CEF Insights: CAPIX: An Interval Fund for Broader Private Credit Access

Transcript

CEFA:
Welcome to CEF Insights, your source for closed-end fund and interval fund information and education, brought to you by the Closed-End Fund Association. Today we are joined by Phil Bauer, Senior Vice President and Portfolio Specialist with Calamos Investments. Calamos partners with Aksia in managing portfolios focused on private credit strategies including Calamos Aksia Credit and Income Fund, an interval fund with symbol CAPIX. Phil, we are happy to have you with us today.

Phil Bauer:
Hey, great to be here. Thanks for having me.

CEFA:
Phil, as I mentioned, Calamos and Aksia manage an income strategy that invests in a broad range of private credit sectors. Can you discuss the investment strategy as well as the key objectives?

Phil Bauer:
Yes, absolutely. And so at a high level, the fund's goal is really to allocate across the full spectrum of private credit and generate a high level of current income for its investors, which we pay out monthly for this fund and has been about 9.5% annualized over the two years since we launched the fund. But in order to do that, Calamos partnered with Aksia, who was one of the largest private market specialist consultants in the world, in order to design this fund to be a simple one-stop shop solution to give investors full access to the market.
And that's important because the vast, vast majority of private credit funds in market today are purely focused on direct lending. Most of them even specialize in a particular area of direct lending like upper middle market or lower middle market. And so we thought that it was important for this fund to be designed to really take advantage of that evolution and expansion of the private credit market and be able to allocate not only to direct lending, but also to the other areas of the market like asset backed finance, infrastructure lending, and real estate credit.
And so the fund is really designed to give you diversification across each of those sectors and then be highly tactical at the subsector level in allocating to the areas that we are finding the most relative value. And the way that we do that, the reason that we are able to bring a one-stop shop solution to market is because of Aksia's scale and their business model of being on the consulting side and knowing which GPs are best in breed across each of those subsectors. So what we do within this fund is that we co-invest alongside who Aksia believes to be some of the best of the best within each of those sectors. And because of Aksia's scale, we get access to a lot of those deals on a no fee, no carry basis. And so we're able to wrap that up into one fund and manage it that way.

CEFA:
What advantage does an interval fund structure provide for a private credit strategy? And what should investors be aware of when considering an interval fund product?

Phil Bauer:
Right. So it's incredibly important I think for investors to understand the structure of this fund and some of the differences between other fund structures like it, whether it be a BDC. And so from an interval fund perspective, you can think of it as being the exact same as a mutual fund in pretty much every way. And so you have a ticker, you can invest in it on a daily basis. There are no subscription docs. You have 1099 tax reporting. But the major difference is that liquidity on the way out is only offered on a quarterly basis and even on a quarterly basis it's limited to about 5% of the fund's net asset value.
And so while mutual funds can trade in and out daily, the way out for an interval fund is on a quarterly basis, but it's that liquidity profile that allows the fund to invest in private markets. And so 90 to 95% of this fund is going to be in direct private credit loans. And so if you structure these funds correctly and conservatively, like we think we have, it prevents you from ever really having to be a forced seller of an illiquid asset because you always know specifically what your max outflows are going to be and specifically what day they're going to be.
And so what that allows us to do is really take advantage of the fact that we can put together a fund that historically investors could only get exposure to really via drawdown funds that lasted 8 to 10 years where they had zero liquidity and give them rebalancing liquidity, but still give them 90, 95% pure private credit exposure.
And so when you think about how that is different from BDCs, for instance, which historically were the primary way for investors to get exposure outside of drawdown funds, what the major differences are that fees tend to be lower. And you generally don't see incentive fees within the interval fund space, you pretty much always see them within BDCs, and the way those are structured is on accrued income. And so by avoiding those, you effectively halve the cost of a lot of the funds. There are no subscription docs with an interval fund. With the BDC, you typically have subscription docs. And then the liquidity for the interval fund is guaranteed on a quarterly basis up to 5%. For a lot of other funds like BDCs, it is still discretionary.
And then the final one, again, the point of this fund is to be highly diversified and have the ability to invest across the full spectrum private credit, whereas BDCs, because of the regulatory structure are largely limited to invest in corporate credit. And so those are some of the major differences between interval funds and why we think for the investment universe that we're targeting it's really the perfect structure for this fund.

CEFA:
Phil, does private credit provide a degree of diversification to a portfolio that investors may not get from more traditional fixed income investments?

Phil Bauer:
Yes, we definitely think so. I mean, we view diversification as one of the key benefits for investing in private credit, and that's really on a few dimensions. And so the first is that the asset class is almost entirely floating rate, and so you really have no mark to market sensitivity to the movement in long-term interest rates. And because of that, the correlation with, say, core bonds or treasuries tends to be incredibly low. And that's also the reason why the volatility profile for a lot of these funds have been really low relative to traditional fixed income. Because again, you're isolating credit risk, you're not taking any serious duration risk.
Then the other point is that the underlying collateral for these loans can be quite different. For instance, about 50 to 60% of our portfolio will be invested in asset backed finance where you generally will have hard collateral or financial collateral that is just different than investing in corporate credit where you're relying on a business's earnings to pay you back. And so when you combine those two, you really get good diversification away from treasuries and core bonds, but it also helps you diversify away from a lot of investor portfolios that are heavily allocated to corporate credit or equity risk.
And then again, the last point again, to the interval structure discussion that we had earlier is that because these funds aren't daily liquid you're largely immune from the technical selling pressure that you see within public markets. And so we think you wrap that all together. It's a great way to allocate to the space and honestly, a way to generate income without having a ton of volatility that's highly correlated with what's going on in the public side of your book.

CEFA:
Your strategy invests in a broad range of credit sectors, including outside of direct lending. How do you make specific credit selections and allocate those positions as you build your portfolio?

Phil Bauer:
So this is really where Aksia's expertise and scale comes into play. And so the Aksia team are seeing deal flow from across the full market of hundreds of underlying GPs or managers. And so we are co-investing alongside them. And so Aksia is seeing deals from who they believe are best in breed across all of the various sectors of private credit and effectively selecting which areas of the market and which specific deals they think are most attractive at that point in time.
And so just to put that into perspective, since we launched this fund about two years ago, the Aksia team has reviewed over $53 billion in deal flow from over 300 different managers. And again, that's for a portfolio that's $700 million today. So it just gives you a feel for the origination function, which is what allows us to make real time relative value decisions. And again, a lot of that is purely supply-demand driven. If you have a lot of capital chasing a few deals in a specific market, it becomes pretty clear that maybe that's an area that you should avoid, it's getting frothy relative to others. But you really have to have the ability to see flow from these other areas to really take advantage of that. And so that's really the biggest difference between this fund versus a lot of other private credit funds out there.

CEFA:
What would lead you to change your portfolio allocation?

Phil Bauer:
From a high level sector perspective? It doesn't move too much quarter over quarter because we view sector diversification as a key value prop for this strategy, but at a subsector level we will be quite flexible. And so I can give you an example of that. About 40% of the portfolio is invested in direct lending specifically. And so when we launched this fund in 2023, you had just come off the back of the Fed raising interest rates quite sharply in 2022, which caught the high yield and bank loan markets offsides. And so you had effectively two years where companies that needed access to financing really had to tap private credit. And so you saw a very limited competition. You were getting pretty juicy spreads for large companies. And so that was a unique moment in time where the upper middle market specifically within direct lending was highly attractive.
And so in 2023, we did quite a bit of our middle market direct lending. And then fast-forward to January, 2024, you had the bank loan market come back in and really compete down the spreads in a lot of those deals. And so, we, having the broader opportunity set, we're able to pivot just the holdings within our direct lending exposure towards lower middle market, European and non-sponsored deals. And so that's an example of, hey, the macro environment shifted and we were able to take advantage to shift the portfolio to the areas that were just more attractive.

CEFA:
Phil, the Federal Reserve has been maintaining rates at current levels, and we have a new administration that has introduced significant changes in policy. Where do you see the fixed income markets currently and what is your outlook for the rest of 2025?

Phil Bauer:
Yeah, I think public fixed income markets are pretty tough today. You have higher rates that seemingly are going to be with us for a longer period of time, and you also have highly compressed spreads. You have longer term rates that seem to be anchored by deficit worries and fiscal policy uncertainty, and then you have shorter term rates that seem anchored a little bit higher due to tariff uncertainty and the potential inflation ramifications because of that. And so we think with higher for longer interest rates, you're not really getting a massive benefit from core bonds or longer duration exposure. From a credit perspective side, you're not really getting paid to take that level of risk in high yield bank loans. Those spreads have compressed all the way back to pre-2007s tights, even though we had a moment of what we thought was going to be significant volatility post the tariff announcements.
And so we think that that area of the public credit markets are just highly efficient and you're not really getting paid to take that risk. And so we don't really see that changing anytime soon. Which is again, why we think that diversifying in the private credit, particularly the areas where that banks are getting forced out of, is really where you want to start positioning your portfolio for income needs over the next three to five years.

CEFA:
What are the most significant risks in the current environment?

Phil Bauer:
So within private credit specifically, we think the biggest risks in market today, are actually deals that were done before the Fed started raising interest rates in 2022. And so deals that were done in 2019, 2020, 2021, those are deals where companies thought they were going to be borrowing at 6 or 7% type yields. But fast-forward to today, the Fed raised rates now they've been borrowing over the last two and a half years closer to 11, 12%. And so you're starting to see that type of stress really take its toll, and you're seeing that within private credit portfolios as being their allocation to payment in kind or PIK interest, which you're starting to see pick up particularly within BDCs. And so by far, we think the biggest risk in market today are those legacy pre-2022 loans because a lot of the high quality ones have already been refinanced out of the market. And so that is by far the biggest risk in today's market.
If you fast-forward to two or three years from now, where we see the biggest risks evolving are consumer credit. You have tariffs coming through, that's going to take its toll on the consumer, in our mind, you weren't really getting paid to take that type of risk coming into this situation. But then the other one is in the upper middle market of direct lending. You have a lot of larger managers that have raised a ton of flow that have to put money to work in that particular area of the market, again, because of their narrow universe. And at the same time, they're competing with the bank loan market. And so what you've seen is spreads compressed pretty dramatically over the last 18 months, and at the same time you've started to see some covenants get looser and leverage has picked up. And so that is an area that in a couple of years we could start to see some stress in.

CEFA:
Do you expect there to be differences in performance between the broad public and private credit markets?

Phil Bauer:
Yeah, I think absolutely. If you look at the index data really over the last 15, 20 year periods, that's what you've seen. You've seen the data of private credit outperform the bank loan and high yield markets by almost 3% annually, and that's with loss rates that are right in line with each other at about 100 basis points to 125 basis points. And so historically, you've seen that outperformance without taking on more risk of loss. So you're getting that 3% not for free because you are giving up liquidity, but we would say at a similar level of capital risk.
But ultimately we think short-term performance is going to ebb and flow. But over those longer term periods, the data has been pretty clear that allocating to diversified private credit is a pretty good way to outperform allocations to public credit markets, which makes sense because the cost of capital is higher for these funds, and private credit is just a less efficient market. It's not an area of the market where you can go on your Bloomberg terminal, type in a CUSIP and get exposure to, you really do need to have the abilities to originate and structure these loans and hold them to maturity because there isn't yet a robust secondary market for these loans.

CEFA:
How is the private credit strategy currently positioned?

Phil Bauer:
So the fund is about 40 to 45% allocated towards direct lending. And again, that is diversified across the full spectrum direct lending with a tilt towards lower middle market or European or non-sponsored deals. And then the other 50 to 60% is in these complimentary areas of the market, like asset-backed finance, real estate credit, and real asset credit. And so we think that with that level of diversification, we're able to provide, in our mind, a more robust and stable yield and income generation.

CEFA:
Where do you see the best opportunities to invest in new capital?

Phil Bauer:
Yeah, so a couple of the areas that we find interesting today, and a lot of it again, is supply-demand driven. The first I would say is commercial real estate. And so you have this interesting dynamic where historically regional banks are the ones that originated a lot of the commercial real estate loans in the US, over 50% actually historically, but at the same time they had a ton of exposure to office coming into 2020, which has prevented them from really making new loans over the last 12 months. And this is happening at the same time there's about a $2 trillion need for refinancing just within commercial real estate, and you have the primary lender out of the market. And so that's an opportunity where we can lean in, provide capital on a highly selective basis, don't have to even touch office space, and you can really center on industrial or multifamily or hospitality and then generate spreads in the 650, 700 basis point range with lower LTVs than historically were the case. And so that's an area that we find attractive today.
And then a higher-level term that we use is liquidity solutions. And so you've probably read headlines where particularly private equity funds, but also private credit funds have just been really slow to distribute capital back to their LPs, and these are drawdown funds that we're talking about. And so figuring out ways to lend money to them to help them work through these situations where you have a motivated buyer of your capital and you can lend to them 10, 12% type yields with LTVs, sub-20% for private equity and sub-50% for private credit. We believe that risk reward is really shaping up to be great value, and it's a place that we've been allocating to quite a bit over the last year.

CEFA:
Phil, how do you see an actively managed private credit strategy best positioned in a diversified investment portfolio?

Phil Bauer:
Yeah, so if you simplistically think of the typical asset allocation as being 60/40 or 70/30, and that 30 or 40% has traditionally been fixed income, that fixed income exposure is really designed to do two things. It's to play defense and generate income. We view diversified private credit as by far the most effective way to generate income. And we went over the performance statistics earlier where you have historically received about 3 to 4% of outperformance related to public credit markets, but you have to give up some level of liquidity. We think the interval fund structure in being quarterly liquid up to a point is still, if you're willing to give up some level of liquidity, that is still in our mind, the best way to generate income, bar none, particularly if you are diversified like what this fund is.

CEFA:
Phil, thank you so much for taking the time to join us today.

Phil Bauer:
Thank you.

CEFA:
And we want to thank you for tuning into another CEF Insights podcast. For more educational content, please visit our website at www.CEFA.com.

Podcast recorded June 2025.

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This material is not and is not intended as investment advice, an indication of trading intent or holdings or the prediction of investment performance. All fund-specific information is the latest publicly available information. All other information is current as of the date of this presentation. All opinions and forward-looking statements are subject to change at any time.
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