Michelle Russell-Dowe, Schroders Capital

Private Markets: 50 Women Leaders 2024

Originally published on 24 July 2024
  • Above: Michelle Russell-Dowe, Co-Head of Private Debt and Credit Alternatives (PDCA) and Global Head of Securitized Product and Asset-Based Finance, Schroders Capital, New York

Download

Private Markets: 50 Women Leaders 2024

Michelle Russell-Dowe seems to combine what might elsewhere be four roles and finds time to head the PDCA investment committee. This reflects the firm’s breadth, running the gamut of public and private markets from alternative credit to private debt, including specialty and secured debt, as well as products with asset cashflows and contingent cashflows, with year-end 2023 assets under management for PDCA of USD 32 billion. 

Schroders’ PDCA business synthesizes elements from four businesses acquired at different times: the Brookfield Investment Management global securitized products and asset finance business where Michelle worked before, insurance linked securities, infrastructure debt and Australian real estate debt. “We offer a continuum of liquid and illiquid income solutions across regions and asset classes, covering the spectrum of liquidity and return. This provides better perspective that lets us work together to run a flexible, best ideas approach. We are not a siloed business,” she explains. 

This business seeks natural puzzle solvers.

Michelle Russell-Dowe, Schroders Capital

The interconnectivity of Schroders’ business encourages partnership, objectivity and flexibility. “We find it very rewarding to learn and understand commonality, background and curiosity, and we are willing to develop connective tissue to facilitate mutual understanding. For instance, real asset solutions can use infrastructure and real estate,” Michelle points out.

The firm is still growing on the heels of the formation of its PDCA business in October 2023 and is continuing to hire problem-solvers. “We have hired sales, product and investment staff with diverse backgrounds in origination, sourcing, operations and science. Executives with science and engineering expertise are attractive candidates because this business seeks natural puzzle solvers.”

Valuation arbitrage between public and private credit might seem the most obvious way to bridge the breadth of coverage but is practically quite difficult. “As markets and bigger players grow, the arbitrages do not last as long. Over the gilt crisis, the opportunities only lasted a few months, rather than years, and to take advantage of the best Covid opportunities you had to be an active market participant, especially in March and April 2020. Leveraged loans in the secondary market briefly traded at higher yields than direct lending, but the opportunity was brief, and needed a quick response. Capital raises to take advantage of brief liquid market opportunities are sub-optimal,” says Michelle.

Compelling yield and alpha opportunities

Debt can now provide an equity-like return of 8-10%, well above past decades, and divergence between central bank policy also increases opportunities beyond straight beta. “Some investors want ABS, CLOs, CMBS, and others want to lend directly or buy receivables in private markets. There are also more tenors, maturities and liquidities to consider,” explains Michelle.

Shorter tenor assets came to the fore after the denominator effect increased weighted average portfolio durations, because some illiquids lost less value than liquids in 2022. “Schroders can fill this gap with 2-to-3-year loans,” says Michelle. At the liquid alternatives end, Schroders runs Schroder GAIA CAT Bond, one of the largest CAT Bond funds. This asset class currently offers higher yields in a UCITS format, higher than many semi-liquid strategies.

Pension funds’ funding status in the US, UK and Europe can also change their asset allocation. “Some pension funds are annuitizing, which increases their demand for higher quality, secured investments. They are asking for infrastructure, asset-based finance, and investment grade private debt. We need to source, assess the right collateral and structure,” explains Michelle.

Outlook for rates and economy

“We are more bullish than most on the US economy, and globally, US housing is our favorite for risk taking today. We also like infrastructure for more defensive and more predictable cashflows. We manage with lower exposure to spread duration and to interest rates, based on our macro view,” says Michelle. For three years, 2021-2023, the team were accurately hawks on rates and in March 2024 Russell-Dowe doubted the consensus for US rate cuts, which have been pushed back as the US economy continues to defy the Cassandras. She is becoming more selective after the credit “panic buying” filtered through to ABS, CLO and CMBS and tightened spreads. “Yields look high, but risk premiums are low. We see better value in more inefficient markets, including the mid-market CRE debt and bank risk transfers.”

Avoiding some CMBS and commoditized direct lending

These top-down views dovetail with Schroders’ distinctive bottom-up approach to investing in MBS, ABS, CMBS and CLO, and the related private alternatives. “Fundamentals come first, always with high quality. Deep data dives can drill down to the individual loans,” explains Michelle. She has concerns about parts of the CMBS market. “We were one of the first sub-investment grade buyers back in the late 1990s/early 00s, based on rich data, but multi-borrower markets are one of the most misunderstood markets. The difference between whole loans and securitizations is that we need to look at the worst five loans, those that will be the first to default. Par is never the right price. The analysis needs to be very specific to borrowers and regions.”

It is hard to generalize about mid-market private debt yield pickups because the market is somewhat segmented, but some of them have compressed too far. “We do not favor corporate direct lending, which only pays -10% for straightforward, traditional lending. Margins and origination fees have both declined. Traditional direct lending is becoming overcrowded and more of a beta play than an alpha play, or the quality is being compromised in the most recent vintages. This is partly because the CLO machine has been very busy with 32 resets, refinancings or new issues in one week. CLOs no longer only serve the BSL (broadly syndicated loan) market, but also middle market direct loans. Other asset backed strategies are more interesting,” says Michelle. Competing with the most robust securitized markets doesn’t seem the right call to Russell-Dowe, but an awareness of the public markets is key to her investments.

Majoring on bank risk transfer

Regulatory capital and significant risk transfer deals for banks can pay more than the equity of a private credit CLO. “SRT deals are sometimes a better way to get greater risk premium than through a “similar” CLO. SRT can be exposed to revolving investment grade loans, with attachment points offering a low risk of loss. We estimate SRT might pay 2%-3% more than the comparable CLO attachments. There are easier ways to get a 9-10% net interest margin than CLO equity. We are busy reviewing a lot of term sheets,” says Michelle.

She sums up: “We do also have financial goals as business builders. We’ve designed our team to be very scalable, and while credit is one of the most misunderstood markets, we know it well.”

Education

BA Economics, Princeton University; MBA Finance, Columbia