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9Questions is our Q&A series featuring key decision-makers in the corporate credit markets — get in touch if you know who we should be talking to!

Stephen Stites is a partner at Goldman Sachs and head of its corporate structured finance business, which earlier this year issued the first securitization backed by private equity subscription lines. 9fin caught up with him to talk about the future of capital call-backed lending and other new ABL products in 2025.

1. For those unfamiliar, describe how a capital call-backed bond works.

Beginning on the asset side, the underlying collateral includes receivables from loans backed by the uncalled capital commitments that limited partners make to closed-end funds across private equity, credit, infrastructure and real assets, among others. As is customary in securitizations, the assets were sold into a special purpose vehicle that issued term notes. The notes are issued across senior and subordinated classes and the structure includes recyclability provisions that enable the issuer to use principal repayments to acquire new receivables in the securitization structure. In addition, there were various collateral quality and coverage tests, as well as concentration limitations, that are often present in securitization transactions.

2. What are the factors — both from a macroeconomic perspective and the industry perspective — that led to this securitization?

First, and perhaps most importantly, the capital call loan market is almost exclusively funded on bank balance sheets. Depending on who you speak to, the total size of the capital call loan market globally is somewhere in the $750bn to $1trn range. In addition, it is a segment of the market that historically has had limited delinquency and loss history. When you combine the existing size of the market, its performance history and the continued growth of traditional and alternative asset managers looking for new investment grade-rated segments of the market in which to deploy capital at scale, it has led us to this outcome.

3. What types of investors (asset managers, insurance companies, etc.) bought into this product? Was there an overlap in the types of buyers you’d normally see in a mortgage-backed security or other ABS products?

Definitely. We saw a broad group of investor types that wanted to participate in the transaction. Because capital call loans have historically been a bank funded product, there has been limited ability for capital markets investors to invest directly into the space. This transaction has enabled market participants to gain access to a piece of that market. As a result, we saw interest from a broad array of investors that participate across the asset backed securities market to learn more about the underlying assets and the structure used in this deal.

4. How important is it for the rating agencies to have a standard methodology for future issues?

Investors were definitely focused on the rating outcomes across the tranches which we think ultimately help demand and pricing. We expect that more rating agencies will focus on this asset class — both in the case of rating individual capital call loans as well as future securitizations like this transaction. The key will be for there to be sufficient financing opportunities to allow for the agencies to dedicate the time and resources to further developing criteria tied to the asset class.

5. What hurdles did Goldman have to navigate in structuring this deal? Is the operational infrastructure in subscription lines, in terms of transferability and standardization, ready for the growth of this specific securitization?

I don’t know that I would characterize it as a challenge per se, but given this transaction was novel and the investor demand was there, we had to be very rigorous in our diligence process. We knew this would set the benchmark for future transactions in this space, so we were very careful to in thinking about the structure. It took us over 12 months to bring to market from the point of conception.

6. What’s the future of capital call-backed security issuances in the next several years? Do you anticipate more originators to get into this space?

We expect additional issuers to enter the market over the next several years. Ultimately, we would expect the macro backdrop — both in terms of overall funding costs in the capital markets, as well as the continued demand for banks to fund the risk — to ultimately be the biggest factors in terms of driving additional capital markets issuances backed by capital calls.

7. Outside of the capital call securitizations, what key themes have you seen this year in esoteric structured finance?

This year has seen record levels of issuance across the structured finance market as investors look to diversify away from corporates that have been trading at historically tight levels. The esoteric space is no exception, as 144a markets have digested supply from fiber, data center, whole-business securitization, solar, and music royalty ABS issuers whose volumes have surpassed or are on par with record issuance levels from 2021-2023. At GS, we have also seen more esoteric issuers seek to tap the 4(a)2 private placement markets as well, which allow issuers to create more unique structures and diversify their investor bases away from the traditional 144a investor buyers.

8. What are your predictions for development in esoteric ABS for 2025?

Looking ahead, 2025 may see a more favorable backdrop for M&A, which has seen muted activity in the past few years. This could materially impact issuers in the digital infrastructure, whole business securitization, and music royalty spaces, as sponsors look to potentially tap alternative sources of financing instead of ABS. As a result, we could see some downward pressure on supply, but it’s more likely we will see even more bespoke private placements as opposed to regular 144a transactions. As for solar issuers, they will be looking towards any changes in policy, particularly relating to the Inflation Reduction Act, as the space has shifted from loan transactions to lease transactions in the past year since the IRA had made leases more economical than loans.

9. What portion of next year’s private placement supply do you think will be distributed through a section 4(a)(2) process?

While the pace of rate cuts appears to be slower than expected, investors continue to have an axe for longer dated paper. Supply has leaned shorter in the higher rate environment, and we expect this long demand to persist, especially if we are in a higher rate environment for longer than initially anticipated.

This is a very favorable environment for continued and even heightened private placement issuance going into 2025, as most of the investors in the space are insurance accounts. Further, insurance accounts continue to benefit from a supportive technical backdrop of higher fixed annuity sales, pension risk transfers, and stable markets leading to strong cash positions. GS’s breadth of distribution is well-positioned across both 144a and 4(a)2 markets with a higher for longer rate backdrop, and we expect it to grow even further in 2025.

9Questions — Stephen Stites, Goldman Sachs — Where does capital call-backed lending go from here?

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9Questions — Stephen Stites, Goldman Sachs — Where does capital call-backed lending go from here?

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