FireSide Podcast Summary: "The Takeaway with Troy Gajeski: How Andrew Beckman Approaches Credit"

Release Date: February 26, 2025

Introduction

In this engaging episode of FireSide, FS Investments’ podcast series, host Harrison Beck sits down with chief market strategist Troy Gajeski and Andrew Beckman, the head of FS Investments' global credit business. Recorded live from the FS Investments’ New York office, this discussion delves deep into the intricacies of credit markets, investment strategies, and risk management from the perspective of seasoned professionals.

Andrew Beckman’s Career Journey and Expertise

The conversation kicks off with Harrison Beck introducing Andrew Beckman, who outlines his extensive 20-year career in credit. Graduating from Wharton, Andrew transitioned from investment banking at Solomon Smith Barney to private equity, where he honed his skills in sourcing opportunities and managing distressed debt. His tenure at Goldman Sachs in the Special Situations Group marked a pivotal moment, emphasizing dynamic and tactical investing within credit markets. Andrew further enhanced his expertise at Magnetar Capital, focusing on risk management and portfolio construction.

Notable Quote:

Andrew Beckman [01:23]: "The confluence of deep hardcore private equity underwriting, Goldman very tactical strategy, and Magnetar Risk defines where I am today."

Building FS Investments’ Credit Platform

Andrew explains his decision to join FS Investments was driven by a desire to recreate a specialized credit business with a core middle market focus. Over eight years, the credit team has grown to manage over $7 billion across five strategies, encompassing liquid public credit, public-private credit, and entirely private credit investments. The team consists of 23 professionals, more than half being managing directors, many of whom share the Goldman Sachs heritage, fostering a culture of strategic and disciplined investing.

Notable Quote:

Andrew Beckman [05:14]: "Our mandate is private credit with an opportunistic tilt, allowing us to pivot and allocate capital where the best opportunities lie."

Current Dynamics in Credit Markets

Andrew observes that credit markets have evolved significantly, becoming more bifurcated. The large private credit market now mirrors public credit in terms of covenant and pricing structures, while the core middle market remains distinct, focusing on underbanked and smaller businesses. This bifurcation presents both challenges and opportunities for investors seeking alpha rather than mere beta.

Notable Quote:

Andrew Beckman [07:13]: "The private credit market has become more bifurcated, with the core middle market offering differentiated opportunities compared to traditional private credit."

Troy adds that the growth in private credit has led to a split between alpha and beta managers, emphasizing the importance of selecting managers who can add meaningful value beyond market exposure.

Notable Quote:

Troy Gajeski [08:31]: "As private credit markets have grown, there's far more opportunity to add alpha, but also to detract alpha. Pick your manager carefully."

Assessing Relative Value and Risk vs. Reward

Andrew discusses FS Investments' approach to balancing risk and reward across private and public credit. He highlights the importance of downside protection and spread premiums, aiming for investments that offer higher spreads with better recovery prospects. This strategic balancing act ensures that the portfolio can weather varying economic conditions.

Notable Quote:

Andrew Beckman [10:47]: "We weigh downside protections and spread potential together, striving for investments that offer better spreads and stronger recoveries."

Troy emphasizes the necessity of choosing managers who focus on alpha generation, pointing out that many funds may inadvertently take on more beta than intended due to insufficient deal flow.

Notable Quote:

Troy Gajeski [12:47]: "Private credit is now a multi-trillion dollar asset class. Focus on the alpha areas where managers can truly differentiate themselves."

Deal Sourcing and Competitive Differentiation

Andrew outlines FS Investments’ robust deal sourcing strategy, which differentiates them from mid-sized peers. Their network encompasses sponsor-based sourcing, non-sponsor intermediaries, a proprietary partnership with JP Morgan, and a firm-wide sourcing network. This multi-faceted approach ensures a high-quality deal flow, allowing FS Investments to select the most promising opportunities.

Notable Quote:

Andrew Beckman [24:02]: "Our differentiated sourcing network, including a proprietary relationship with JP Morgan, allows us to compete effectively in the middle market."

Troy adds that having a strong sourcing network combined with rigorous diligence processes ensures that FS Investments maintains a high bar for investment selection, leading to superior portfolio performance.

Notable Quote:

Troy Gajeski [29:30]: "Always have four times more high-quality investable ideas than the capital you're deploying to maintain a high investment standard."

Risk Management and Downside Protection

A significant portion of the discussion focuses on risk management. Andrew emphasizes the importance of structuring investments creatively to safeguard downside, leveraging his distressed investing background. FS Investments pre-wires investments with protections to ensure high recovery rates even in adverse scenarios. This proactive approach is crucial in maintaining portfolio resilience against economic downturns.

Notable Quote:

Andrew Beckman [29:44]: "Our biggest focus is figuring out what the downside looks like, modeling it, understanding our protections, and ensuring structural safeguards are in place."

Troy highlights the broader market challenges, such as higher interest rates and the impact on debt service coverage ratios, which could lead to increased defaults. He underscores the importance of robust underwriting and recovery strategies to mitigate these risks.

Notable Quote:

Troy Gajeski [31:17]: "In a higher for longer interest rate environment, debt service coverage ratios are lower, potentially leading to more defaults."

Middle Market Focus and Investment Philosophy

Andrew clarifies FS Investments' definition of the middle market, focusing on underbanked businesses that lack access to syndicated credit markets. This niche approach allows them to negotiate better terms, enhance downside protection, and achieve higher spreads, distinguishing them from larger private credit funds.

Notable Quote:

Andrew Beckman [17:00]: "Middle market for us means focusing on underbanked businesses that aren't competing in the syndicated route, enabling better terms and higher spreads."

Troy elaborates on the significance of the middle market within the US economy, emphasizing the surge in private enterprises and the expanded opportunity set for generating alpha.

Notable Quote:

Troy Gajeski [19:44]: "The broad middle market is clearly the place to be in private markets, offering vast opportunities to add alpha."

Final Takeaways

As the episode wraps up, both Troy and Andrew share key takeaways for listeners:

• Troy Gajeski emphasizes the necessity of selecting managers who focus on alpha generation over mere market exposure, especially given the increased bifurcation in private credit markets. He highlights FS Investments' commitment to extracting income, adding alpha, and minimizing downside risk.

  Notable Quote:

  Troy Gajeski [37:33]: "Pick your manager carefully. There's much more differentiation in private credit today than there was 10 years ago."

• Andrew Beckman echoes the importance of understanding the nuanced landscape of private credit today. He advises investors to meticulously assess the specific type of private credit product and its potential performance across different market scenarios.

  Notable Quote:

  Andrew Beckman [38:29]: "Private credit no longer means the same thing. Look carefully at the type of product you're investing in and whether it’s an alpha or beta product."

Conclusion

This episode of FireSide offers a comprehensive exploration of the current state and future directions of credit markets. Through the expertise of Troy Gajeski and Andrew Beckman, listeners gain valuable insights into effective credit investment strategies, the importance of robust risk management, and the critical role of selecting the right investment managers. For those interested in deepening their understanding of credit markets and investment approaches, this conversation serves as an essential resource.

For more insights from Andrew Beckman and Troy Gajeski, visit fsinvestments.com.

Credits

• Host: Harrison Beck, Content Strategist, FS Investments
• Guests: Troy Gajeski, Chief Market Strategist; Andrew Beckman, Head of Global Credit
• Production: Edited and engineered by Aaron Sherman; Video edited by Melissa Vendetti
• Special Thanks: Ellie Zhang and Laura Coleman

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