Opportunistic Credit

Opportunistic Credit is a flexible credit strategy that invests where risk-adjusted returns are most attractive at a given time: stressed loans, discounted bonds, structured credit, rescue deals, or bespoke financings. The objective is to exploit market dislocations—when forced selling, refinancing gaps, or complexity creates mispricing—and to build positions with strong downside protection through structure and documentation.

Unlike traditional private credit focused on steady income, opportunistic credit often accepts volatility and complexity in exchange for higher expected returns. The underwriting priority becomes: (1) margin of safety at entry, (2) clear downside recovery, and (3) the ability to hold through turbulence without forced exits.

How allocators define opportunistic credit risk drivers

• Entry price vs intrinsic value: discount to recovery value and stress scenarios
• Structural protection: seniority, collateral, covenants, remedies
• Liquidity and drawdowns: ability to hold through volatility
• Catalyst dependence: if returns require a specific event, timeline risk rises
• Issuer behavior: liability management risk and sponsor aggressiveness
• Macro sensitivity: rate and growth exposure, sector cyclicality
• Concentration risk: single-name outcomes can dominate fund performance

Allocator framing:
“Is the return coming from a real margin of safety—or from hoping the market normalizes fast?”

Where it matters most

• periods of market stress with forced selling and refinancing gaps
• transitional environments (rate shocks, sector-specific downturns)
• complex credit situations where specialist skill creates edge

How it changes outcomes

Strong discipline:

• captures asymmetric return profiles through discounted entry and strong structure
• improves portfolio resilience by investing with recovery-oriented underwriting
• exploits dispersion across sectors and capital structures

Weak discipline:

• becomes a “high yield” sleeve with insufficient structural protection
• relies on short-term market rebounds; IRR collapses if timing slips
• concentration and liquidity risk amplify drawdowns

How allocators evaluate discipline

They trust managers who:

• show recovery-first underwriting with conservative valuations
• document legal protections and priming defenses clearly
• manage liquidity (lock-ups aligned to strategy, conservative leverage)
• present case studies that include drawdowns and how they were handled

What slows decision-making

• vague definition of “opportunistic” without a repeatable framework
• insufficient clarity on downside recovery and legal remedies
• unclear liquidity terms relative to underlying assets
• overconcentration in a single sector or theme

Common misconceptions

• “Opportunistic credit is just higher yield.” → yield is not protection.
• “Discounted bonds are safe.” → they can be structurally weak.
• “We can exit if needed.” → liquidity can disappear exactly when needed.

Key allocator questions during diligence

• What is the recovery thesis and what validates it?
• Where are we in the capital structure and how can we be primed?
• What are the top downside scenarios and expected recovery ranges?
• How do fund terms match asset liquidity?
• What prevents the strategy from drifting into riskier carry trades?