Signal Capital Partners has proudly styled itself as a European credit specialist since it was formed in 2015, believing it holds an edge versus US asset managers looking to expand on the continent.
That focus could serve the firm well with founder and CIO Elad Shraga stating that, with Europe on the cusp of a stimulus drive, the implications for credit funds are potentially game-changing. So often the critique against European credit is that it’s not deep enough (certainly in comparison to US credit markets), but such is the scale of the projected investment and associated financing requirements in Europe that there should be plenty to go around.
In this interview Shraga outlines how challenging it has been for credit fund managers to navigate around geopolitical noise. It’s not quite panic stations, but he says that tail risk has increased and pricing has not caught up to this fact.
And while market participants might be looking at data centre financing as the next big opportunity in credit (it’s IG-rated and linked to the AI boom) Shraga sees potential fallen angels.
1. As a fund manager and previously a trader that has operated through numerous cycles, how do you assess 2026 so far?
The last 12 months are a better timeframe through which to address this question. Usually, when there is geopolitical noise the event occurs, markets adjust and then financial implications get priced in. But for the last year we have encountered US tariffs, war in the Persian Gulf and the US intervention in Venezuela, which go well beyond anything we’d usually account for and adjust to. These risks are omnipresent and they’re causing investors to delineate between what is investible and non-investible.
We should be able to withstand volatility better than in equities, but our starting conditions for credit spreads were at an all-time height. Added to this, we have had a broad business disruption event from AI, meaning that business models everywhere need to be rethought and that’s a difficult recalibration to price amid all the geopolitical headwinds.
Let’s say there is an 80% chance that things are copacetic. That implies a 20% probability that we miss the base case, with 10% at each extreme. That scenario analysis holds true today, but I think the tails represent much greater risk. I’m not calling panic, and I’m not expecting a huge, distressed cycle, but anything that appears problematic — such as software credits — is under the microscope.
We cannot account for the fact that tariffs of 25% are being proposed, jumping to 100% and then dropping back to 25% over the course of three days. You cannot logically assess this and so the bottom line is that we are in a much more sensitive position as credit investors.
2. With that in mind, how are you positioned today?
Generic risk pricing has not moved enough to reflect tail risk and that’s because there are some crowded trades with large swathes of the market looking to offload risk. That includes fallen angels that are suffering in this part of the cycle, such as European chemicals.
We’d like to add risk, but timing is key. I don’t think it’s worth buying the market now as it’s not cheap enough, but there are pockets of value.
I’d prefer to make bold calls on sectors or names that have been oversold. Take the peak of the software sell-off in early February — LPs were asking their fund managers about the risk this represented and naturally some credit funds looked to lighten their exposure to this space and that’s where we want to tactically add risk.
We’ve also seen instances where the dominant buyer of loans — CLOs — have been looking to manage around their low single-B and triple-C holdings, and that again has presented a buying opportunity for us.
3. Given some of these risks, what is your approach to going short credit?
In Europe as a credit investor, you are structurally long as you want to own spread rather than pay for it. You mainly want to be short market beta. In some products we are beta neutral, others we are long. The challenge is that the most efficient way to short credit is iTraxx Crossover, and most people use it as a hedging tool which creates squeezed positions.
During the wave of US tariffs, we were short, credit dropped say 5-6% and index spreads moved by 80bps. I don’t think that’s the right ratio and the reason is that everyone was short and everyone was using Crossover to hedge market beta.
4. What’s your view on growth prospects for European credit?
Going back to Q1 2025 and just after Donald Trump won the US presidential elections, we formed a view that Europe would have no choice but to rebuild its military capability. It was clear that Germany would have to invest in defence and infrastructure to the tune of several hundred billion, and across Europe there is over €2trn of investment waiting to be unlocked.
Compare this to Covid — in the entirety of 2020 through till mid-2022 the US spent around $4.1trn on Covid-relief packages. And what did people do? We bought stuff on Amazon, essentially spending into an environment of economic headwinds — but crucially governments were not investing domestically.
By contrast in Europe the environment is much more conducive to domestic investment. In fact, the level of stimulus being discussed represents a game changer in Europe.
Since 2010 we have been stifled by austerity across Europe. Germany is leading the reversal of that, going from fiscal conservatives to running a projected 5-6% deficit. This is not an isolated case. Current US foreign policy is a catalyst for growth in Europe and we think that adds 100bps of growth across the continent. There is a lot of economic growth potential and that’s a cure for leverage.
The chink in the armour for Europe is sensitivity to energy prices, although this is not as acute as during the Russian invasion of Ukraine because Europe has learned to diversify its energy sources. There may be a short-term wobble in clearing Europe’s investment drive, but overall, the environment is positive.
Inflation is the other fear people cite but I think AI will be a force for deflation, introducing efficiency.
5. But is there a danger that going long European credit becomes a crowded trade?
Let’s run the math. If we say €2.1trn of capital investment in the next 4-5 years then add a conservative €5-6trn of leverage, then even with a surge in demand for European credit, there is enough to go around.
There might be some element of crowding out and maybe borrowing costs inch lower in some sectors but that will be a de minimis amount.
The other feature of Europe which prevents a crowding out is the more restricted access to credit, which causes some investors to look elsewhere. In the US for instance, around 75-80% of debt is provided by capital markets instruments such as CMBS, loans, high yield bonds etc. So that’s just 20-25% of financing provided by banks. In Europe we’re still in a place where banks provide 90% of financing.
Europe does not have deep capital markets so accessing that risk is a craft all in and of itself. If nine times out of 10 financing is coming from banks then you need to find other ways. In CMBS for example, if there is a Singaporean investor that wants exposure to office mezz and looks at what they can buy then you might see 5,000 CMBS bonds in the US such that you could even create a diversified portfolio of assets spread across say the north and southeast. Try to do that in Europe — you can’t, it doesn’t exist. The only solution is finding a fund manager, allocating locked up capital and hoping they find a good exit.
However, US tariffs have made it abundantly clear that there is a real risk of geopolitical capital markets weaponry. Investors want to diversify into Europe at scale but it’s not easy. If Europe can get away from being a banking-centric capital market — as Mario Draghi has pushed for — then this unlocks even more opportunity.
Right now, the proposition is investing in the US, which grows at 3% and has liquidity versus Europe at 1% growth and limited liquidity. It’s difficult to make a strong case for European credit based on that equation but investors are seeing that they are over-exposed to the US.
This underlines how Europe needs more private capital flowing through its system, not directly channelled through banks. This would create a deeper capital market and everyone would cheer it on.
6. What is the biggest danger or challenge you see lurking in credit markets today? Are there opportunities some are missing?
If you look at iTraxx Crossover moving from 200bps to 300bps, you’re maybe losing 4% on your investment. That’s not substantial failure.
I don’t think default rates will spike or that we will have a deep slowdown in Europe. But there might be a black swan event occurring in the US investment grade market connected to AI. 17-18% of US IG issuance is connected to this space.
The situation reminds me of 1999-2000 in e-commerce when people understood there was a real opportunity but business models were incoherent and it was not exactly clear how to make money.
It became clear that value lay in big data, but that took years to come to fruition. With AI it is clear the premise for some businesses is not viable, yet investors are throwing money at even some of the smaller data centre investments and the scale of leverage is significant.
These are big investments with a half-life of four years. We understand that AI and data centres are king, but it also feels to me like the king has no clothes. You have to go back to the question of why people are investing in this space — it’s in the IT space, it’s IG-rated, and most importantly it’s investing in the future through AI.
But Anthropic and OpenAI are both pulling back due to high operational costs so if the big boys are pulling back then what about everyone else?
We’re watching this space for fallen angels.
7. Let’s go back to the origins of Signal — you’d worked on the sell side as a trader before this, what was the driver behind launching your own fund?
I’ve had a reasonably varied career. I started as a prop trader and created an illiquid credit portfolio in 2003 at a time when investments were driven by analyst coverage. One of our first large trades was 2004 with GM during a difficult period for car makers.
GM senior secured and senior unsecured were trading in line with each other and the reason was that the car press parts that were securing the SSNs were not really valued in a downside scenario as if GM shut down there would be limited application for these parts. The upside was not factored in and we were able to make money buying these bonds and shorting against the rest of the capital structure.
From this point we started to look for opportunities where we could create an interesting basis. After 2008 and the implementation of the Volcker rule it became clear that our fixed income trading business needed to be split into a liquid side and illiquid side.
I was tasked to oversee the risk management of this in 2008 and I started assembling businesses from ABS and structured credit trading to complex derivatives. The way the business was structured, we had some flexibility to take on risk while other banks were going in the other direction. My job was essentially to deploy into our best ideas.
I ended up growing the business from 11 people in 2003 into a business with $17bn of equity capital. While some funds were buying stressed and distressed portfolios that banks were offloading, I was doing the same on the sell side.
We had a lot of support internally but in late 2014 and after 15 years at DB, I needed a new challenge and the buy side made sense. It’s like a footballer with Premier League experience wanting to test themselves in La Liga. So, in mid-2015 we launched Signal with €500m in capital.
We were built on a similar mandate, targeting special situations across the credit market, but what differentiated us compared to others was our focus on Europe. Other large funds would send a young partner to build in Europe, or someone they had to put out to pasture, so there was not really the same level of competition.
The other differentiator is that the mega-funds will target portfolio deals where you don’t really get the same level of engagement with banks. And that’s important as I’ve pointed out that in Europe, the banks can be the gatekeepers.
8. In recent years we've seen more hedge-fund style managers establish CLO management platforms. What convinced you to move in this direction?
I’ve never managed a CLO but that’s why you hire a Rajat [Mittal, head of leveraged credit]. At some point in life, you are not just measured in your own skill or experience, but also on your ability to bring in real talent.
Post-Covid and the Russia/Ukraine war we observed that European CLOs were becoming a more challenging market to access. We thought we could add value provided we had the right team.
Active management was a big part of this. Our philosophy was to have views on credit, move fast and build par doing this. If you look at Rajat’s book now his portfolio turnover is in the top decile.
The integration also had clear benefits for our fund business as we have a dedicated CLO analyst team processing and feeding back a lot of information. In special sits we are typically investing over a 2-3-year horizon and seeing the information flow across par loans is valuable to us. It allows us to step back from a more insular angle, see the full universe and better assess the long-term liquidity conditions.
9. What's a fact about yourself that people in the market may not know?
My late father was a pilot, and as a child I was fascinated by the instruments in the cockpit. Understanding what the gauges were telling you, and how they informed decisions in real time, sparked an early interest in probability, statistics and decision-making that has stayed with me throughout my career.
