Last year, two friends who met at the Stockholm School of Economics almost 20 years ago began realizing an old dream of building something together.
They co-founded Ridge Capital AB, which enables professional investors to invest alongside the two founders in a focused Nordic high-yield strategy.
Both Christoffer Malmström, CIO and lead portfolio manager, and Måns Levin, CEO and portfolio manager, had been working abroad and in Sweden before they decided the time was right to start Ridge Capital on their own.
The timing could not have been any better, they argue. With the prevalent equity market turmoil on the back of higher interest rates and soaring inflation, the bond market looks very attractive relative to other asset classes.
Some might think: Why leverage on leverage? But for us, it’s a very good opportunity.
The strategy focuses on what the team defines as the better half of the EUR 50bn Nordic high-yield segment.
“As credit investors, the glass is always half empty rather than half full. We focus a lot on downside protection. We like to invest in companies with very strong cash flow generation, a good asset base, and owners that can support with capital if necessary,” Malmström tells AMWatch.
The strategy is categorized as Article 8 under the EU’s Sustainable Finance Disclosure Regulation (SFDR), meaning that it considers and promotes ESG and sustainability.
“We apply a bottom-up due diligence approach, analyzing a company’s operations, financials, market, and ESG risks. All areas carry equal weight, and we wouldn’t consider investing in a company underperforming in any part,” Malmström explains, adding:
“In our experience, businesses that have appropriate ESG procedures in place and are conscious of how to mitigate risks relating to ESG typically are also among the top performers in the portfolio.”
Growing much bigger than that, it becomes challenging to deliver returns above the market, as you are forced to buy almost everything
As the strategy has monthly liquidity, this enables the managers to have a focused portfolio of currently 25 to 30 positions, compared to other plain vanilla Nordic high-yield funds under the UCITS regime with more than a hundred different bonds to avoid liquidity risk.
“Obviously, it is very challenging to do any sort of deep analysis with that many positions if you are only one or two portfolio managers, and such funds better resemble a passive rather than an active strategy,” says Malmström.
As assets under management – and with that, the number of positions – increase, the two portfolio managers expect to hire more portfolio managers.
“It’s not a matter of a maximum number of positions, but rather how many holdings one portfolio manager may cover and still stay on top of them all,” says Levin.
We target to reach a maximum of EUR 300m to still be able to deliver the return target. Then we are less than 1% of the Nordic high-yield market.
The monthly liquidity and the fact that the strategy is only aimed at professional investors enable the managers to manage the portfolio more actively as well as use leverage.
“Some might think: Why leverage on leverage? But for us, it’s a very good opportunity. The market is currently yielding 10%, and the strategy is looking to outperform the market. Rather than buying higher-risk companies paying high coupons, we can take down the credit risk and buy better quality bonds with lower yield and risk, and apply moderate leverage. We substitute some of the credit risk for financial risk if that makes sense,” says Malmström.
The Nordic corporate bond market is not always very liquid, and this is an issue, especially for investors looking for daily liquidity.
“Obviously, it creates a liquidity mismatch risk if you offer your investors daily liquidity while you sit on a portfolio of not so liquid assets,” says Malmström.
It’s very important to us that we are able to run the company with a sound long-term view. We have invested most of our own money as well.
The founders decided to go for monthly liquidity to match the liquidity of the portfolio and the bond market better.
Ridge Capital currently has commitments of EUR 30m without leverage, an amount the two portfolio managers expect to reach EUR 50m in the coming months.
So far, there are around 20 investors consisting of Tier 2 and 3 institutional investors, as well as foundations, family offices, private equity and hedge fund partners, as well as professional ultra-high net-worth individuals and billionaires.
“We target to reach a maximum of EUR 300m to still be able to deliver the return target. Then we are less than 1% of the Nordic high-yield market,” Levin says.
And there are good reasons not to become bigger.
“Growing much bigger than that, it becomes challenging to deliver returns above the market, as you are forced to buy almost everything. It’s also much more difficult to be opportunistic in the secondary market, where we find the most value, as the volume you need to buy would move the price in individual bonds too much,” Malmström explains.
The two founders each own 50% of the company, meaning that it is fully independent.
“It’s very important to us that we are able to run the company with a sound long-term view. We have invested most of our own money as well,” explains Levin.