to give you some color, Greg.

Greg Singer

Yeah, so that’s really helpful. So typically a three to five year average life of these loans in practice, single-B credit quality. You mentioned the reference rate plus a spread of 5 to 6%. I think that reference rate is SOFR, which is typically around the fed funds rate. So we’re looking at kind of fed funds rate plus 5 to 6% is the way people should think of the yield on the category.

Connor DeLaney

That’s right. Yeah. So three months SOFR is like 4% and change right now.

Greg Singer

Yeah. OK. That’s helpful. And again, you talked a little about the default rates, but again, a limited history of this category at scale. So we all want to be skeptical on that history. What is the environment where things go wrong? And again, I think we think of this as even though it’s upper middle market, it’s smaller businesses than what we have in our corporate loan portfolio on the public side, smaller businesses tend to be more cyclical. We have a lot of concerns now about tariff and tax policy and how are things going to play out as recession risk elevated. How would we think about this direct lending, let’s say, in a recession environment and/or what is the type of shock that’s like your worst case scenario where things could really go awry?

Connor DeLaney

Yeah, it’s come up a lot recently, as you can imagine. The question is, what if inflation resurfaces and rates reverse course? That’s our downside scenario. So if you see inflation flare up, we would anticipate higher defaults, particularly for levered companies where free cashflow might already be tight and the company just has less cushion to deal with some of those negative impacts. And that is just where, again, credit selection matters the most. So we’re underwriting to stress cases and looking closely at that cyclical exposure, trying to avoid it at all costs. And if things do turn, we have the tools, back to our operational resources, including a dedicated workout team, a restructuring team, a portfolio monitoring team. We have extensive legal resources. We can respond really quickly. We’re also often the sole or the lead lender, which gives us the ability to actively manage through any of those issues as they arise. But that’s what I’d offer there.

Greg Singer

Great, thanks. All right, so let’s switch gears and go into that second area, asset-based finance. Maybe a little bit more color on the risk-return profile and types of investments that are there.

Connor DeLaney

Yeah. So on asset-based finance, this is the second core deal type that we want you all to understand, and this is probably our best slide in my opinion. So looking at this cartoon, just look at everything in this drawing and try to quickly identify all of the obvious objects that you see in this picture. And I’ll give everybody a few seconds so that it’s interactive. So you can jump to the next slide.

This is how we try to explain asset-based finance in simple terms, because it takes a little bit more education. So just imagine all of the things that are not corporate credit. Auto lending, residential mortgages. We own a bunch of aircraft and we lease them out. We own rail cars and we lease them out. We bought music IP or music royalties from streams. We’re lending to home builders, which would be more of a developmental loan bucket. We’re lending against equipment leases. We’ll go buy a hand-selected credit card portfolio from a bank. We’ve done a bunch of student loan deals in the U.S. We’ve done a bunch of renewable deals in the solar space in the U.S. So all deals, again, privately originated, privately negotiated, but really across a broad spectrum here.

So to drive this home, and if you’re taking notes, this is like my easiest takeaway, is, in asset-based, we’re financing against cash flows from financial assets, so like receivables or hard assets like aircraft or equipment leases. So unlike direct lending where you’re relying on corporate cash flows from the company you’re lending to pay you back, in asset-based, we rely on asset cash flows rather than company earnings. We like to say it is financing the global economy. It’s finding stores of value and then you’re putting capital against it.

And when we talk about it in a very private fashion as an institution, we as KKR, our ABF team, we are out there sourcing opportunities. We manage about $70 billion in asset-based and we’ve really become a, I think you’d call it like a repository or a first call when you hear about these big transactions in asset-backed in the news. So this business is a clear differentiator, in my opinion, for KKR credit. The size and the scale we have, they give us a real edge.

If you think about the collateral, you think about the pool of assets, a recent example, we recently just bought a pool of student loans from Discover. It was about $11 billion worth, or 800,000 loans underlying. So millions and millions of lines of data that our team had to go crunch. When you think about what you’re investing in, then it’s not a binary outcome that you’re betting on, the company pays you back or it doesn’t. In these deals we have a very, very large statistical pool of many credit-worthy borrowers, credit-worthy being the keyword. So we’re usually going to filter for FICO scores for people that are north of 750 or 760, just to give you an easy reference point. And that big pool is kind of like a second level of diversification that you’re getting when you invest in ABF.

For the return profile, and this is important, when we’re talking about the U.S., it’s predominantly fixed rate. So think about how you pay your mortgage or you pay your auto bill. Hopefully it’s the same number you’re paying every month. And that’s because we’re based upon a fixed rate payment economy here. And that works really well as a profile when you think about credit for investors, there’s a lot of floating rate exposure in corporate direct lending, which I just talked about. So this is a nice complement to that when you think about how highly fixed rate it is.

So what is the use then of those proceeds? And hitting this again, just to keep it simple is, this is going towards providing financing for all the important needs from buying a house to financing equipment. We do music royalties, like I said, trade receivables, supply chain finance. This is working capital for companies, smaller businesses, very important sources of capital that really fuel the economy.

And I want to be clear now on the risk side, here we focus on investment grade or high grade opportunities that are senior in the capital stack. Many times they have a rating, but in all cases they have a form of asset backing over collateralization to them that provide really a meaningful amount of protection even when things are bumpy, when you go into recessions. These are structures that provide a ton of controls, enhancements that provide you protection. So expected maturities on these deals is usually something in the three to five year range. People ask about covenants a lot. Asset-based finance loves covenants. This is covenant heavy. There’s a ton of different really technical triggers or trip wires in place that we put in the documents that are going to protect us. I love talking about this, we’re pretty proud of our track record in the space. We’ve had very few downgrades even over the last decade-plus of investing in this area.

And then just to close, briefly, I want you to remember this: in asset-based finance you’ll see a focus from us on prime collateral, working with highly capitalized companies, dealing with upper tier types of borrowers, because we are frankly an upper tier lender. So we think that provides a lot of security and safety in a macro economy that I think everybody would agree has some uncertainty. So we’re not going to do anything with reputational risk in this area. You’re not going to see subprime mortgages, you’re not going to see payday lending, things like that.

When we invest, we also always want to be able to weather volatility in the macro economy among whether it’s a consumer borrower, to the FICO scores I mentioned earlier, whether it’s a company or a small business, we don’t want to take exposure on commodity risk, sovereign risk, other things that are outside of pure credit. And we’re really focused on the better resourced borrowers and individuals in the economy. So if you see corporate earnings go down, for example, there’s probably a good chance your standard traditional credit portfolio is going to get impacted close to one-for-one. ABF is going to be your diversification. You’ll call it like a weapon against that kind of correlation.

I don’t want to forget to hit this either. If you’re looking at the PPS strategies, I’d be remiss if I didn’t call this out, the most important thing when deals are getting originated, they are going to an investment committee and then they’re getting allocated down pro rata to all of the KKR credit pools or funds that we manage just based upon size and mandate. So there is no hierarchy for deals. And that will be the same thing for the PPS funds. PPS is on even-footing. You’re not getting the leftover deals. This is not the JV team at KKR.

So an interesting selling point or fact for everyone is the same deals that the large institutions are getting on the institutional side of our business, those are the same deals going into the PPS funds. And honestly, if we didn’t run it that way, I don’t think that we would be able to run the business because we’re not going to be cherry-picking where certain deals should go and then just hope that we’re right. That would not be a good outcome for clients, wouldn’t be a great outcome reputationally, track record wise, all those things. So just wanted to make sure I hit that, Greg, and I’ll hand it back to you.

Greg Singer

Great. Yeah, thank you so much, Connor. So think of asset-based finance, more of an investment grade category. And I really pick up on, you talk about risk mitigation and volatility mitigation on both of these topics.

And getting back to that question we started with, John, on some of the commonalities between Capital Group and KKR. I think we’ve always prided ourselves on, both on the stock and bond side, holding up well in downside markets by always doing stress tests around recession scenarios on a proactive basis. When we hear from KKR, it’s the exact same framework, right? Be underexposed to cyclicals and always be doing a recession stress test. It really gives a commonality of framework that can help us get through the inevitable times of stress.

John Queen

I think that’s exactly right. But if I could just echo one of Connor’s last points. I mean, I think I’ve said it a couple of times that the exciting part of these is that ability to access private markets. There’s a reason large institutions, university endowments, sovereign wealth funds, pension plans have significant allocations to private assets. And I talked about diversification. We’ve all talked about the excess returns you might get from it. This is not just an ability to access those targets, it’s an ability to access those asset classes alongside sovereign wealth funds, university endowments. Connor talked about the allocation process at KKR being one where you are literally alongside of those large institutional investors in these asset classes. I mean, that is a really exciting aspect about this and really gets back to the whole goal of providing this access in a way that I think our investors just wouldn’t have otherwise.

Greg Singer

Yeah. Perfect segue. I think that the next area we wanted to cover is getting a little bit back to the structure we’ve got a lot of questions on, is this a traditional 40 Act mutual fund? So maybe you can share just a little bit of the similarities and differences between the interval fund structure and a mutual fund.

John Queen

Sure. Effectively, in almost every way, this will look just like a traditional 40 Act fund. Daily subscriptions, you can put in money every day, a thousand dollars minimum and 1099s at the end of the year instead of K-1s. The one difference being, in the interval fund structure, it is only quarterly redemption. So if you want to take your money out, that happens once a quarter. There’s a period of time over which you can, up until the final day, put in your desire to redeem. And these, unlike most, which have a 5% max, these have a 10% of the fund maximum. So it doesn’t mean you can only get back 10% of your money on a given quarter. It means the fund will only redeem up to 10% on a given quarter. So if somehow there were more redemptions than that coming in, that would be the one gate. It would come down to 10%, but otherwise it would look a lot like a regular mutual fund in your account.

Greg Singer

All right, fantastic. Maybe also, let me ask, historically, private credit was often done as a limited partnership. Maybe just highlight how is this different from a limited partnership structure?

John Queen

Sure. Well, again, there’s a lot of aspects to the liquidity of this that’s much better than a limited partnership. The fees are different and lower. There’s more transparency into what you’re getting in terms of reporting. The minimums to invest are quite a bit different. The timing, you can invest over time if you want or all at once. And that 1099 every year, you’ll get your tax statement in January or early February whenever it is, instead of waiting three or four months after you’ve already filed your taxes to have to go back and revise.

Greg Singer

Right. So often with limited partnership you have to file an extension. You don’t get your tax forms until August or September.

John Queen

Exactly. I think a lot of people enjoy that process, but for those who don’t, this is a nice alternative.

Greg Singer

Exactly. And so yeah. Now you mentioned the 40 Act fund is SEC regulated was on that stride, but we got a question that came in that said, isn’t private credit nonregulated? So how do you think about that in a regulated fund?

John Queen

Well, this is clearly a regulated fund, goes through the same process. It is a 40 Act fund in that sense. Connor can talk a little bit more about the exemptive relief and the things that happen on the private credit side to allow it to be put into this kind of structure. The key is, we’ve done a lot of work to make sure we’ve provided we think very attractive package that allows access to these private assets in client portfolios. And maybe Connor can talk a little bit about exemptive relief and what that means and how it fits.

Connor DeLaney

Yeah, I think you said it well, John, without going down a rabbit hole, we worked with the SEC to structure this in the most operationally, administratively elegant, efficient way for individual two-legged investors to access our true unadulterated institutional portfolio management and expertise. Yeah, I wouldn’t add too much more onto that at the risk of losing the audience.

Greg Singer

All right, one other structural question that was just written in, why do an interval fund structure when some other people in the marketplace are using an ETF or exchange traded fund structure?

John Queen

We felt like this was, and I’ll try not to cast any aspersions, we felt like this was the only structure that actually properly reflects what private credit is, the liquidity there, these are daily marked, but the ability to actually access liquidity in the private side is not really there. In fact, Connor talked about the types of securities that are in the direct lending side, for example. These are loans. You don’t just have secondary markets in actual loans to companies to easily access liquidity.

So to make them daily liquid, both directions, I think is not reflecting the true character of these. What we want to do is have a structure that gives access to a market that is less liquid and put it in a package that’s more liquid, but still appropriately reflects the characteristics of the securities we’re putting in there. We think that our 60/40 combination gives us sufficient public liquidity to both feed that private side, but also provide that quarterly liquidity if our clients need it. And we felt going down the ETF path or something where you’re promising more liquidity than really exists in those kinds of securities is not really appropriate.

Greg Singer

All right, fantastic. All right. Let me close our formal remarks with our final slide, which is a really helpful summary of the fund terms and characteristics. And I’ll also conclude with some of our thoughts on if these funds may be an appropriate investment for you. One of the biggest questions we get is about fees. So I want to know in the third line of this slide, you can see that the fund fees for the F-3 share class, which is what’s typically available for our Capital Group private clients, are 0.84% for the Core Plus+ service and 0.89% for the Multi-Sector+ service. This is a flat fee and it’s important to note there’s no incentive fee, no carry on this service.

We also got a question regarding whether there are preferred fees based on large investment levels, and I think it’s important to note that unfortunately as a 40 Act fund, it does not offer discounts for scale. This fund is valued daily and can be purchased daily. But as we’ve been discussing throughout today’s presentation, it’s really important to understand the limited liquidity that withdrawals are limited to up to 10% of the fund on a quarterly basis. If we did have more redemption requests than that 10% of the fund, they’d be met on a pro rata basis. But Johnny, a quick quiz. What is the largest redemption we’ve ever had in a quarter for any of our Capital Group fixed income mutual funds.

John Queen

I believe that’s 7.6% for BFA back post GFC.

Greg Singer

Global financial crisis.

John Queen

Global financial crisis, thank you. And I think there’s only been a couple of quarters where it’s even been at the seven percent-ish level, so 10% feels like there’s plenty of cushion there. In fact, we did a fairly extensive modeling looking at other funds. OK. One thing about capital, obviously our funds are well understood and people tend not to be playing fast money games with them, but even looking out in the marketplace, there’ve been extraordinarily few instances. So we feel like the 10% gets us past that spot where people would feel limited in how much they could take out. So good quiz. I think I know the answer.

Greg Singer

Glad to hear. Yeah, so look, we hope that this gate of 10% never comes into play, but I think any investor in the fund needs to be prepared for that, right? I think it’s only appropriate for someone with a longer time horizon. Just the same way, even though say, public equities have daily liquidity, no one should be investing in public equities unless they have a long time horizon and is not seeking to get the money out the next quarter. But the extent you need liquidity, it’s most likely there but be prepared. And I also say this gate is a feature. I think it’s really designed to protect ongoing shareholders from the classic run on the bank that we would never be able to force this — fall into distress.

John Queen

Exactly.

Greg Singer

Right? Let me, I also got some questions, John, on just how do we meet that liquidity? Do we just sell the public part to meet liquidity? Let’s suppose it was a 10% reduction in a quarter. How do we meet that 10% reduction?

John Queen

Well, yeah, naturally that’s the beauty of the 60/40 combination is that you have this portion that is liquid. And so our expectation would be, particularly if we’re getting a run-on-the-bank kind of quarter, we’re seeing some sense of that and preparing, that we could sell bonds and get that liquidity available. It would come from the public side. Now I think there’s also ... it needs to be an understanding that the private side is not static in that it’s 40% invested there and no cash comes out of that. Connor was talking about the very high yields that these spin off on an annual basis, their average lives. So there are things paying down all the time once the funds are up and ramped along. So we’re constantly looking at reinvesting the portfolio, making sure that the asset allocation between the two pieces is appropriate and toward that 60/40. So you’re right, if big redemptions come in, it’s going to be funded by the public side, that’s part of why it’s there.

But we also have ongoing cash flows from both sides that we would expect to reinvest and very quickly get back to that 60/40 portfolio. Again, I mentioned we ran simulations on extreme circumstances so much as if we got 10% withdrawals every quarter for three years, we would still have a fund that under almost every circumstance would look very similar to the starting point of 60/40.

Greg Singer

All right, fantastic. All right, so just continuing the key terms. As you mentioned, tax reporting is on a 1099, though the same reporting schedule as other mutual fund or ETF holdings. It’s important to note that the income from these funds is expected to be taxable investment interest. So that’s taxed at the same rate as your ordinary income. You do have a choice that the interest can be paid out monthly or reinvested into the funds and the investment minimum for this fund is just $1,000. I’ll also note, not on this page, we’ve got a lot of questions about the yield of the fund and we did report a yield as of April 30th. The yield to maturity on the Multi-Sector+ fund was 7.8% and on the Core Plus+ fund 6.4%. That said, I must caution, April 30th was the second day of the fund. The portfolios in the process of getting constructed. So those yields will move around a bit.

And then let me just close this section with advice. One of the questions that came in is why do I need exposure to alternative investments if I already have a well-diversified portfolio? Which is a completely fair question, I’d say. The short answer is that we always want to take maximum advantage of diversification, so that will be our default. More diversification should mean less risk and better risk-adjusted returns. So we are recommending the Capital Group KKR, Multi-Sector+ strategy for clients that have a tax-exempt fixed income allocation, which include endowments, foundations, donor advisory funds, and individual retirement accounts that we believe will help improve the yield and provide additional diversification to those funds. It may be appropriate in certain taxable accounts depending on your marginal tax rate or if you have offsetting investment interest expense. So I would encourage everyone to please consult with your Private Wealth Advisor and your CPA about your specific situation.

Well, let’s conclude here. John, Connor, thank you so much for sharing your thoughts and your insights with us today. To our audience, thank you again for your time. If we didn’t get to your questions or if you’d like to learn more about whether these strategies are a good fit for your portfolio, please reach out to your Capital Group Private Wealth Advisor. For those that would like a copy of the presentation materials that we shared today, they can be downloaded directly from the event website. I do have one last request of you. Shortly, a survey will appear on your screens. We greatly appreciate you taking a quick moment to fill it out. Your response provides valuable feedback that helps us shape future events. So once again, thank you and we look forward to hosting you soon at our next event.

1099: 1099 tax form. The 1099 series of forms are used to report various types of income other than wages, salaries and tips, such as returns on financial investments.

40 Act: Investment Company Act of 1940. The Investment Company Act of 1940 is a federal law that regulates the organization and activities of registered investment companies, including mutual funds and closed-end funds. Its primary purpose is to protect investors by minimizing conflicts of interest and ensuring transparency in the investment industry.

ABF: Asset-backed finance or asset-based finance. This is a broad form of non-bank lending backed by a variety of collateral, including tangible and financial assets owned by corporations and individuals.

Accredited investor: An investor that meets certain financial or knowledge requirements that allows them to invest in unusual investments, often ones that are deeply complex or riskier.

Asset-backed finance: More commonly asset-based finance (ABF); a broad form of non-bank lending backed by a variety of collateral, including tangible and financial assets owned by corporations and individuals.

Asset-backed securities: Securities that are backed by a pool of assets that generate cash flow, such as loans, leases, credit card balances or receivables.

Asset-based finance: Asset-based finance (ABF) is a broad form of non-bank lending backed by a variety of collateral, including tangible and financial assets owned by corporations and individuals.

Basis point: One one-hundredth of a percentage point. Often abbreviated as “bp” or “bps” when plural. Example: 15 bps of $1,000 would be $1.50.

BFA: The Bond Fund of America. This Capital Group fund is a bond fund with the objective of providing “as high a level of current income as is consistent with the preservation of capital.”

Blue chip: A large, financially stable company. This term is often used to refer to companies that are perceived as solid, long-term investments.

Call protection: A clause in a debt instrument like a bond that prevents the borrower from prepaying — or “calling” — it during some period of time. This is often used to ensure that the borrower is subject to some interest payments before the debt instrument is paid off.

Capital stack: A ranking of all the debt instruments used to fund a project. Generally, an instrument higher in the stack has more privileges, such as a larger claim to repayment in case of a default.

Collateral: Collateral is an asset pledged by a borrower to secure a loan or credit, which can be seized by the lender if the borrower defaults on the loan.

Counterparty: Another person or organization in any agreement. For example, if you secure a loan, your lender would be a counterparty.

Covenant: A covenant is a clause in a loan agreement that requires the borrower to fulfill certain conditions or prohibits specific actions.

Default: Default occurs when a borrower fails to meet the legal obligations of a loan agreement, such as missing scheduled interest or principal payments.

Direct lending: Direct lending involves non-bank financial institutions providing loans directly to companies without intermediaries like traditional banks.

EBITDA: EBITDA stands for “earnings before interest, taxes, depreciation and amortization.” It is a financial metric used to assess a company's operating performance by evaluating earnings generated from core business operations, excluding the effects of capital structure, tax rates and non-cash items like depreciation and amortization.

EM: Emerging markets. This refers to economies that have some, but not all, features of modern economies. They are often marked by high growth rates, market volatility and illiquidity.

ETF: Exchange-traded fund. This is a kind of fund that holds multiple underlying assets, but shares of the ETF are sold rather than direct ownership of the underlying assets, similar to a mutual fund. A major difference from mutual funds is that ETFs can be traded at any time, rather than once per day after market close. As a result, their price can vary during the day.

Exemptive relief: An exemption to some securities regulations that can be granted to specific investments or investment vehicles.

Fed funds rate: The federal funds rate. An interest rate that sets the effective minimum interest rate that most U.S. lenders would consider. It is influenced by market activity and actions by the U.S. central bank, the Federal Reserve.

First lien: A lien is a claim on repayment when a debtholder defaults. The holders of a first lien have priority for repayment ahead of other lenders.

Enterprise software: Applications designed for organizational and business use, such as systems that manage payroll.

Evergreen fund: An investment fund that doesn’t have a set end date.

FICO: A credit-scoring system devised by its namesake corporation, the Fair Issac Corporation. Higher scores indicate higher creditworthiness.

Financial Times: A publication that specializes in business and economic reporting.

Fixed rate: An interest rate for a debt instrument, such as a bond or a loan, that is set at creation and does not change.

Floating rate: An interest rate for a debt instrument, such as a bond or a loan, that can change over time.

GFC: Global financial crisis. The global financial crisis was a severe worldwide economic crisis that occurred in 2007–2008, triggered by the collapse of the U.S. housing market and the excessive risk-taking of financial institutions.

High-yield bonds: Debt issued by entities with credit ratings that are below investment grade. This type of debt usually carries greater default risk but typically offers higher investment yield potential compared to higher rated debt securities.

Illiquidity: Illiquidity is a condition of assets that cannot be easily sold without significantly affecting its price. Illiquid assets, such as real estate or private equity, cannot be easily converted into cash.

Interval fund: An interval fund is a closed-end, registered investment company that offers liquidity to investors at pre-scheduled "repurchase windows," up to an amount between 5% and 25% of the fund's total outstanding shares. These funds are used as a mechanism to bring periodic, interval-based liquidity to investors while holding illiquid assets such as private credit.

Investment grade: Investment grade refers to bonds or other debt securities that are rated as having a relatively low risk of default by credit rating agencies. These ratings are typically 'BBB-' or higher by Standard & Poor's and Fitch Ratings, or 'Baa3' or higher by Moody's.

IP: Intellectual property. Nontangible assets that can be owned, such as trademarks and copyrights.

K-1 form: A K-1 form is a tax document used to report the income, deductions and credits from partnerships, S corporations, estates and trusts to the Internal Revenue Service (IRS). Individual partners, shareholders or beneficiaries receive a Schedule K-1 to include in their personal tax returns, reflecting their share of the entity's income.

Leverage: Leverage involves using borrowed capital to increase the potential return of an investment. While it can amplify profits, leverage also increases the risk of losses, as obligations to repay theborrowed funds remain regardless of the investment's performance.

Leveraged loan: A leveraged loan is a type of loan extended to companies or individuals that already have considerable amounts of debt or poor credit history.

Limited partnership: A business arrangement in which multiple parties merge funds to launch a venture, but only some of the parties manage the venture.

LTV: Loan to value. A ratio of a loan versus the value of the asset that is used as collateral. A higher LTV implies a riskier loan.

M&A: Mergers and acquisitions. The practice of one company purchasing another.

Maturity: Maturity refers to the date on which a financial instrument, such as a bond or loan, becomes due for payment. At maturity, the principal amount of the debt is repaid to investors, and the issuer's obligation ends. The term to maturity is the remaining time until this date.

PE: Private equity. Private equity involves investment firms acquiring ownership stakes in private companies, often with the goal of restructuring, growing or eventually selling the businesses for a profit. These investments are typically long-term and involve active management to enhance the value of the company before an exit strategy, such as a sale or initial public offering (IPO), is executed.

Private assets: Assets, including equity and debt instruments, that are not traded on a traditional public exchange.

Private credit: Private credit refers to non-bank lending where investors provide loans or other financing options directly to private companies or projects, outside of traditional public markets. Private credit is typically used by businesses seeking capital without issuing public debt or equity.

Pro rata or prorating: In an interval fund, if all of the investors' combined repurchase requests exceed the fund's repurchase limit, each investor's repurchase will be prorated (reduced) based on the excess request relative to their ownership of shares in the fund.

Property plant: The physical assets held by an entity, such as machinery and vehicles.

Public assets: Assets, including equity and debt instruments, that are traded on a public exchange.

Receivables: Obligations owed to an entity, such as payments for goods, that are considered assets on the entity’s balance sheet.

Recovery rate: A percentage of how much of the initial investment in a debt instrument was recovered after the borrower defaulted. This can be higher than 100% if some amount of interest was paid before the borrower defaulted.

Repurchase window — A repurchase window refers to a specific period during which investors in certain investment vehicles, such as interval funds, can redeem or sell back their shares to the fund at the current net asset value (NAV). These windows occur at predetermined intervals, providing limited liquidity to investors.

Redemption: Interval funds do not offer daily redemptions. They provide periodic repurchase offers / windows (usually quarterly), during which investors can tender a portion of their shares back to the fund at the current NAV.

Reference rate: An interest rate that is used as a benchmark to inform interest rates on debt instruments. For example, many bond funds compare their returns to an index that holds similar assets.

Regular-way: A description of a financial transaction that takes place in a standard settlement cycle, usually one to three days. Non-regular trades could happen faster or slower.

Reputational risk: A risk to a company’s standing or image that isn’t necessarily financial. For instance, a company might avoid investing in a particular industry because that industry has a poor reputation.

Sarbanes-Oxley Act: A 2002 U.S. federal law designed to protect investors from fraudulent securities reporting, such as overstating revenue or hiding risk.

SEC: Securities and Exchange Commission. The U.S. federal agency body that regulates securities and companies that trade in securities.

Secured direct lending: Secured direct lending involves non-bank lenders providing loans directly to borrowers, typically private companies, with the loan secured by collateral. This collateral can help mitigate some of the lender's risk, as it can be seized and sold if the borrower defaults on the loan.

Senior loan: A senior loan is a debt obligation that holds priority over other unsecured or subordinated debt in terms of repayment. In the event of a borrower's liquidation, senior loans are repaid first, reducing the risk for lenders. These loans are often secured by collateral and may include covenants to help protect lenders' interests.

Sleeve: Refers either to a credit sleeve, in which a third party offers the collateral to secure a borrower’s loan, or to supplemental “sleeve” portfolios with specific strategies that complement an investor’s core portfolio.

SOFR: Secured Overnight Financing Rate. A measure of the cost of borrowing money overnight, collateralized by U.S. Treasuries, that is often used as a reference rate for debt instruments.

Structured credit: Assets and financial instruments stemming from structured finance, which is complicated securitization of assets generally only used by larger entities. Common examples include credit default swaps and syndicated loans.

Syndicated markets: Markets dealing in syndicated loans, which are loans with multiple lenders. These are often used to fund projects that are too large or complicated for a single lender to cover.

Underwrite: Underwriting is the process by which financial institutions assess the risk and determine the terms of a financial transaction, such as a loan, insurance policy or securities issuance. In lending, underwriting involves evaluating a borrower's creditworthiness.

Unlevered: An evaluation that excludes the effects of loans and debt.

Write-down: An accounting procedure that notes that an asset’s fair market value has fallen. This impacts an entity’s balance sheet and can have tax and creditworthiness implications.