Is CLO Outperformance Sustainable?

INSIGHTS

CLO Performance Report, August 2023

August 11, 2023

A portfolio of U.S. CLO equity and CLO BB debt securities should outperform HY bonds across a variety of potential future economic scenarios

Introduction

The junior portion of the CLO capital structure has seen solid performance so far in 2023. Over the course of the past several months, Pretium has highlighted this outperformance and made the argument that CLO mezzanine securities were undervalued relative to HY single-name credit, supporting this latter point by comparing the currently wide CLO BB spreads to the historical spread relationship the two asset classes have traditionally maintained. Given the uncertainty surrounding where the economy and the Federal Reserve may go from here, we have received inquiry from our investor base as to whether or not we view this outperformance as sustainable. In summary, we believe it is. Pretium believes that current CLO mezzanine and equity pricing reflects worst-case assumptions related to forward defaults and recoveries. While Pretium expects loan default rates to rise and recovery rates to remain depressed, we believe that current CLO spread and yield levels more than compensate for the fundamental strain that credit markets have already begun to realize and are likely to continue to experience over the coming quarters (Exhibit 1 below).

CLO BBs and CLO equity provided +8.6% and +7.6%, respectively, in (non-annualized) total returns over the first six months of the year vs. just +4.8% for HY corporate bonds1. Pretium believes this strong YTD performance for CLO instruments is sustainable across a variety of possible forward market outcomes. The market environment in the first half of 2023 reflected only muted spread changes and close to flat point-to-point long-term interest rate moves. Thus, the strong 23H1 CLO results for that period reflect what we see as only slightly above average expected returns for a sector which entered the year offering particularly generous spreads and yields.

BB CLOs began 2023 with average yields of approximately 14%, reflecting SOFR margins at the time of over 900 basis points2. The strong total return for BB CLOs over the first half of 2023 largely reflected interest carry, as opposed to mark-to-market price gains which might have been harder to replicate in the future. By contrast, BB corporate bonds have yields-to-maturity of just 7%, with correspondingly smaller scope for carry returns (Exhibits 2-3 below).

To assess the sustainability of CLO outperformance going forward in greater detail, we review expected returns for CLOs across a range of possible future interest rate and macro-economic scenarios. Our analysis suggests that mezzanine CLOs should outperform generic HY corporate bonds over a short-term (e.g., 1-year) horizon across most scenarios, with an even higher probability of outperformance over a hold-to-maturity horizon. Long-term expected returns for CLO BBs remain elevated under adverse scenarios at current pricing levels due to the fact that the investments benefit from significant structural protections which allow for full principal repayment under all but the most extreme default and recovery rate assumptions (Exhibit 4 below).

While CLO BBs can provide long-horizon downside protection in deep recession scenarios, CLO equity can complement the profile of CLO debt by offering a return distribution with significant upside potential in scenarios involving only mild recession or recovery. Combined, a portfolio which incorporates both CLO equity and CLO debt securities produces a highly attractive distribution of returns across a range of potential future economic outcomes.

Interest Rate Scenarios and Their Impacts on CLO Returns

The scenarios we include in our analysis are:

  • 1. Follow Forwards (high probability). Current interest rate curve plays out in line with current forwards, inflation continues to move down from current spot levels but remains above 2% target, unemployment ticks up modestly and corporate earnings stay flat or see a muted pullback: a soft landing scenario in which credit will outperform vs. current pricing and realized defaults are slightly below the market baseline forecast.
  • 2. Higher for Longer (high probability). Interest rates stay higher for longer, remaining close to current spot levels, inflation comes down slightly but remains elevated, unemployment ticks up and corporate earnings stay flat or see a muted pullback: a soft landing scenario in which credit will marginally outperform vs. current pricing and defaults are in-line with the market baseline forecast.
  • 3. Stubborn Inflation (low probability). The Federal Reserve hikes rates over the next twelve months in response to stubborn inflation and strong corporate earnings, inflation remains unchanged vs.current spot levels and unemployment remains low: a short term bullish market for credit with default rates lower than forecast due to strong corporate earnings.
  • 4. Hard Landing (low probability). Material economic weakness emerges in the second half of 2023, inflation trails lower towards target and unemployment becomes elevated: a hard landing scenario for the economy and credit with short term and long term default rates above baseline forecasts and pulled forward.

Further detailed assumptions regarding these scenarios, including the assumed unemployment rate, inflation rate and short and longer term interest rates, are provided in Appendix A.

The calculations of expected CLO and corporate bond returns under the alternative scenarios incorporate both projected coupon income (e.g., with lower income for floating rate CLO instruments in falling rate scenarios) combined with, over the short horizon, expected mark-to-market price changes, and, over the longer term, potential realized credit losses.

Short-Term Outlook

Exhibit 5 below shows the estimated scenario returns over a one-year horizon holding period. In scenarios 1 to 3 the returns for BB CLOs are projected to significantly exceed those for BB corporate bonds. This outperformance is driven by higher coupon income for CLOs. In effect, the projected outperformance of CLOs in these scenarios mirrors the recent historical outperformance of CLOs vs. HY bonds, which has also been largely driven by superior carry for the CLOs.

For scenario 4, a Hard Landing, CLO BBs are projected to deliver lower returns than fixed rate HY bonds. This modeled underperformance is a consequence of an expected decline in CLO floating rate coupons as the Federal Reserve cuts interest rates in response to an economic contraction, combined with an assumption that generic fixed rate bond spreads widen less sharply than CLO BB spreads into the contraction.

The short-term CLO equity performance estimates shown in Exhibit 5 are calculated from the cash-on-cash equity yields expected in these scenarios combined with expected instrument price changes; the price change estimates, in turn are estimated based on the historical relationships between CLO equity and HY bond prices across different market environments. In scenarios 1 to 3, CLO equity is projected to significantly outperform BB corporate bonds as high current carry is offset by only marginal changes in cash flow discount yields. Near-term changes to discount rates remain range-bound as default expectations over the first year are primarily constructed from credits that are already identified as candidates for default as a function of their current trading price. In scenario 4, CLO equity is projected to underperform as the pull-forward of defaults in credits that are currently trading above $90 is likely to result in a downward revision to forward cashflow projections combined with an increase in market yields used to discount the cashflows.

Hold-to-Maturity Outlook

Exhibit 6 shows the expected hold-to-maturity returns for the different asset classes across scenarios. Here, CLO BBs are projected to outperform HY BB bonds across all the scenarios, including the Hard Landing. Historically, only a small percentage of BB CLOs have ever experienced principal losses, including during the global financial crisis period, due largely to the structural protections from which the bonds benefit3. Accordingly, we project no CLO BB losses under the four scenarios considered. Generic HY corporate bonds lack these structural protections and hence, are projected to experience small but non-zero performance drags due to defaults, which are modeled here as ranging from a 0.1% annualized yield degradation in the more benign scenarios to a 0.3% yield impairment in the Hard Landing scenario. Most of the projected BB CLO vs. BB corporate bond outperformance though, comes not from differences in credit loss assumptions but rather, from the substantially wider spreads CLO BBs currently contain, which helps generate much stronger carry income over the lives of the respective bonds.

While CLO debt is seen in Exhibit 6 to provide high prospective yields and significant long-horizon downside protection, CLO equity offers a return distribution with significant upside potential in scenarios involving milder recession or recovery. For example, in the Follow Forwards scenario, CLO equity would be expected to deliver a 17% annualized return. Combined, a portfolio incorporating CLO equity and CLO BB securities can produce a risk-return profile superior to those available in public equity or single-name HY credit markets.

The hold-to-maturity CLO equity performance estimates in Exhibit 6 are based on IRR calculations which project CLO equity cash flows under the alternative scenarios. The modeled CLO equity held-to-maturity return is lowest in the Hard Landing scenario, in which loan default rates are assumed to be relatively elevated and CLO equity cash flows are consequently reduced. Lower interest rates in this scenario also put downward pressure on CLO equity cash flows in this adverse scenario. Even in the Hard Landing scenario however, we project a portfolio of CLO equity securities to ultimately deliver low double-digit IRRs given the currently favorable pricing of these instruments

Summary

Our analyses suggest that the strong total returns delivered by CLO mezzanine debt and equity securities in the first half of 2023 are sustainable going forward given current pricing. An analysis of the projected returns for CLOs vs. fixed rate HY corporate bonds suggests that CLOs should outperform over a 1-year horizon across most economic scenarios, with outperformance even more probable over longer holding periods. Pretium believes the attractive relative value provided by a portfolio of CLO equity and CLO BBs clearly indicates that CLOs should be an integral component for every allocator looking to optimize their corporate credit exposure in this environment.

Appendix A — Economic scenario assumptions


1 Source: Bank of America, Bloomberg, JPM, data as of June 30, 2023.
2 Source: JPM CLOIE, data as of July 17, 2023.
3 Source: “CLO Performance”, Federal Reserve Bank of Philadelphia, WP 20-48, November, 2021.

Disclosure

This confidential presentation was prepared exclusively by Pretium for the benefit and internal use of the party to whom it is directly addressed and delivered (the “Recipient”). None of the materials, nor any content, may be altered in any way, transmitted to, copied, reproduced or distributed in any format in whole or in part to any other party without the prior express written consent of Pretium. As used in this presentation, “Pretium” refers to Pretium Partners, LLC and/or its affiliates.

Pretium’s Credit investment strategies are focused on corporate credit, structured products collateralized by corporate credit, and legal opportunities financing. The team invests in broadly syndicated loans, as well as securities issued by CLOs. Investments in non-investment grade companies are subject to greater risk of loss of principal and interest than higher-rated investments and are generally considered to be predominantly speculative with respect to the issuer’s capacity to pay interest and repay principal. Litigation finance depends on whether the cases in which the fund invests will be successful, will pay the targeted returns and will pay those returns in the anticipated time. Assessing the values, strengths and weaknesses of a case is complex and the outcome is not certain. Should cases, claims, defenses or disputes in which the fund invests prove to be unsuccessful or produce returns below those expected, the performance of the fund could be materially adversely affected. Furthermore, laws and professional regulations in litigation funding can be complex and uncertain and details of certain cases are unlikely to be disclosed because of confidentiality and other restrictions.

There can be no assurance that Pretium’s objectives will be achieved, that any risk management will adequately protect against downside losses, or that an investor will receive any return on its investment. An investment should only be considered by persons who can afford a loss of their entire investment. Past activities of investment entities sponsored by Pretium provide no assurance of future results. Past or targeted performance is not a guarantee, projection or prediction and is not necessarily indicative of future results.

These materials do not constitute, or form part of, any offer to sell or issue interests in an investment vehicle or any other entity. Any such offer or solicitation will be made solely by means of a definitive offering document, which will describe the actual terms of any securities offered and will contain material information regarding the securities. Any information contained herein will be superseded by information delivered to Recipient as part of an offering document. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained herein.

Past performance is not necessarily indicative of future results and there can be no assurance that targeted returns will be achieved. There can be no assurance that Pretium will achieve results comparable to or that the returns generated will equal or exceed those of other investment activities of Pretium or that Pretium will be able to implement its investment strategy or achieve its investment objectives. Pretium does not make any representation or warranty, express or implied, regarding future performance.

Certain information contained in these materials constitute “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “seek,” “expect,” “anticipate,” “project,” “estimate,” intend,” continue,” “target,” “plan,” “believe,” the negatives thereof, other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results of the actual performance of an investment vehicle or strategy may differ materially from those reflected or contemplated in such forward-looking statements.

Certain information contained in this presentation has been obtained from published and non-published sources prepared by third parties, which, in certain cases, have not been updated through the date hereof. While such information is believed to be reliable, Pretium has not independently verified such information nor does it assume any responsibility for the accuracy or completeness of such information. Except as otherwise indicated herein, the information, opinions and estimates provided in this presentation are based on matters and information as they exist as of the date these materials have been prepared and not as of any future date and will not be updated or otherwise revised to reflect information that is subsequently discovered or available, or for changes in circumstances occurring after the date hereof.

These materials are intended to assist the Recipient in connection with its due diligence and to assist the Recipient in understanding the strategies that Pretium intends to pursue to seek to maximize portfolio performance. They are not intended as a representation or warranty by Pretium as to the actual composition or performance of any future investments that would be made by Pretium. Assumptions necessarily are speculative in nature. It is likely that some or all of the assumptions underlying the potential investments will not materialize or will vary significantly from any assumptions made (in some cases, materially so). The Recipient should understand such assumptions and evaluate whether they are appropriate for its purposes.

Recipients should note that COVID-19 has, among other things, significantly diminished global economic production and activity of all kinds and has contributed to both volatility and a decline in all financial markets. The ultimate impact of COVID-19 — and the resulting precipitous and near-simultaneous decline in economic and commercial activity across several of the world’s largest economies — on global economic conditions, and on the operations, financial condition and performance of any particular industry or business, is impossible to predict, although ongoing and potential additional materially adverse effects, including a further global or regional economic downturn (including a recession) of indeterminate duration and severity, are possible. The extent of COVID-19’s impact will depend on many factors, including the ultimate duration and scope of the public health emergency and the restrictive countermeasures being undertaken, as well as the effectiveness of other governmental, legislative and financial and monetary policy interventions designed to mitigate the crisis and address its negative externalities, all of which are evolving rapidly and may have unpredictable results. Even if and as the spread of the COVID-19 virus itself is substantially contained, it will be difficult to assess what the longer-term impacts of an extended period of unprecedented economic dislocation and disruption will be on future macro- and micro-economic developments, the health of certain industries and businesses, and commercial and consumer behavior.

Pretium’s Real Estate Team Expands by Adding Experienced Portfolio Manager Jason Lewis as Managing Director

PRESS RELEASE

Pretium's Real Estate Team Expands by Adding Experienced Portfolio Manager Jason Lewis as Managing Director

July 10, 2023

Pretium's Real Estate Team Expands by Adding Experienced Portfolio Manager Jason Lewis as Managing Director

NEW YORK, July 10, 2023 – Pretium, a specialized investment firm with more than $50 billion in assets under management, today announced that Jason Lewis has joined the firm as a Managing Director and Portfolio Manager on the Real Estate team. Mr. Lewis will be focused on the performance and expansion of Pretium’s single-family rental (“SFR”) vehicles.

Mr. Lewis brings over 15 years of experience in managing large, diversified real estate portfolios across product types and investment strategies. His experience spans portfolio construction, asset management, capital raising, performance measurement, and he has overseen more than $10 billion in investment transactions. Mr. Lewis joins Pretium from UBS Realty Investors, where he served as an Executive Director and Portfolio Manager. Before UBS, Mr. Lewis was the Head of Asset and Portfolio Management at CA Residential. He began his real estate career at Capri Capital Partners, LLC., most recently as a Partner, Head of Asset Management and lead portfolio manager for some of the firm’s largest separate accounts and commingled fund vehicles.

“The addition of Jason to our growing Real Estate team demonstrates the continued success of our strategy and our platform,” said Josh Pristaw, Senior Managing Director and Head of Real Estate at Pretium. “We are excited to welcome Jason to Pretium, and I am confident his expertise in executing winning portfolio management strategies and forming strong client relationships will be an asset to our firm.”

“Pretium is a leader in the single-family rental industry and has a strong track record of delivering value for its stakeholders,” said Mr. Lewis. “I am looking forward to partnering with such a talented team and to leveraging my experience as we expand the firm’s investment management capabilities, optimize portfolio performance for its global investor base and continue to pursue innovation within the housing sector.”

Mr. Lewis earned a Master of Business Administration, with a concentration in Real Estate and Finance from Columbia Business School and a Bachelor of Science in Mathematics from Morehouse College.

About Pretium

Pretium is a specialized investment firm focused on U.S. residential real estate, residential credit, and corporate credit. Pretium was founded in 2012 to capitalize on investment and lending opportunities arising as a result of structural changes, disruptions, and inefficiencies within the economy. Pretium has built an integrated analytical and operational ecosystem within the U.S. housing, residential credit, and corporate credit markets, and believes that its insight and experience within these markets create a strategic advantage over other investment managers. Pretium’s platform has more than $50 billion of assets, comprising real estate investments across 30 markets in the U.S., and employs more than 4,000 people across 30 offices, including its New York headquarters, Dubai, London, Seoul, and Sydney. Please visit www.pretium.com for additional information.


Contacts

Jon Keehner / Kate Thompson / Lyle Weston
Joele Frank, Wilkinson Brimmer Katcher
212-355-4449
Media-SFR@pretium.com

SCI Pretium – Mezz Opportunities

INSIGHTS

SCI Pretium - Mezz Opportunities

July 2023

Pretium structured credit and CLO liabilities MD Ian Wolkoff and Director Marty Young argue that mezzanine CLO bonds should be on the radar screens of most asset allocators with long investment horizons.

Mezz opportunities

Pretium structured credit and CLO liabilities MD Ian Wolkoff and Director Marty Young argue that mezzanine CLO bonds should be on the radar screens of most asset allocators with long investment horizons

US CLO mezzanine debt offers high expected return rates, with yields maintained under a default scenario more extreme than the GFC credit cycle and with upside potential in a market recovery scenario.

CLO debt offers strong long-run expected returns with bounded downside

In the current market context, macro uncertainty and the potential for a growth downturn loom large while valuations across many sectors still screen as relatively expensive. Given this set-up, asset allocators are searching even more actively than usual for investment opportunities which offer high potential yields but with contained downside protection in bearish scenarios. CLO mezzanine debt is a sector which appears to offer this combination.

The US CLO market has grown to over US$950bn in outstanding balance, with over US$160bn of balance in mezzanine (single-A through single-B) tranches. As a result, a CLO mezzanine debt strategy addresses a market large enough to allow investors to allocate selectively while still targeting high yields with contained risks.

Yields on CLO mezzanine debt securities have moved up sharply over the past two years; double-B CLO bonds purchased in the secondary market offer average lifetime quoted yields of 14.4% as of June 2023 versus 7.7% in mid-2021. The current baseline yields for double-B CLOs compare quite favourably to the yields available from other similarly rated fixed income assets: double-B leveraged loans and double-B corporate bonds, for example, currently yield just 7.6% and 7.2% respectively.

The extra yield earned by double-B CLOs versus double-B corporate bonds does not appear to reflect added default risk as the comparison holds debt ratings constant; indeed, during the 2008 financial crisis episode, CLO bonds had significantly lower default rates than similarly rated corporate bonds. CLO transactions are designed so that the bond classes can withstand elevated default rates on the underlying loan portfolios without taking principal losses; the double-B CLO bonds benefit from multiple structural protections, including overcollateralisation and excess spread that absorb losses before they can be passed to the double-B bonds.

A price-yield analysis of a double-B tranche from a sample 2021 vintage CLO transaction indicates that the double-B bond yield remains in double-digits under a scenario in which 28% of the underlying loan assets default over the next five years with a 60% recovery rate – a default intensity over 1.6 times the five-year cumulative default rate experienced following the global financial crisis. Indeed, the double-B tranche yield remains positive, even if the assumed five year cumulative loan default rate rises to 35%, more than 2x the level seen during 2007-2013. CLO double-B bond yields remain positive in this high default rate scenario, despite the fact that much of the bond principal would be projected to be written down in such an event, as the high projected coupon payments over the lifetime of the bond would compensate for the principal loss.

CLO debt offers upside potential in a market recovery scenario

Per above, double-B CLOs can offer around 14% yields under a moderate recession baseline scenario. The bonds can maintain these double-digit yields in a loss scenario comparable to that experienced during the global financial crisis and can continue to earn positive yields in scenarios significantly more extreme than in 2008. Thus, the long-run downside risk for the majority of bonds in the double-B CLO sector, while not zero, appears bounded.

At the same time, the bonds provide meaningful potential return upside in a scenario in which double-B CLO spreads partially normalise relative to their current wide levels. Double-B CLO spreads are currently trading 250bp above the level that would be predicted, given their historical relationship to high yield corporate bond spreads. If 60% of this pricing anomaly were to be slowly corrected over a two-year period, the double-B CLO horizon yields would be expected to reach around 18%, with 14% of the yield coming from coupon income and 4% from price appreciation.

Summary

Mezzanine CLO yields are currently elevated relative to the yields available on comparably rated corporate bonds. While CLO bonds may experience short-term mark-to-market price volatility, over a longer-term horizon, yields would be expected to remain in double-digits across a wide range of loss scenarios – including scenarios featuring default rates more extreme than those that were realised during the challenging 2007-2013 period.

At the same time, mezzanine CLO bonds offer realistic chances of return upside if bond spreads partially revert back to more historically typical levels. Given this favourable risk/return profile for mezzanine CLO debt, Pretium believes the sector should be on the radar screens of most asset allocators with long investment horizons.

Based on Pretium’s research, data and estimates from publicly available sources. Statements throughout these materials, including those regarding the market, represent the opinions and beliefs of Pretium. There can be no assurance that these will materialise.

This article was published in Structured Credit Investor on 28 June 2023.

Long-Term Bullish Outlook for the Housing Rehabilitation Industry

INSIGHTS

Long-Term Bullish Outlook for the Housing Rehabilitation Industry

May 2023

The aging U.S. housing stock, slow new home construction pace, and postpandemic shifts in housing utilization create strong tailwinds for housing rehabilitation and remodeling activity

Rehabitation and remodeling are important tools in addressing the U.S. housing undersupply problem

A recent Harvard study notes that across the U.S., 49% of owner-occupied housing was built before 1980; in certain geographic areas – including Boston, New York and Los Angeles – two-thirds or more of the owner-occupied homes were built before 1980.1 The aging of the U.S. housing stock is a consequence of the sharp slowdown in new home construction that began in 2007 and that has extended through 2023, per Exhibits 1-2 below.

The continued aging and deterioration of the U.S. housing stock points to a large market of homes in need of rehabilitation. The 2023 Harvard study notes that recent improvement spending has focused not just on cosmetic enhancements but has also been directed at core replacements of basic housing components including roofing and HVAC systems which have extended beyond their functional lifetimes.1 Pretium and our affiliated lending partner Anchor Loans believe that modernization and rehabilitation of the already existing U.S. housing stock will play an important role in addressing the general problem of housing undersupply across the country. Further, it is likely that the extensive amount of modernization required for many homes will be difficult for typical homeowners to manage and finance; rather, such extensive rehabilitation will often be most conveniently executed by professional developers who purchase homes for sale, bring them up to modern standards, and then subsequently resell the homes once the improvements are complete.

Post-pandemic shifts in living patterns provide additional positive impulse for home improvement

Post-pandemic changes in patterns of housing activity are another force that is likely to put upward pressure on the demand for home improvements. Measures of U.S. office space occupancy remain at below 50% of pre-COVID levels, now three years after the initial pandemic shock (Exhibit 3), suggesting that the move towards work-from-home has become structural. Exhibit 4 relatedly shows a large increase in inflation-adjusted consumer spending on categories such as exercise equipment and furniture since the start of the pandemic. With the growing amount of both work and leisure activity taking place at home, homeowners will demand newer and better housing features that can support these pursuits. Again, it is likely that the extensive home remodeling needed to bring housing quality and size up to the level that can facilitate increased home-centered living activity will often be most efficiently executed by professionals with access to scale economies and efficient and stable financing vehicles.

Demographic trends are supportive of housing rehabilitation

Not only is the U.S. housing stock aging, the population of U.S. homeowners and homebuyers is aging as well. The National Association of Realtors has noted that over 40% of all the 2022 U.S. home purchases were made by homebuyers from the so-called baby-boomer or silent generation cohorts6; per Exhibit 5, the share of homes purchased by older homebuyers has trended higher over the past two decades. An older homebuying population will likely be supportive of housing rehabilitation activity: the Harvard home improvement study notes that older homeowners will tend, for example, to value homes modified for improved accessibility and safety. Older homebuyers also have relatively high levels of average net wealth, per Exhibit 6 below, to help facilitate the purchase of improved homes.

The aging of the U.S. housing stock, combined with post-pandemic shifts in lifestyles that benefit from expanded and modernized single-family housing, and demographic trends leading towards an elevated share of older homebuyers, are strong tailwinds for the housing rehabilitation industry. Pretium and Anchor Loans remain constructive on the long-term outlook for the professional home improvement sector and look forward to playing a role in the ongoing process of rehabilitation of the U.S. housing supply.

This is not an offer, advertisement, or solicitation for interests in any Pretium managed vehicle and should not be construed or relied upon as investment advice or as predictive of future market or investment performance. Past performance is not indicative of future results.


1. “Improving America’s Housing 2023”, Harvard Joint Center for Housing Studies, March 2023.
2. American Community Survey, Pretium. Data as of December 2021.
3. Census Bureau, Pretium. Data as of February 2023.
4. Kastle, Pretium. Data as of April 2023.
5. BLS, Pretium. Data as of December 2021.
6. “2022 Home Buyers and Sellers Generational Trends Report”, NAR, March 2023. Boomer and Silent Gen cohorts are defined as the groups born during 1946-1964 and 1925-1945, respectively.
7. FHFA National Mortgage Database Program, Pretium. Data through June 30, 2022.
8. “2022 Home Buyers and Sellers Generational Trends Report”, NAR, March 2023.

Pretium’s Second State of ESG Report

INSIGHTS

Pretium's Second State of ESG Report

April 2023

The past year of our environmental, social, and governance journey features milestones for Pretium and our operating companies.

We believe sound ESG principles and practices can help maximize returns to our investors by having a positive impact on our employees, our residents, our borrowers, the communities in which we operate, and the businesses we serve.

Opportunities for Generating Alpha in the U.S. CLO Market

INSIGHTS

CLO Performance Report, April 2023

April 6, 2023

U.S. CLO debt offers high average yields due to persistent complexity and liquidity premiums, with return dispersion providing opportunities for generating alpha through active management

CLO debt offers strong average returns due to persistent complexity and liquidity premiums

CLO debt securities have historically delivered strong positive returns across a wide range of economic environments: Exhibit 1, below, shows that BB-rated CLO bonds have outperformed leveraged loans and high yield corporate bonds over the past 3-year, 5-year, 7-year and 9-year horizons. Pretium believes CLO debt has the potential to continue to outperform other assets with comparable ratings profiles: Exhibit 2, for example, shows that BB CLOs currently offer average yields of 13.7%, 6.5% above the yields available on similarly rated corporate bonds. Exhibits 1 and 2 represent the average opportunity accessible through the CLO market – that is, by passively allocating to the entire universe of outstanding BB CLO debt instruments, an investor can earn high average returns relative to the returns available from competing asset classes due to the persistent presence of a CLO complexity premium.

CLO debt offers significant alpha opportunities

In addition to the opportunity for earning strong average index-level returns, the CLO market also features a meaningful amount of return dispersion across different CLO transactions; as a result, there is potential for earning additional alpha returns through judicious active selection of specific CLO bonds. Exhibit 3, for example, shows the annualized total unlevered returns of the underlying loan portfolios for the population of CLOs issued between 2013 and 2022: for a typical quarterly vintage of CLO transactions (e.g., those issued in 2019Q2), the range of loan portfolio returns exceeds 200bp. Given the degree of natural leverage embedded within CLO transaction structures, this amount of return dispersion across loan portfolios translates into an even larger amount of dispersion in returns for junior CLO debt and equity tranches, providing an alpha-rich environment for active CLO investors.

Exhibit 3 highlights one potential means by which active CLO bond investors might outperform the index – namely, by identifying specific CLO managers whose loan portfolios consistently manage to deliver high average returns. In this Exhibit, the loan portfolio returns delivered by one particular CLO manager, here labeled as “Manager X”, are seen to frequently come in near the high ends of the ranges of returns of CLOs issued in nearby time periods. CLO bond investors with tools for and expertise in monitoring CLO manager performance may thus be able to generate alpha by over-allocating to CLO bonds issue by such high-performing managers.

Exhibit 4 shows an alternative sample screen that may be used to actively select CLO bonds with high return potential. The chart in this Exhibit compares the yields on BB CLO bonds traded in the secondary market in the month of February 2023 to a proprietary quantitative measure of risk levels of the bonds. The bond yield and the aggregated risk measure levels are fairly highly correlated, with high risk bonds usually trading at wide spread levels, suggesting the CLO market is roughly efficient. However, there are bonds, such as the ones labeled “Bond Y” and “Bond Z” in the chart, which appear to have high yields relative to the measured amount of risk. CLO investors aided by tools that can similarly help identify bonds with high risk-adjusted yields thus have the potential to generate positive alpha and deliver returns above those earned by the broad CLO index.

The CLO asset class has grown significantly over the past two decades, in large part because of the consistently strong performance of the sector through a wide range of economic scenarios including the global financial crisis episode. The CLO sector offers strong index-level return potential given the high average yields available across the sector’s bonds; there are also meaningful opportunities for earning alpha, or extra returns above the average CLO index, via active management. The potential for earning high returns from CLOs in the current environment suggests that many investors who allocate to sectors such as high yield corporate bonds could benefit from investing as well in CLO debt.

Confidentiality and Other Important Disclosures

This confidential presentation was prepared exclusively by Pretium for the benefit and internal use of the party to whom it is directly addressed and delivered (the “Recipient”). None of the materials, nor any content, may be altered in any way, transmitted to, copied, reproduced or distributed in any format in whole or in part to any other party without the prior express written consent of Pretium. As used in this presentation, “Pretium” refers to Pretium Partners, LLC and/or its affiliates.

Pretium’s Credit investment strategies are focused on corporate credit, structured products collateralized by corporate credit, distressed debt and equity and legal opportunities financing. The team invests in broadly syndicated loans, debt and equity of public and private companies, as well as securities issued by CLOs. Investments in high yield securities are subject to greater risk of loss of principal and interest than higher-rated securities and are generally considered to be predominantly speculative with respect to the issuer’s capacity to pay interest and repay principal. Investments in distressed situations expose the investor to the difficulty in obtaining information as to the issuer’s true condition; legal risk, including laws relating to fraudulent conveyances, voidable preferences, lender liability, and bankruptcy; litigation risk; and liquidity risk. In addition, accounts will not be diversified among a wide range of types of securities, industry, markets, or countries. Litigation finance depends on whether the cases in which the fund invests will be successful, will pay the targeted returns and will pay those returns in the anticipated time. Assessing the values, strengths and weaknesses of a case is complex and the outcome is not certain. Should cases, claims, defenses or disputes in which the fund invests prove to be unsuccessful or produce returns below those expected, the performance of the fund could be materially adversely affected. Furthermore, laws and professional regulations in litigation funding can be complex and uncertain and details of certain cases are unlikely to be disclosed because of confidentiality and other restrictions.

There can be no assurance that Pretium’s objectives will be achieved, that any risk management will adequately protect against downside losses, or that an investor will receive any return on its investment. An investment should only be considered by persons who can afford a loss of their entire investment. Past activities of investment entities sponsored by Pretium provide no assurance of future results. Past or targeted performance is not a guarantee, projection or prediction and is not necessarily indicative of future results.

These materials do not constitute, or form part of, any offer to sell or issue interests in an investment vehicle or any other entity. Any such offer or solicitation will be made solely by means of a definitive offering document, which will describe the actual terms of any securities offered and will contain material information regarding the securities. Any information contained herein will be superseded by information delivered to Recipient as part of an offering document. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained herein.

Past performance is not necessarily indicative of future results and there can be no assurance that targeted returns will be achieved. There can be no assurance that Pretium will achieve results comparable to or that the returns generated will equal or exceed those of other investment activities of Pretium or that Pretium will be able to implement its investment strategy or achieve its investment objectives. Pretium does not make any representation or warranty, express or implied, regarding future performance.

Certain information contained in these materials constitute “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “seek,” “expect,” “anticipate,” “project,” “estimate,” intend,” continue,” “target,” “plan,” “believe,” the negatives thereof, other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results of the actual performance of an investment vehicle or strategy may differ materially from those reflected or contemplated in such forward-looking statements.

Certain information contained in this presentation has been obtained from published and non-published sources prepared by third parties, which, in certain cases, have not been updated through the date hereof. While such information is believed to be reliable, Pretium has not independently verified such information nor does it assume any responsibility for the accuracy or completeness of such information. Except as otherwise indicated herein, the information, opinions and estimates provided in this presentation are based on matters and information as they exist as of the date these materials have been prepared and not as of any future date and will not be updated or otherwise revised to reflect information that is subsequently discovered or available, or for changes in circumstances occurring after the date hereof.

These materials are intended to assist the Recipient in connection with its due diligence and to assist the Recipient in understanding the strategies that Pretium intends to pursue to seek to maximize portfolio performance. They are not intended as a representation or warranty by Pretium as to the actual composition or performance of any future investments that would be made by Pretium. Assumptions necessarily are speculative in nature. It is likely that some or all of the assumptions underlying the potential investments will not materialize or will vary significantly from any assumptions made (in some cases, materially so). The Recipient should understand such assumptions and evaluate whether they are appropriate for its purposes.

Recipients should note that COVID-19 has, among other things, significantly diminished global economic production and activity of all kinds and has contributed to both volatility and a decline in all financial markets. The ultimate impact of COVID-19 — and the resulting precipitous and near simultaneous decline in economic and commercial activity across several of the world’s largest economies — on global economic conditions, and on the operations, financial condition and performance of any particular industry or business, is impossible to predict, although ongoing and potential additional materially adverse effects, including a further global or regional economic downturn (including a recession) of indeterminate duration and severity, are possible. The extent of COVID-19’s impact will depend on many factors, including the ultimate duration and scope of the public health emergency and the restrictive countermeasures being undertaken, as well as the effectiveness of other governmental, legislative and financial and monetary policy interventions designed to mitigate the crisis and address its negative externalities, all of which are evolving rapidly and may have unpredictable results. Even if and as the spread of the COVID-19 virus itself is substantially contained, it will be difficult to assess what the longer-term impacts of an extended period of unprecedented economic dislocation and disruption will be on future macro- and micro-economic developments, the health of certain industries and businesses, and commercial and consumer behavior.


1. Bloomberg, Markit, Palmer Square, Pretium. Leveraged loan, high yield bond, and CLO returns are derived from the Markit iBoxx USD Liquid Leveraged Loans Total Return Index, the Bloomberg High Yield Corporate Bond Total Return Index, and the Palmer Square BB CLO Total Return Index, respectively, Data as of January 2023. Bloomberg, Pretium. Data as of February 2023.
2. Bloomberg, Pretium. Data as of February 2023.
3. Pretium. Data as of January 2023.
4. Pretium. Data as of February 2023.

Pretium Expands Real Estate Team with Addition of Melanie Gersper as Managing Director, Asset Management

PRESS RELEASE

Pretium Expands Real Estate Team with Addition of Melanie Gersper as Managing Director, Asset Management

March 20, 2023

Newly Created Role Enhances Enterprise Collaboration and Boosts Operational Efficiency

NEW YORK – March 20, 2023 – Pretium, a specialized investment firm with more than $50 billion in assets under management, today announced that Melanie Gersper has joined the firm as Managing Director, Asset Management. In this role, Ms. Gersper will lead the asset management of Pretium’s equity real estate portfolio across the United States, including more than 90,000 single-family residential homes managed by Progress Residential as well as Pretium’s build-to-rent platform.

Ms. Gersper brings a proven track record and more than 25 years of experience managing large residential real estate portfolios, including multi-family rentals, and has been responsible for operating stabilized assets and overseeing complex development projects across multiple geographies. Most recently, she served as ACRE’s Chief Operating Officer since 2015, where she was responsible for the oversight of property management and asset management. She also had a meaningful role in acquisitions and dispositions. Prior to joining ACRE, Ms. Gersper held senior leadership roles at residential companies including Chief Operating Officer at CF Lane, Senior Vice President of Operations at Bell Partners, President of Operations for Cortland Partners, and Regional Vice President of Lane Company.

“Melanie’s success driving operational performance across a variety of residential real estate portfolios will be invaluable as we continue to scale and optimize our business,” said Josh Pristaw, Senior Managing Director and Head of Real Estate. “We are confident she will have an immediate impact at both the individual asset and broader portfolio level, and I look forward to working with her during our next phase of growth.”

“Pretium has built the leading and most innovative single-family rental platform in the United States, and I am proud to join such an incredible team,” said Ms. Gersper. “As Pretium continues to grow, I look forward to leveraging my real estate operating experience to deliver even greater value for our stakeholders.”

Ms. Gersper earned a Bachelor of Science in Business Administration from Bowling Green State University.

About Pretium

Pretium is a specialized investment firm focused on U.S. residential real estate, residential credit, and corporate credit. Pretium was founded in 2012 to capitalize on investment and lending opportunities arising as a result of structural changes, disruptions, and inefficiencies within the economy. Pretium has built an integrated analytical and operational ecosystem within the U.S. housing, residential credit, and corporate credit markets, and believes that its insight and experience within these markets create a strategic advantage over other investment managers. Pretium’s platform has more than $50 billion of assets, comprising real estate investments across 30 markets in the U.S., and employs more than 4,000 people across 30 offices, including its New York headquarters, Dubai, London, Seoul and Sydney. Please visit www.pretium.com for additional information.

Contacts

Jon Keehner / Kate Thompson / Lyle Weston
Joele Frank, Wilkinson Brimmer Katcher
212-355-4449
Media-SFR@pretium.com

Julie Harbert Joins Pretium as Senior Managing Director and President of Pretium Enterprise Services

PRESS RELEASE

Julie Harbert Joins Pretium as Senior Managing Director and President of Pretium Enterprise Services

March 13, 2023

Newly Created Role Enhances Enterprise Collaboration and Boosts Operational Efficiency

NEW YORK – March 13, 2023 – Pretium, a specialized investment firm with more than $50 billion in assets under management, today announced that Julie Harbert has joined the firm as Senior Managing Director and President of Pretium Enterprise Services. In this newly created role, Ms. Harbert will be responsible for building and leading the firm’s shared service solutions, including through enhanced technology, services, and processes that create scale and deliver long-term value for stakeholders. She will be a member of the firm’s Executive Committee.

Ms. Harbert brings more than 25 years of experience in business operations. Most recently, she served as Entergy’s Senior Vice President and Chief Administrative Officer, where she was responsible for building high-performing teams enterprise-wide. Prior to joining Entergy, Ms. Harbert was Senior Vice President and Group Head of Global Business Services at Philips. Ms. Harbert began her career at IBM, where she built a strong record of execution in numerous roles, including as Vice President and Chief Operating Officer of Global Process Services.

“Julie has an impressive track record of successfully leading continuous improvement for large, complex organizations,” said Chris Weidler, Chief Financial Officer of Pretium. “We are excited to welcome her to Pretium and look forward to optimizing our solutions, services, and processes enterprise-wide under her leadership.”

“I am honored to join Pretium at a time of significant growth and innovation,” said Ms. Harbert. “I look forward to building on the strong foundation already in place at Pretium and working collaboratively across the ecosystem to deliver premium shared services that generate long-term value for our stakeholders.”

Ms. Harbert currently serves on the board of directors for the Louisiana Children’s Museum and Shared Services Network (SSON) Europe. She holds a Master of Business Administration degree with a focus on International Finance and Economics from the Fuqua School of Business at Duke University, and a Bachelor of Science in Accounting from West Virginia University.

About Pretium

Pretium is a specialized investment firm focused on U.S. residential real estate, residential credit, and corporate credit. Pretium was founded in 2012 to capitalize on investment and lending opportunities arising as a result of structural changes, disruptions, and inefficiencies within the economy. Pretium has built an integrated analytical and operational ecosystem within the U.S. housing, residential credit, and corporate credit markets, and believes that its insight and experience within these markets create a strategic advantage over other investment managers. Pretium’s platform has more than $50 billion of assets, comprising real estate investments across 30 markets in the U.S., and employs more than 4,000 people across 30 offices, including its New York headquarters, Dubai, London, Seoul and Sydney. Please visit www.pretium.com for additional information.

Contacts

Jon Keehner / Kate Thompson / Lyle Weston
Joele Frank, Wilkinson Brimmer Katcher
212-355-4449
Media-SFR@pretium.com

Pretium Announces New Partnership With iCapital®

PRESS RELEASE

Pretium Announces New Partnership With iCapital®

March 8, 2023

Custom Technology and Distribution Agreement Is First of its Kind for Pretium

NEW YORK – March 8, 2023 – Pretium, a specialized investment firm with over $50 billion in assets under management, and iCapital1, the global fintech platform driving access to alternative investments for the wealth management industry, today announced a custom technology and distribution agreement.

“We’re excited about our new partnership with iCapital and the range of tech-enabled solutions it will unlock for our private wealth investors and their advisors now and into the future,” said Don Mullen, Founder and CEO of Pretium.

Since its founding in 2013, iCapital’s end-to-end digital platform has efficiently improved the client experience through automated subscriptions, investment process transparency, and the seamless integration of alternative investment performance and reporting.

“We are thrilled to partner with Pretium to support their priority of providing institutional-style access of alternatives to advisors and their clients,” said Lawrence Calcano, Chairman and CEO of iCapital.

About Pretium

Pretium is a specialized investment firm focused on U.S. residential real estate, residential credit, and corporate credit. Pretium was founded in 2012 to capitalize on investment and lending opportunities arising as a result of structural changes, disruptions, and inefficiencies within the economy. Pretium has built an integrated analytical and operational ecosystem within the U.S. housing, residential credit, and corporate credit markets, and believes that its insight and experience within these markets create a strategic advantage over other investment managers. Pretium’s platform has more than $50 billion of assets, comprising real estate investments across 30 markets in the U.S., and employs more than 4,000 people across 30 offices, including its New York headquarters, Dubai, London, Seoul and Sydney. Please visit www.pretium.com for additional information.

This material is provided for informational purposes only and is not intended as, and may not be relied on in any manner as legal, tax or investment advice, a recommendation, or as an offer to sell, a solicitation of an offer to purchase or a recommendation of any interest in any fund or security offered by Institutional Capital Network, Inc. or its affiliates (together “iCapital”). Alternative investments are complex, speculative investment vehicles and are not suitable for all investors. This material does not intend to address the financial objectives, situation or specific needs of any individual investor. The information contained herein is subject to change and is also incomplete. This industry information and its importance is an opinion only and should not be relied upon as the only important information available. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed, and iCapital assumes no liability for the information provided.

This material is confidential, is the property of iCapital and may not be shared without the written permission of iCapital. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of iCapital.

Products offered by iCapital are typically private placements that are sold only to qualified clients of iCapital through transactions that are exempt from registration under the Securities Act of 1933 pursuant to Rule 506(b) of Regulation D promulgated there under (“Private Placements”). An investment in any product issued pursuant to a Private Placement, such as the fund described, entails a high degree of risk and no assurance can be given that any alternative investment fund’s investment objectives will be achieved or that investors will receive a return of their capital. Further, such investments are not subject to the same levels of regulatory scrutiny as publicly listed investments, and as a result, investors may have access to significantly less information than they can access with respect to publicly listed investments. Prospective investors should also note that investments in the products described involve long lock-ups and do not provide investors with liquidity.

Relationship Between iCapital and Underlying Fund GPs (defined as Underlying Fund GPs of products offered on the iCapital platform where iCapital is acting in an investment advisor capacity). iCapital is not a current client of, or investor in a private fund advised by, the Underlying Manager; however, iCapital sponsors and manages the Access Fund, which is or is expected to be an investor in the Underlying Fund, a private fund managed by the Underlying Manager. Prospective investors in the Access Fund should be aware that, as a result of the relationship between iCapital and Underlying Fund GPs and its affiliates created by the access fund arrangement discussed herein (1) iCapital is financially compensated for the arrangement by payment of certain management fees (which are calculated as described in “SUMMARY OF PRINCIPAL TERMS OF THE ACCESS FUND – Management Fee” or corollary section of the Access Fund Offering Memorandum) and, if applicable, certain fees for placement of investors in the Access Fund or the Underlying Fund (which are typically calculated as a percentage of an investor’s aggregate commitment to the relevant fund), and (2) the existence of such compensation may create conflicts of interest whereby, for example, iCapital may be more inclined (a) to establish access funds (including the Access Fund) (i) for investment in underlying funds (including the Underlying Fund) sponsored or managed by the Underlying Fund GPs and its affiliates, than for investment in investment funds sponsored or managed by other fund managers, and (ii) upon terms and conditions more favorable to the Underlying Fund GPs and its affiliates than iCapital would otherwise agree to in the absence of such compensation; (b) to make positive statements about the Underlying Fund GPs and its affiliates in order to encourage investors to make a larger commitment to the Access Fund, thereby increasing the fees paid to iCapital, or (c) to vote or exercise consent rights in respect of interests in underlying funds (including the Underlying Fund) held by access funds (including the Access Fund) in a manner more favorable to the Underlying Fund GPs and its affiliates than iCapital would otherwise vote or exercise in the absence of such compensation.

Securities and services may be offered through iCapital Securities, LLC, Axio Financial LLC, and/or SIMON Markets LLC, each of which is a registered broker/dealer, member FINRA and SIPC, and subsidiary of Institutional Capital Network, Inc. (“iCapital”). iCapital Advisors, LLC, a subsidiary of iCapital, is an investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”). These registrations and memberships in no way imply that the SEC, FINRA or SIPC have endorsed the entities, products or services discussed herein. iCapital and iCapital Network are registered trademarks of Institutional Capital Network, Inc. Additional information is available upon request.

© 2023 Institutional Capital Network, Inc. All Rights Reserved.

 


1. Institutional Capital Network, Inc., and its affiliates (together, “iCapital Network” or “iCapital”)

Pretium’s Housing Insights, February 2023

INSIGHTS

Pretium’s Housing Insights, February 2023

February 28, 2023

Summary

Single-family and multifamily supply outlooks have diverged meaningfully.

It will likely take much longer to absorb multifamily vs. single-family units under construction.

During the pandemic, both single-family and multifamily construction climbed in response to strong home purchase and rental demand. The contraction in construction over the past nine months has played out differently, with single-family construction falling sharply while multifamily construction has been much slower to react. As of January, single-family starts have been falling for a year and are already down 35% from their pandemic peak; on the other hand, multifamily starts were still reaching new multidecade highs in November1. The differing trajectories are partly driven by the inherently greater flexibility of single-family homebuilding where each unit is started independently vs. multifamily projects where all units in a structure are started at once. Also, single-family projects typically have shorter timelines and are less complex compared to multifamily projects2. Finally, since 95% of singlefamily homes are built for homeowners, their rate of building is especially sensitive to changes in consumer behavior and mortgage rates; on the other hand, 94% of multifamily units are built for investors who have longer-term time horizons3.

The difference in trajectories of single-family vs. multifamily construction has important implications for the rate at which construction backlogs are likely to be worked down. The number of housing units under construction reached record highs during the pandemic driven by the synchronized surge in home purchase and rental demand. The sharp contraction in single-family construction means that as of January, the pace of single-family completions is 45% higher than the pace of new single-family units being permitted1. As shown in Exhibit 1, single-family construction backlogs have been falling since mid-2022 and at their current pace of decline will be back at pre-pandemic levels by mid-2024. By contrast, multifamily construction backlogs are still rising since multifamily permits remain 70% higher than multifamily completions. As shown in Exhibit 2, multifamily construction backlogs are approaching their all-time highs of 994,000. Even if multifamily construction backlogs began to decline immediately, Pretium estimates that it could take until mid-2026 for multifamily construction backlogs to return to their pre-pandemic levels.

As described in Pretium’s November 2022 Housing Insights, we believe that supply-demand imbalance will remain a central driver of US housing market dynamics4. Elevated construction pipelines aren’t enough to resolve a supply-demand imbalance that measures in the millions5; however, they do represent both an investment risk and opportunity as developers work their backlogs down. Over the next 12-18 months, we expect single-family homebuilders to continue to be proactive in working to reduce their construction backlogs, but not in a manner broadly disruptive to single-family home prices. The multifamily outlook is cloudier given the continued momentum of construction and the potentially long period over which it will be resolved.

Exhibit 1

Exhibit 2

Source: US Census, New Residential Construction, as of January 2023.

Want more Housing Insights from Pretium?: Increased long-distance migration persisted in 2022

This is not an offer, advertisement, or solicitation for interests in any Pretium managed vehicle and should not be construed or relied upon as investment advice or as predictive of future market or investment performance. Past performance is not indicative of future results.


1. US Census, New Residential Construction, as of January 2023.
2. NAHB, “Slightly Longer Time to Build Apartments in 2021”, July 7, 2022 and “How Long Does it Take to Build a Single-Family Home”, September 30, 2020.
3. US Census, “Quarterly Starts and Completions by Purpose and Design”, as of 3Q22.
4. Pretium Housing Insights, “The US is already underbuilding again, worsening the long-term supply shortage”, November 2022.
5. Pretium White Paper, “The US Housing Shortage”, October 26, 2021.

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June 2022

Pretium’s State of ESG Report

Read here to learn more.