Commodity Watch: A Portfolio SHIELD for Uncertain Markets

<div class="grid grid--33-66-col"><div class="col"><img loading="lazy" src="/getContentAsset/061c994a-a452-418f-bfa0-f2cf3cf5c577/cb87803a-320c-480f-ab75-7b9029eaaf79/Ahmad-Al-Sati-new.png?language=en" alt="Ahmad Al Sati - insights" title="Ahmad Al Sati - insights" style="width: 180px" class="fr-fic fr-dii"></div><span style="font-size: 12px"><div class="col"><strong>AHMAD AL-SATI<br></strong>PORTFOLIO MANAGER<br><br><p>Ahmad is the President and Portfolio Manager for Gemcorp Capital Advisors LLC, based in New York.&nbsp;<br><br>Ahmad has spent most of his career in the global credit markets. Prior to Gemcorp, Ahmad was President of Pandion Mine Finance and RiverMet Resource Capital, LP - a fund focused on investing in precious metals, where he was responsible for managing the investments and the day-to-day operations of the registered investment adviser.&nbsp;</p></div></span></div><hr><p>In the beginning, Business Development Companies (BDCs) financed themselves with secured balance sheet debt. But when BDCs’ underlying loan values plummeted during the global financial crisis, liquidity evaporated and BDC managers spent many a night restructuring their balance sheets and cajoling lenders for time and leeway. This changed during Zero Interest Rate Policy (ZIRP). Over the past 15 years, BDCs increasingly issued unsecured debt at low fixed rates to grow their loan portfolios. Interest rates reached record lows in 2021 (around 2% for some issuers) and issuances peaked in 2024 at nearly $21 billion (as 2025 was a tad smaller).&nbsp;</p><p>In parallel, software was eating the world. Both private equity and private credit grew enamoured with Software as a Service (SaaS). Software attracted approximately 7x more private equity capital in 2022 than it did in 2012. Private credit participated with gusto in the leveraged buyouts (LBOs) providing leverage at 6-8x EBITDA. The typically 5 to 7-year bullet loans relied on recurring “sticky” revenue backed by zeros and ones (there are no hard assets). Today, at least 20% of private credit portfolios are exposed to software (but it may be higher, per Bloomberg).</p><p>These trends are now colliding with AI disruption (and higher interest rates). BDCs owe $30 billion in the next three years and must refinance that debt at a point when AI might be adversely affecting the profitability and cashflows for a significant part of their portfolios. UBS expects a significant wave of defaults across the sector. JPM expects 33% of the companies to thrive, 33% to default and 33% to remain as zombies. Markets reacted. Asset managers, BDCs, software companies and software loans are all down year to date.</p><p>A shift towards hard asset businesses immune to AI might be here. Joshua Brown coined HALO (Heavy Asset Low Obsolescence) to describe potential winners from this regime change. Investing in hard assets and commodities can take many forms and across hard assets, a credit approach to commodities may be add value to portfolios.&nbsp;</p><p>SHIELD, a mnemonic, might be useful:</p><p>Short-duration self-liquidating credit (S) allows &nbsp;lenders to reprice risks in short interims. Hard assets (H) may provide salvage value when things go wrong (you actually have collateral). Income (I) from assets unrelated to health care, software and middle market private equity may potentially provide different asset exposure. The enduring (E) continues wants and needs of 8 billion people as they eat more, use more electricity and build more infrastructure means inelastic demand for food, energy and materials. Secured loans with liens at appropriate loan-to-value levels (L) could provide a margin of safety for lenders and investors. Finally, an approach that relies on debt (D) in financing commodities may mitigate against the financialization (and negative roll yields) of futures.</p><p>It remains unclear if software will run into an AI buzzsaw (the experts still disagree). And to date, private credit lender portfolios have proven resilient. However, it is increasingly clear that we are living with heightened uncertainty. In such a world, diversification may provide a lifeboat for investors seeking to navigate this sea change. To mix my metaphors, it may provide a SHIELD against a market onslaught.</p>