Understanding Global Direct Lending Markets

Greg: Global direct lending markets have experienced massive growth over the last decade plus as the appeal of private credit has become well recognized and valued by investors. What may be less understood, however, are the nuances between direct lending markets in North America, Europe, and Asia- Pacific.

Tyler: There are a lot of differences between direct lending markets, globally from pricing, competitive dynamics to market size and depth. There are also a lot of similarities even overlap, which is why we think there's real value in having local expertise, different regions combined with a global perspective to kind of bring it all together.

Greg: That was Tyler Gately, head of North America Private Credit at Barings, and this is Streaming Income, a podcast from Barings. I'm your host, Greg Campion. Coming up on today's show, understanding Global Direct Lending Markets. Before we get into it, just a quick reminder that you can follow streaming income on Apple Podcasts, Spotify, and if you want the full video episodes on YouTube as well. With that, here's our conversation on global direct lending. All right, welcome everyone. I'm excited to have you all joining me virtually today from around the world to talk about global direct lending markets. So the conversation today, we're hoping to dive into the nuances of private credit in North America, in Europe, in Asia Pac, and to do so, I'm really excited to be joined by such an esteemed panel of experts, starting with Tyler Gately, head of North America Private Credit. Tyler, welcome.

Tyler: Thank you.

Greg: I've also got Orla Walsh, managing director and portfolio manager of Global Private Finance based in London. Orla, thanks for joining.

Orla: Thank you for having me.

Greg: And last but not least, we have got Justin Hooley, head of APAC Private Credit. Welcome Justin.

Justin: Thanks, Greg. Great to be here today.

Greg: All right, awesome. So let's dive right into it. So really I'm hoping to that we can start by setting the scenes for our viewers and our listeners and talk through some of the similarities and differences between these different regional markets between North America, Europe and APAC, private credit markets specifically when it comes to attributes like market size and depth, pricing, structures, competitive dynamics, all that kind of stuff. Really hoping to kind of shine a light on these similarities and differences between markets and give our listeners a little bit more context and education on this. So Tyler, I'm going to turn it over to you and just ask you if you can start by talking us through the North America market and just giving us kind of an overview maybe on some of those vectors that I just mentioned.

Tyler: Yeah, yeah. Happy to. Look, I mean relative to Europe and APAC, North America is certainly the most mature. However, that growth and broader opportunity set, at least in my opinion, still remains relatively early in the broader kind of repositioning of the capital markets. Yeah, I think you've heard best guesses out there from the likes of Preqin that show market AUM tripling between 2010 and call it 2024 and probably doubling again from now till the end of the twenties to nearly 2 trillion. Pretty amazing what's transpired over the last couple of years, but other sources have shown we're already there in terms of that 2 trillion figure. So yeah, I think the point being here, the growth has been nothing short of remarkable, but I think the consensus across the market is still, there's plenty of room to run over the coming years. I think the interesting point though, when you actually dig into what that means to the competitive landscape, the vast majority of that growth is really focused around fewer and larger players in the market. To put a finer point on that, there've been nearly, I believe it was 500 new entrants in the private credit market over the last five years or capital and deal flow continues to consolidate around fewer GPs. So again, putting data around that, five years ago, top 20 managers raised about 35% of the capital in the market. Last year the top 20 managers raised close to 70% of the capital in the market. So the winners are kind of running away with it and really not too jealous of anybody trying to be a new entrant in the market. It's going to be really, really hard to catch up at this point. So while competition is fierce, actual flows of LP capital, sponsor deals has really consolidated around that smaller group. So to put it a different way and really more relevant to this audience being predominantly LPs and market participants on that side, North American markets are rather efficient given the competition, but access points to the higher quality sponsors and assets in the market have really narrowed around just a handful of managers.

Greg: And then how about on the pricing side? What are you seeing in North America at the moment there?

Tyler: Yeah, it's tough. I think about our market being really around, focused around unique origination, so access to unique assets in the market and the goal being hopefully delivering some form of illiquidity premium relative to the broadly syndicated market. I think the challenge that you see in today's market with that is syndicated markets have really backed up. A lot of that is around speculation of what's going to happen from the volatility out of Washington and broader economic headwinds. I think about that market and then the public market as being more of a jet ski, maybe a speedboat, and the private credit market is more of an oil tanker, so we tend to evolve slightly slower, which obviously shows up in investor portfolios in terms of more stability and less volatility. But I think more acute to kind of pricing and structures is just a limited amount of deal flow in the market because of the broader volatility and the broader challenges in the market. I think fortunately we have a very large portfolio where we can deploy into known deals, deals that we already are financing, tends to be kind of off- market financing opportunities, but on new platforms there's really an imbalance in terms of supply and demand. So when you think about that, you have hundreds and hundreds and hundreds of platforms out there chasing only a couple of deals, and while I think that's driven pricing a little bit tighter, the larger more established platforms, again, same theme here, have found ways to deploy and kind of protect themselves from some of the hyper competition in the market for the new assets.

Greg: And then before we move on and talk about Europe, just talk to me a little bit about the, I know this market tends to be more of a sole or a lead lender market. Talk to me about that and maybe just, it might be worth just clarifying for our listeners and viewers, just where your teams kind of really specifically focus within the direct lending spectrum.

Tyler: Yeah, I'll start with the last first. So our team globally, and then I think you'll probably hear a consistent theme in every region, but we really anchor ourselves at the senior part of the capital stack, so really want to focus on principal preservation and again, generating a modest premium in doing that. So very consistent there. Candidly, with the growth of the market and the competition in the market, there's been more and more limited ability to deploy into more junior parts of the capital stack, and I think where that does exist, that risk reward just hasn't really been there. If you actually put some numbers around that, typically our funds can deploy 20 to 30% of the fund into more junior capital. We've averaged two or 3% in most of our funds, and that's just at a strategy level, and I think that's really just a view of relative value given where the risk is. In terms of the club makeup of the transactions in North America, I think you're starting to see a little bit more of that in other markets. APAC has been a club market for quite some time and Justin will dig into more of those details. Europe is starting to trend towards that or we'll talk a little bit more about that as well. But in North America, it's been a club market for a very long period of time. Our goal is, while it will inevitably be other lenders in the vast majority of our deals, is to lead the deal though, we really need a consistency of approach, consistency of documentation and protections within the individual assets across our fund. So historically we've been averaging lead or co- lead on about 90% of our deals. It's important for it to be a Barings deal, not just a compilation of 200 deals in a portfolio that all look and smell and act a little bit differently. So I think the other thing to point out is while that's our goal, I think the market's also helped that. So you've actually seen the lender group, so the number of lenders coming into any given deal actually shrink from pre- COVID to post- COVID. I think that's really a byproduct of some probably less than ideal execution and less than ideal management of challenges from COVID to rising rates and so on and so forth. I think sponsors have really changed how they think about lending relationships and it's much more about who is a large liquid stable form of financing that is going to be with being able to support my equity thesis in all parts of the cycle.

Greg: Yeah, yeah. All right, well thank you for that overview. Very clear. We've got the largest kind of market in the world here in North America. We've got a very competitive market, but interesting to hear that it's sort of more consolidating around the larger firms for some of the reasons that you mentioned there. And I think that club dynamic and the importance of leading transactions seems particularly notable. Orla, let's shift over to Europe and thank you for your patience, but I'd love to hear you talk us through a little bit around the European market and maybe what's similar and what's different when you compare to what Tyler just talked to us about from a North America perspective.

Orla: Yeah, sure. So happy to, it's my favorite topic, European private credit and its evolution. So I mean starting with the US, most bank flows, bank types, capital structures, capital markets. When things evolve on the US side, they will eventually land on the European side, there's usually a bit of a timing lag and then there's usually a couple of complexities that make it a little bit different. So some estimates would put European private credit maybe five to 10 years behind the US but I think that gap has certainly closed particularly since the COVID period. When I think about when I first joined the banking world, private credit was very much not really in existence in Europe in an institutional way. So there were lots of houses and shops doing it ad hoc, doing ad hoc mezzanine lending for example. So it hadn't really emerged into that sort of core and true and proper flow business probably until about 2013, 14, 15. And Barings in Europe was one of the first institutional players in the space to start doing these direct lending transactions at scale and consistently and using third party capital to do so, institutional capital. I think from a size perspective and evolution on that basis, not dissimilarly to the US, I mean the rationale for the evolution of private credit in Europe was largely around the retrenchment of the banks. And that continues to be the case, and I felt it myself back when I was a banker, certain transactions that we wanted to do suddenly we could no longer do them due to leverage lending guidelines. And so that squeeze meant that those investments were great investments, most of them private equity sponsor backed investments, they still needed to be financed. And so what you saw was those great transactions getting done by the private markets, by private credit and specifically within the direct lending space. So in terms of an AUM perspective, just to give you a flavor of what the size looks like, probably somewhere between half a billion and a billion in Europe right now with most of that being in direct lending specifically. So it's roughly about half the size of the North American market, but it is growing and I think the growth rate on the European side is still pretty high. I think there's a couple of reasons for that.

Greg: Sorry, half a trillion I think you mean. Yeah.

Orla: Sorry, half a trillion.

Greg: Yeah, yeah, yeah.

Orla: Thank you. Thanks for that correction. Otherwise, it'd be a little bit small. Yeah, no, so I think where is it going? I think the resilience of private credit, I like the reference to the oil tanker piece that you made, Tyler, because actually the problem I suppose still with the banks in Europe is where there are broader macro challenges, where there are certain announcements made, where there are rates cuts, where they're really sort of macro impacts. The execution certainty of a bank being able to transact in periods of market volatility is quite low. And so if you're a private equity sponsor in the space and you're still wanting to get your deal done to a specific timeline, that certainty of execution is not necessarily there. And so what tends to happen is that more reliable factor, that reliability feature, and particularly on a go- forward basis, that's very much still within the range of the private credit providers to execute on, not dissimilarly. I think another couple of examples where we've seen certain larger transactions that we would have thought might go the way of a bank, maybe it's sort of too big for private credit now, maybe this is really into banking territory, they could get much lower pricing for example. And actually in the specific example I'm thinking of that particular sponsor and management team have decided actually to stay with private credit simply because of that certainty of execution feature within more challenging macro backdrop. That's interesting because they're willing to pay a premium for that.

Tyler: Orla, you mentioned kind of when banks shut down, I candidly think that every time the syndicated market shuts down, it accelerates the growth of private credit just generically speaking.

Orla: Absolutely. Absolutely.

Tyler: I think that certainty of execution becomes more and more invaluable to the sponsor where this is really the gating item to executing their strategy and when that is a in one day out the other type of risk, that gets old pretty quickly.

Orla: I would completely agree with you there. And I think what's interesting to note though still from a pricing perspective and from an all- in- yield perspective, and this is something that we track on each and every deal that we do, we are still obtaining that not insignificant premium pricing premium over that BSL market. So what does that say? It says that private equity sponsors are willing to pay a premium for certainty of execution to get those deals done, and I think that plays pretty well for us, I would say. Maybe just commenting on the competitive dynamics in the space, so what I would say is maybe 10 years ago or maybe 10 plus years ago, there weren't really that many players in Europe doing private credit, direct lending institutionally, probably count on less than five fingers. Those who were doing it sort of in any real scaled way and we saw a lot of new entrants come into the space, some of them sort of evolved out of more traditional private equity houses. Some of them sort of were formed organically and came up that way, but not dissimilarly to the US, there has been a flight to top tier, there's been a flight to scale. One of the key benefits that we have of here at Barings is that scale and that incumbency piece, and that's very difficult to replicate. We've been doing this institutionally and at scale for a really long period of time and that's very difficult for new entrants to come in and try and get a bit of that share. So just to put some numbers around it, I think the top five managers in Europe represent roughly 45% of all transactions that were completed in Europe last year, so 2024. Maybe one of the key differences here is that not dissimilar to lots of other features generally about Europe is that there is more complexity just given. We're not lending to single country risk here. There are so many different jurisdictions each with their own specific legal systems, tax regimes, their own little macro ecosystems from within etc. And so that does mean that you have got to have very specific representation within each of these markets if you want to play a good game here and if you want to play a full pan- European strategy. So what does it matter? It means European teams, you've got to have a big team, you've got to have a diverse team, you've got to have a dynamic team.

Greg: Are there geographies or jurisdictions within Europe that you're more or less likely to lend into?

Orla: Yeah, so that's actually a really good question. If you actually look at how direct lending evolved across Europe, the UK was the first and sort of early adopter of it, why? English law, ease of restructuring, etc. And so really early adopter. And so even up to about five years ago, probably 70, 80% of the volume of activity of issuance loan, issuance was getting done out of the UK. The next country to adopt it in a real way was France. Following that we saw sort of inaudible, Benelux, Netherlands, etc. We see Spain now coming in. They've really made a lot of significant advances in their workout systems and legal systems, Italy as well. So from a market evolution perspective, so beginning with UK, France, Germany, inaudible, Benelux, and then the wine drinking European countries as we refer to them as. We still say Northwestern Europe in terms of, I mean that's just where we can capture the most amount of flow and what our objective here is to have the broadest funnel as possible to suit. So to see every loan that's happening of top tier quality with top tier sponsors, I don't want to say we don't look at specific countries. We first and primarily look at the credit quality of the borrower itself and then just naturally in terms of the volume of transactions available in the respective jurisdictions means that for us on a portfolio basis, we probably look to have about 30 ish percent UK, about 30 ish percent France, 30 ish percent inaudible Benelux region, and then peripheral countries thereafter.

Greg: And last question, is there any more nuance to be aware of in terms of the club dynamic or deals that we're leading or sole lender on or I'm just curious what that difference between North America and Europe looks like currently?

Orla: Yeah, sure. Well, Tyler touched on it. It's an interesting one. If you were to look back prior to 2010, 2012 period, that was very much sort of clubland, mezzanine type clubland and then we went through a period where it was for us at least only sole. What we are seeing, and by the way that's where we like to play. We're either sole or we're co- landing but we're in the lead. That means we are in the lead from a documentation negotiation perspective and if anything might happen to go wrong with the performance of that business that we really are the ones who are driving and have the ability to negotiate through whatever it is we might have to negotiate through. So that's sort of our starting point. So just from a stats perspective, 90% plus of what we do, we're leading on documentation. What we are seeing now is this is again, it's a function of evolution of the market. We're seeing a lot of the more sophisticated top tier sponsors look to diversify their financing partner. That's due to a couple of things, that's due to obviously this, I would call it perhaps instability in terms of being openness and willingness to print deals on the bank side. And it's also due to certain private credit shops who are maybe not of sufficient scale to be able to sort of finance further and add- ons, acquisitions, et cetera, et cetera. Don't forget these businesses, these sponsor- backed businesses generally have a growth strategy behind them, be that organic or by add- ons. And so what they're looking to do is probably still have an anchor, an anchor part financing partner. So maybe to do 60, 70% of the deal, but they may perhaps choose to bring in one other financing partner into that dynamic. When we talk about what a true club is, so say five, six lenders, that's been seen in Europe, we've seen a couple handful. Those tend to be at the large cap side of things and not necessarily in that core middle market region that we tend to focus on.

Greg: Last but not least, let's move to Justin. Justin, talk to me about the APAC market. Maybe you can give us similar kind of high level view on the dynamics that are shaping the market in your region.

Justin: Yeah, no problem Greg. I mean I think I'll start off with a bit of the history. I think definitely the US and Europe are further ahead of APAC. APAC's a relatively nascent or immature market at least from the private credit direct lending side. Really we saw quite a big change in about 2016, 17 with a bunch of more global funds coming in here and really supporting the product. We've been down here a long time and we've been doing various bits and pieces but not direct lending as you think about it today. That has now grown over those sort of last 10 years to probably the private credit market would probably be about a hundred billion, just short of a hundred billion for APAC. And out of that direct lending is probably 20 to 25 million. A bit harder to give specific data points really because the market here is still not as transparent but more opaque and harder to get real live data. But it's definitely grown a lot. I think historically similar to the US and European markets, finance was really provided by the banks, but through regulation they've stepped back a lot and there's been a need for private credit. I think if you look indicatively or directionally at the US, 70% of financing currently probably today is provided by non- banks and 30% by the banks. If you look at APAC, we're probably the inverse of that. So we're 30% non- banks, 70% banks, and I think that is continuing to change. There's still a lot of banks here definitely in APAC, so outside of ANZ, banks are still very supportive, but we see that there's a lot of growth potential over the next five to 10 years. Structures are very similar in terms of what we're seeing in the US, in Europe, so we call it the uni- trans or the stress senior product. So really it's a single strip of debt here at that sort of five, five and a half times leverage. Pricing economics, what I would say the benefit of being out here is it has been stickier and probably higher. It doesn't move because the capital markets are not as developed out here. It doesn't move as quickly and is not as volatile as the US and Europe. So we too tend to get either similar returns or in some cases better returns than what we see offshore and we see that continuing with where we live.

Greg: Yeah, that's great. Great overview there. Talk to me just a little bit about some of the jurisdictions that you invest in. Orla talked about some of the differences and nuances between some of the different markets in Europe and some of the ones that are more or less attractive and the importance of having people locally in some of those markets to really understand the dynamics. But obviously you think about Asia, it's such a big diverse region. It'd be interesting just to hear you talk a little bit about the countries that you invest in and maybe why, what it is about those countries that jumps out to you and the team.

Justin: Yeah, it's a really good question and I think when people think about investing or allocating dollars to Asia, historically that's really been focused on what I would call the special inaudible part of the market, which is, they're aiming for double- digit returns and there's probably jurisdictions that are coming up which maybe include countries such as Indonesia or Thailand, some of these what we would deem to be more tricky jurisdictions, at least from a security perfection and enforcement. I think with our strategy, given our DNA being very conservative, we're really focusing on rule of law being very similar to Europe and the US. So it's countries, Australia, New Zealand, and then it's what we call developed regions or countries such as Singapore, Hong Kong, potentially Taiwan, Korea and Japan. But the last three are pretty well banked at this stage we haven't done as much there, but in reality the rest of those jurisdictions have all, a lot of their legal systems are based on commonwealth law and you're right, being down here in the region, we've been down in the region for sort of 15 years, we follow assets, we know the jurisdictions well and we stick to where we feel that it's, we can confidently say we've got good security and if something goes wrong we can, we have a good chance of recovery on those assets.

Greg: Yep. Yep. And then I just want to ask you what the dynamics are like in terms of being a sole lender or club dynamics. What do those dynamics usually look like for the types of deals that you and the team are seeing and participating in, in the APAC region?

Justin: The strategy we run out here is quite consistent with the US or Europe. So we are trying to be the lead agent if you like, or the main party getting one of the first calls. We're structuring the deals, we're doing the diligence, and we've got a seat at the table. So over 90% of the deals in our portfolio are where we are either the main lender or a big part of a small club of lenders. And that's no different to what we're trying to do offshore. There are certain exceptions to that where we've done a lot of work and we haven't necessarily got what we've wanted and we maybe put a small piece in to build the relationship with the sponsor, but in reality we're wanting to be at the table and that's important going in because you shape the terms of the deal. And then also importantly, when if something goes wrong, you're able to go and have those conversations with the sponsor and be involved, say your chance of recovery and working through more challenging situations is improved by having that influence rather than being part of a syndicate of 20 or 30 banks which are very difficult to control in harder times.

Greg: All right, well thank you everyone for all of that context. It's really clear that there are differences in these markets, but it's also possible to have a consistent approach within each region and also across them. So let's get into this conversation just around quote unquote global direct lending strategies and I want to talk about the benefits of investing globally, but also I might want to start, Tyler, if you can just take us back a little bit in history and just talk to us about how long have these strategies been around for, how did they emerge and then how has that kind of market developed over time and where are we today if you think about truly global direct lending strategies?

Tyler: Yeah, it's interesting. I mean to be fair, I'm not entirely convinced global strategies really existed before the past couple of years. I think there have probably been two or three GPs that had a reasonable presence in more than one geography, but it's something we're really proud of. Barings really pioneered the fully integrated global approach to private credit nearly 15 years ago with leadership positions across each of North America, Europe and developed APAC. Today I would argue there are probably three or four that have integrated North America and Europe quite well. But I think interesting when you kind of peel back the onion on that, that integration really only exists in kind of the private high yield portion of the market or the upper middle market. And also interesting, primarily funded through what I would refer to as kind the opportunistic allocations out of traditionally retail vehicles such as BDCs when they are investing into Europe. Yeah, I think Barings really remains the primary, if not the only real, fully integrated global solution for institutional LPs in the traditional middle market. So I say all of that really just to say we're still pretty early days in the evolution of private credit strategies. I think if you were to look at an LP's portfolio five, 10 years ago, it was really the satellite allocation, half a percent, maybe a percent to private credit, and it was simply North America traditional mid- market direct lending. Now we've seen LPs upwards of 20%, but it includes a whole host of different other types of sub- strategies. And the more that has evolved, the more LPs are looking at it and trying to map their syndicated market exposure or map just the broader corporate exposures that they have in the book. So as that evolves, I think their desire to integrate their allocations and to have more of a flexible solution. So platforms that can kind of chase relative value across geographies as opposed to just being a narrow focus kind of deployment strategy at the GP level. So certainly continuing to evolve. I mentioned there are a handful out there today that are doing it, that's going to grow. But again, kind of connecting it back to earlier commentary to have that reach and that breadth of capabilities, it takes scale. So you're really looking at that same group of smaller, that smaller group of larger and more significant GPs that are able to actually execute on that. All of that's on the LP front. Think turning to the deal side, our ability to provide kind of financing solutions to sponsors remains candidly a key differentiator and our ability to fund in any relevant currency in any relevant jurisdiction, local market knowledge, everything Orla just described, boots on the ground, native language speakers, so on and so forth. I think that also allows a GP to kind of get past just being another dollar. It can really kind of help facilitate Barings and others being more of a value add partner in an equity thesis that a sponsor has. So again, I think kind of two sides to that, but I think the common thread that runs between them is really a private credit manager being more of a solutions provider as opposed to just that other doctor.

Greg: And in terms of how that actually manifests, I mean are you actually seeing or sponsors that transact, do you transact with across various geographies or does that tend to be really region specific or how does that work?

Tyler: Absolutely. I think just from a coverage model perspective, we'll have a sponsor out of Boston trying to do a new platform in London or Paris and for them to be able to call just one person that they know well that they've done 10 deals with and say, " Hey, I need help to fund in euros and domicile the debt here" and et cetera, et cetera, that's a huge differentiator when you think about actually providing solutions and helping to solve problems. I think the other example of that is a platform in Boston trying to do an add- on acquisition in Paris where you can have a tranche of debt in USD funding the vast majority of operations, and then you have an add- on that's funded in euros and we're able to facilitate liability matching of cash flows. I think that ability to bridge in a very integrated way is incredibly valuable as you kind of work with sponsors and actually build a depth of relationship. And other than just coming into a bigger deal and being that next$ 20 million ticket that rounds out a 500 million financing, that's not a value when you can... Everything that we've talked about, when you can be the leader of that transaction, help structure it, help solve problems via that structuring, that's really where partnership is created, not just another dollar.

Greg: Yeah, yeah, makes a ton of sense. I mean you mentioned earlier, I think Orla mentioned earlier just this idea of building out the biggest funnel possible and not to make this too much of a Barings commercial, but I think if sponsors know that you have these global capabilities and they see the need for that coming down the road at some point I would imagine that you're much more likely to be the first or second call on some of these transactions.

Tyler: You're spot on. I mean, we talked about the hundreds and hundreds of competitors out there and then at the beginning of this soliloquy there are only a couple that can do this. So it shrinks the competitive universe tremendously. And then when you actually zoom into where we actually focus that competitive universe that can execute on this type of financing and be more of a solutions provider, one of one, one of two in the traditional part of the middle market. So it really allows us to actually deliver a fundamentally different value to both the LP and the sponsor at the end of the day.

Greg: All right, Orla, let's shift in and zoom out again back to this idea of a global approach and these global strategies. I mean I can imagine that for any LPs on the other side of this are listening to this or watching this, I mean I think there's different reasons why people invest in direct lending and maybe an investor sitting in Europe who has great reasons to focus on a European strategy, same in North America, same in APAC, but there are situations and there are reasons why it could make a lot of sense to take a global approach versus a regional strategy. Maybe it's a compliment, et cetera. But maybe talk us through some of those because I know that you and the team have had a ton of conversations with LPs all over the world about how they're approaching this asset class, so it'd be interesting to hear you talk a little bit about kind of what you're hearing back from them almost in terms of what they're attracted to when it comes to taking a global approach to direct lending.

Orla: Yeah, sure, sure. Again, one of my favorite topics, I think just not to repeat what Tyler has said, this global approach, there are very few players who can actually achieve this type of a portfolio with the diversification that this portfolio has within it. And that's for a couple of reasons. So usually what we'll see is we'll see a dedicated European fund, a dedicated North American fund, a dedicated Asian fund, and that's fine, and absolutely those have a place too, but if you are a certain LP who is looking for access, global access on a diversified basis, I think we're one of the few that can actually provide that. The other point is understanding that what we look to do and as we look at it from a portfolio construction perspective is keep it relatively flexible. So for example, if we say we're going to target on a market size basis, it could be 60%, 30%, 10% on a US Europe Asia basis. What if from a relative value perspective say things aren't going particularly well in Europe and actually a risk adjusted return from the risk adjusted return basis. Actually the US profile for direct lending looks really great on a 12, 18, 24 month basis. That's that sort of flexibility that allows you to sort of pivot to where the relative value is very, I think it's very beneficial. What's interesting is that it's not actually historically been the case when we run the data, there's really consistent realized asset level IRR data on what the returns are being across regions, across a period of time. Actually they're pretty consistent, but it's just a sort of a natural hedge almost that you get inbuilt within one of these global funds. If, by the way, if you can originate the volume of transactions required for the level of diversification that you would require to do a three- prong approach, this is complimentary to some and it's sort of like entry point to others from an LP perspective because if you think about the LPs that are looking to do regional specific exposure, what if you're an LP who doesn't have billions of dollars to put to play in global direct lending market? Maybe you have something a bit more modest than that and in order to be able to get access to that global piece, well actually there's actually very few access points for that type of an LP.

Greg: Makes a ton of sense. How about things like ramp speed? That's something that we hear come up again and again. Does taking a global approach, does it give you that, back to this idea of the larger funnel? Does it give you the ability to put capital to work more quickly or how do you think about that?

Orla: Yeah, so when we talk about ramp, we've got to be careful because do we want to get capital in the ground relatively quickly? Of course we do. Once that capital is at work, you are earning income on that capital. If you as an LP, you're committing to a vehicle and that commitment is sort of sitting there on the sideline, well that money's not put to work for you. So you definitely want it at work. Do you want it all at work in the first three, six months? Probably not. And so have we got the ability to ramp these vehicles quickly? Yes, we do because it's really more about the broad funnel aspect and the fact that we have the ability to achieve diversification so there are such a high volume of transactions going into this and that we would make sure that there is an appropriate cadence of that ramp. So to answer the question specifically, could we ramp this really, really quickly? Yes. Across significant diversification within the portfolio? Yes. We would want to be mindful around vintage style risk within that as well. So taking that into consideration, but technically should it ramp in a very efficient way. Absolutely.

Tyler: I think to use your term earlier around kind of natural hedge, I think it is a natural hedge to regional specific flow kind of ebbs and flows. So when you think about it in the last, call it 24 months, North America has been a little bit slower than Europe on a relative basis. So if North America is pulling back, you can still deploy into significant diversification and candidly in those cases, likely better relative value but not be overly beholden to one region and the ebbs and flows of transactions in that region.

Orla: Yeah, absolutely, Tyler. And also thinking about relative value play on a risk adjusted return basis, we can all still speculate about what's going to happen with base rates and we can look at the forward curve and that gives us a pretty good indicator. But actually we don't know until it happens and there's lots of sort of macro unknowns currently and what we're looking to go into the rest of the year and coming up into even the following year. So on that basis, like I said, having this ability to pivot to one where the flow is, where the better risk adjusted return is, where the relative value play is, all of these things just make it a pretty, I think a pretty great strategy.

Greg: And as you look back, I mean Tyler I think mentioned that Barings has been investing various vintages of global direct lending strategies going back 10 plus years. How, if you think about those different vintages that have come through over the years, has that the allocation shifted much over time, either between geographies or sectors, or has it remained pretty steady? Any comments on that?

Tyler: I think it's interesting when you actually look at fully ran portfolios, it tends to look rather similar, but really I think the value here that Orla was getting at earlier is within the investment period of the vehicle. I think a great example of that is coming out of COVID, North America opened first in terms of transaction volume and that dislocation was significant. You were talking half the leverage and another 300 plus basis points in pricing. However, while it opened first and that dislocation was far more meaningful, the dislocation in Europe remained outstanding longer. So when you think about going overweight and underweight and a global strategy's ability to pivot, we were overweight North America for the back part of 2020. We saw everything kind of tighten back and I mean you saw it overnight in the liquid markets, but over a period of three to four months. North America started looking rather similar to pre- COVID levels. Europe, that dislocation remained for a much more prolonged period of time. So we were overweight Europe for probably the next four quarters. So while that allows you to pivot within the investment period, interestingly, the overall allocations between geographies on a fully ramped basis have actually been somewhat similar. So I think that that speaks to some reasonable parity over time. I would say we're likely in the last 10 years, structurally overweight Europe when you think about indexing to market sizing. However, when you think about actual deployment and weightings within the books of business, it actually has been pretty consistent from one vintage to the next.

Greg: All right, so Justin, maybe you can talk to us just a little bit of how all of this kind of relative value stuff actually works day to day. So you're based in Sydney. I'm curious when the team is assessing the suitability of an APAC loan for a global strategy, I'm curious how that all works. How is the team in Charlotte or London supposed to kind of understand if a loan in Australia is more or less attractive than a similar opportunity in North America or Europe, let's say?

Justin: Yeah, Greg. I mean look, the benefits of being in what my mind is a truly global firm is that there aren't any silos between regions. We are very integrated. If we start off right at the top, the IC, we have three ICs, one for Europe, one for US, one for APAC. And on those ICs we have regional representatives, but importantly we have several individuals that sit across all three ICs. And that brings a level of consistency in terms of the types of deals we're looking at, the questions we need to answer, the diligence we need to focus on. And so you can look through the book of the 350, 400 issues we have currently, and you would see that there is a lot of consistency between the types of deals we're doing, the structures, the borrowers, the sectors. So I think from that side it is very important to tap in if you're a global firm to tap into that we have access and use the IC memos of the European and US teams as our learnings, and we're looking at a deal at the moment where we're going to look to the US and Europe as to whether we should be doing that deal and what we should be focusing on. So I think that is super important. So that's the first aspect. The second aspect, which you talk about is obviously the role of value. And again, we all use a similar benchmark. We have something called a discount three margin, and basically that sets the target, if you like, of what we are trying to achieve when we deploy because you say we are deploying out of global funds, we need to make sure that the investors get a similar return between regions and we've got a targeted return in our mind of where we're going. So that helps set the bar. Again, we can look across what's happening in the US, we can see what's happening in Europe, and we can compare that to APAC. And I think it's useful for the IC to see it because at times US will probably have more attractive deals. At other times APAC may have more attractive deals. I think we always manage to get more consistency down this region. I think as I sort of alluded to earlier, there's less volatility here. So over the longer term, our pricing stays more steady. It doesn't have the highs, but it doesn't have the lows. But that also helps build this portfolio of diversification across region, across the issuer, and then that generates the similar return that you're looking for, for the whole portfolio.

Greg: All right. So Tyler, to follow up just on this concept of relative value. So we've obviously been seeing quite a bit of volatility in recent days related to geopolitics and economic policies. Can you just talk a little bit about how this impacts private credit and your team's views on global relative value?

Tyler: Sure. Yeah. I think it's been pretty interesting to see how the markets reacted to the recent headline volatility or manufactured volatility, self- inflicted volatility, however you want to articulate it. It's been fascinating. I think when you take a step back and think about what our market is, every manager is going to approach it a little bit differently. But I think it's important to highlight where the market tends to see exposures. In the real upper middle market, or I use the term private high yield, you tend to see far more international and cross border assets just given their size. So thus structurally speaking, there's likely to be a bit more exposure to international trade and within the more traditional part of the market and just using our portfolio as a proxy, that exposure is candidly quite limited. I think the other thing that I'd point out to the group here is from a broad private credit market perspective and every part, so lower middle market, traditional upper middle market, we're never really solving for an index when constructing portfolios. So what does that actually mean? Managers, you tend to avoid many of the industries that are most exposed to earnings volatility. So you tend to see the same handful of exposures and sectors in every single GP. They're not going to be exposed to commodity, volatility, highly cyclical manufacturing, so on and so forth. That said, managers will all lean slightly differently as they think about their industry preferences. So in North America, for example, what tends to be among the largest industry exposures to most GPs, Barings isn't really doing any government reimbursed healthcare. So we do not really have any real exposure to volatility of government action right now. We also tend to skew more towards software or tech business services. So the exposure where any sort of supply chain constraints or tariff impact is similarly quite limited. I think the relative value, it allows us to be overweight and be more focused on more defensive assets, whether that's in North America, Europe, or APAC. But importantly, you just zoom down into our investment philosophy in the simplest way possible, we have to think about these assets as being on the books as long- term buy and hold exposures. These are structured to withstand all parts of the cycle. And I think our loss rates kind of show that. Obviously this is a newer asset class, but over decades and decades of deploying into it to have single basis point loss rates, I think that's a structural approach, not just what fits in today's market.

Greg: Makes a ton of sense. All right, so maybe we can look through the noise. I mean obviously you have to be very diligent in understanding the risks and such, but maybe the public market volatility that we're seeing and things getting whipped around day after day, maybe we get a little bit of a respite from that in private markets. All right, well I appreciate everybody's insights here. This has been really hopefully educational for our listeners and viewers. Certainly for me, let's finish up by putting ourselves in the shoes of an investor. Maybe they've allocated in the past to a strategy that's close to home, whether that's North America, Europe, APAC or somewhere else, and now they're considering allocating to a global strategy. Again without this being too much of a Barings commercial, curious, what are the factors that you think should be considered? Justin, let's start with you.

Justin: Yeah, so I mean I think we are confident in our strategies and our globalness if you like, in inverted commas, but we work together. I think when you're looking at a manager and you're trying to allocate and try and get global exposure, you want to pick managers that know their regions, right? Have they been there for a long time? Are they on the ground? Do they have local knowledge? Have they got a good track record? I think we can demonstrate all of that across the various regions and I think that is pretty powerful. I think scale of the business is also critical, having that access to capital and if you want to be the first call and you want to be leading the deal and being either doing the bilaterals or the clubs, you need to have the ticket size to be able to turn up and play with the sponsors because you've got the bigger ticket size that comes from scale. Scale then itself creates the incumbency because you build the portfolio, how many assets have you got there? In times where M& A is a bit lower, do you have the natural hedge where you are actually doing add- ons for the portfolio? So those sort of things are critical. We've seen a couple of local funds here that set up three or four years ago and they're disappearing or closing down because they can't get the scale, they don't have the incumbency and they don't know how to grow and be able to survive through times, leaner times. And a lot of the guys down here haven't been through cycles. So as it turns or you see volatility, what does that mean? So I think there are a few key things there, but if you're looking at allocating, make sure you get yourself comfortable that the people you're giving to know the markets dynamics and have been there for a long time.

Greg: Yeah, great points. Orla, how about you? Same question.

Orla: Yeah, sure. So from my side, that would have to be the track record, right? You've got to put your money where your mouth is. And like I said, one, we have a very long track record because we've been doing it for such a long period of time and we've been doing it at scale and volume for a long period of time. We've also really stuck to our knitting. That means that the core focus of what we do, a good risk adjusted return, moderate leverage relative to what we see out there, always covenanted a true mid- market European loan documentation. So it's really heavily protected to the downside. We're not shooting at the lights on returns, we're not looking for private equity style returns, we're looking for a consistent track record. We get our money back, we get a nice coupon on that and we get pretty low loss rates. So I think that's really important to check. So yeah, so track record, absolutely. I think the other feature that we don't talk enough about at Barings in my opinion is the diversification of the capital base that we have here. So having a really strong structural and strategic alignment is key. And we have that because we have third- party capital in the form of inaudible fund series, global, regional. We have got a significant BDC franchise, we've got SMA accounts, we've got a parent company with an insurance mindset, so very much risk- focused as well as big CLO franchise, et cetera, and various other pools of capital. So pretty much held to account across multiple capital streams. The other piece to note then there from the actual ability to lend perspective means that we are never dipping in and out of the market. We are permanently in the market seeing what's happening, seeing a broad spectrum of deal flow, and then choosing to select and execute on the best. And if we were not having such a diverse capital base from which to invest from, I don't think we would be so present in the market and I don't think we would retain our pretty significant positions in terms of most active lenders in the space. We're pretty high up the rankings chart on that basis across the US, Europe, and Asia as well.

Greg: That's awesome. Thank you. All right, Tyler, last word to you. Same question.

Tyler: Orla, we should have planned this better. I'm going to echo a handful of those thoughts, but just maybe in a slightly different angle. I think that the diverse capital base is absolutely enormous. When you think about your ability to be ever present in the market to how you describe, to be the financing provider and partner in good times and bad is absolutely enormous. And I think that's something that very, very few players have. I mean, we have close to 50 vehicles on the platform, all different vintages, structures, styles of deployment, you name it. We can kind of go anywhere, do anything that a sponsor would like us to do. More importantly, it allows us to chase that relative value. So whether that is, again, we talked about senior, junior, you name it, region to region, but within that capital base, I think one of the biggest pieces that we have is our own money. And I think Orla you mentioned put your money where your mouth is. I think that's easy to say, but when we are doing upwards of 20%, 30% of every dollar that goes out the door is going to be our own capital in one form or another. I think that speaks volumes. I also think that when it is your own money, you think about it differently. I think that has been one of the biggest drivers of discipline and consistency to what we do and ultimately yielding the track record that we're so fortunate to have. A lot of hard work goes into that, but when it's the team's money, when it's the firm's money, when it's your boss's money, it changes the analysis quite meaningfully. So I think having that, it really, really goes a long way. And it's not just everybody throwing in a little bit here and there and saying that we're all aligned. There is real capital behind that and I think ultimately that helps us on the deal side as well. I think a lot of sponsors really want to look at it and say, you can speak for scale, that's great, but you also are investing with a massive institution with our parent MassMutual right into every transaction and that gives them a lot of comfort. So I think that alignment is absolutely critical. Every platform is going to come about that in a slightly different way, but I think ultimately scaled alignment is really the best path for any LP in going into this market.

Greg: It makes a ton of sense. All right, well, with that, I think we'll bring this discussion to a conclusion. I really appreciate all of you joining us today. I think it's been really great to get that local perspective and really understand some of the nuances between these markets. Obviously there's a lot of similarities, but there's some real nuances there when you dig into it. Along those lines, if you're listening to or watching this and you have not been taking diligent notes, don't worry, we are going to be publishing a white paper in the very near future that dives even deeper into this topic and explore some of the nuances between these markets. So stay tuned on that front on Barings. com. And with that, Tyler, Orla, Justin, thank you so much for joining me. Thanks for listening to or watching this episode of Streaming Income. If you'd like to stay up to date on our latest thoughts on asset classes ranging from high yield and private credit to real estate debt and equity, make sure to follow us and leave a review on your favorite podcast platform. We're on Apple Podcasts, Spotify, YouTube, and more. If you have specific feedback, you can email us at podcast @ barings. com. That's podcast at B- A- R- I- N- G- S. com. Thanks again for listening and see you next time.