Angel Island Capital, after more than a decade investing as a permanent portfolio company of private equity investment firm Golden Gate Capital, is spreading its wings. The San Francisco-based manager with approximately $3.4 billion of assets under management is currently deploying capital in Credit Opportunities, its flagship investment strategy, and Asset Based Opportunities.

We asked AIC’s chief executive Dev Gopalan and chief strategy officer Lynette Vanderwarker why the firm is targeting asset-based lending opportunities.

Dev Gopalan

Asset-based means different things to different people – what’s your definition?

Dev Gopalan: Investors see “asset-based” as a broad category consisting of everything from airplane leasing to structured credit to bespoke transactions to risk transfer trades. We focus on three main verticals. The first is housing, which includes lending against things like mortgage servicing rights and actual single-family homes. The second is consumer, which covers lending against pools of consumer loans. These two verticals will constitute the bulk of the assets in our Asset Based Opportunities investment strategy. Our Asset Based Opportunities strategy also includes investments in “risk transfer” opportunities, such as businesses in equipment leasing. As an example of a risk transfer loan, we’ve just closed a $28.7 million expansion loan to consumer loans business Aura, which is backed by a pool of residuals.

Why are investors branching out into strategies like asset-based lending?

ADG: Many investors exposed to corporate credit or direct lending are worried that we’re 10 years into a bull market and headed for a correction. Asset-based lending is less correlated to corporate credit and offers downside protection for the same type of return profile.

Additionally, we believe this strategy will grow as businesses grow and their capital needs expand. In our view, private sources of capital are better positioned to service such demand since these opportunities require complex solutions, which many banks are not willing or able to provide.

Lynette Vanderwarker

Which investors are potentially branching out into strategies like asset-based lending?

Lynette Vanderwarker: Public pensions, insurance companies, endowments, high-net-worth individuals and the same folks that have focused on the regular first-lien senior secured direct lending market. These are increasingly specialist, established investors looking at asset-based lending to comprise a return in the low- to mid-teens and generate a 9-11 percent current income. These investors typically understand that additional modest levels of leverage may be employed in making these types of investments and certain deal sizes may be relatively large. Now that private credit is a permanent asset allocation within many institutions’ overall allocation, the reality is that corporate credit doesn’t cut it on its own. The illiquidity premium has faded.

Why did you lend to Aura?

ADG: We first started looking at Aura in 2012. We have a strong focus on being a good partner to companies with good environmental, social and governance practices like Aura because it’s providing loans to communities that don’t have access to banks due to their credit score. The company uses payment history, for instance, remittances, to determine risk. The loan is backed by a pool of residuals segregated from the company’s other assets, which provides downside protection. There’s also a very tight covenant package, delinquency triggers and a company guarantee – multiple ways out for us to get repaid.

What does Angel Island Capital look like five years from now?

ALV: AIC aims to build out a multi-strategy credit platform – focusing on not only corporate credit but asset-based solutions – that caters to the objectives of institutional and high-net-worth investors seeking private credit exposure.