Three Opportunities in Private Assets Amidst Volatility

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This is a podcast episode titled, Three Opportunities in Private Assets Amidst Volatility. The summary for this episode is: <p>Head of Private Multi-Asset Investing, John McNichols describes how the recent banking crisis is impacting private markets and discusses where he and the Barings team are seeing private market opportunities in areas like construction loans and European direct lending. </p><p><br></p><p><strong>Episode Segments:</strong></p><p><br></p><p>(2:11) – John’s role at Barings and the investment universe he focuses on </p><p>(4:00) – Sizing up the impact of the banking crisis &amp; why Europe looks well-positioned</p><p>(10:38) – The current opportunity in U.S. construction lending</p><p>(17:02) – The attraction of European direct lending today</p><p>(22:25) – Opportunities to help banks pare risk on their balance sheets</p><p>(27:33) – How investors can potentially capitalize on private market opportunities</p><p><br></p><p>Certain statements about Barings LLC made by the participants herein may be deemed to be “testimonials” or “endorsements” as those terms are defined in rule 206(4)-1 under the Investment Advisers Act of 1940, as amended. Participants were not compensated in connection with their participation in this program, although in certain cases they are investors in Barings LLC sponsored vehicles. These investments subject such participants to potential conflicts of interest in making the statements herein.</p><p><br></p><p>IMPORTANT INFORMATION</p><p><br></p><p>Any forecasts in this podcast are based upon Barings’ opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Any examples set forth in this podcast are provided for illustrative purposes only and are not indicative of any future investment results or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this podcast. No representation is made that an investment will be profitable or will not incur losses. </p><p><br></p><p>Barings is the brand name for the worldwide asset management and associated businesses of Barings LLC and its global affiliates. Barings Securities LLC, Barings (U.K.) Limited, Barings Global Advisers Limited, Barings Australia Pty Ltd, Barings Japan Limited, Barings Real Estate Advisers Europe Finance LLP, BREAE AIFM LLP, Baring Asset Management Limited, Baring International Investment Limited, Baring Fund Managers Limited, Baring International Fund Managers (Ireland) Limited, Baring Asset Management (Asia) Limited, Baring SICE (Taiwan) Limited, Baring Asset Management Switzerland Sarl, and Baring Asset Management Korea Limited each are affiliated financial service companies owned by Barings LLC (each, individually, an “Affiliate”).</p><p><br></p><p>NO OFFER: The podcast is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service in any jurisdiction. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This podcast is not, and must not be treated as, investment advice, an investment recommendation, investment research, or a recommendation about the suitability or appropriateness of any security, commodity, investment, or particular investment strategy.</p><p><br></p><p>Unless otherwise mentioned, the views contained in this podcast are those of Barings and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. Parts of this podcast may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this podcast is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information</p><p><br></p><p>Any service, security, investment or product outlined in this podcast may not be suitable for a prospective investor or available in their jurisdiction.</p><p><br></p><p>Copyright in this podcast is owned by Barings. Information in this podcast may be used for your own personal use, but may not be altered, reproduced or distributed without Barings’ consent.</p><p><br></p><p>23-2835543</p>
John's role at Barings and the investment universe he focuses on
01:32 MIN
Sizing up the impact of the banking crisis & why Europe looks well-positioned
06:30 MIN
The current opportunity in U.S. construction lending
06:07 MIN
The attraction of European direct lending today
05:15 MIN
Opportunities to help banks pare risk on their balance sheets
04:44 MIN
How investors can potentially capitalize on private market opportunities
04:24 MIN

Greg Campion: Investors around the world are on high alert still digesting the news of several high profile bank failures and what the implications of their demise may be for everything from interest rates to credit availability. While the public market reaction in the form of increased volatility, especially in the shares of banks has been clear, what's less obvious is how this crisis is already impacting private markets.

John McNichols: We think you're going to see lots of opportunities to help these banks selectively pair risk on their balance sheet. That can come in lots of ways and we can choose how we want to do that. I think that you'll see some of these banks pulling back in different areas. You'll see some pulling back in real estate, some pulling back in direct lending, some pulling back in consumer lending, some all three, but either way, we are going to have opportunities to participate in that.

Greg Campion: That was John McNichols, head of private multi- asset investing at Barings, and this is Streaming Income, a podcast from Barings. I'm your host, Greg Campion. Coming up on today's show, exploring three private market opportunities amidst the backdrop of volatility. All right, John McNichols, welcome back to the podcast.

John McNichols: Thank you, Greg. It's great to be here. Thanks for inviting me.

Greg Campion: Yeah, excited to have you here. Believe it or not, it's been a year since you were last on Streaming Income. I look back at our last conversation and we were talking about some things that I think are still concerns today. So we were talking then about what the impact of rising rates would look like, what the impact of inflation would look like. We're of course a little bit further along now in terms of both of those cycles and kind of where we're at. So it'll be interesting to hear your comments there. But today we're going to be talking a little bit about this most recent crisis that we've seen in the banking sector and then how that's kind of filtering through to private markets in terms of threats, opportunities, et cetera, so. But maybe before we dive into that, if listeners have not heard our prior conversations or read any of your work or anything like that, would you mind just describing your role here at Barings in your investment universe that you look at?

John McNichols: Well, my role has three parts. First part, maybe the part I spend the most time at is managing multi- asset private portfolios. These are investment accounts in which our clients have given us mandates to invest across a predetermined set of private asset classes. And to kind of get to the last part of your question, that range goes from direct lending to private placements and infrastructure, private asset back and private residential finance, commercial mortgage loans, even into less liquid parts of the liquid or public universe. Things like CLOs can be a part of our mandate. So that's generally the framework I work within. And then the other two aspects of the job are one, serving as point person for the creation and dissemination of opinions on relative value across private markets. And then the third piece is essentially commercializing our business around multi- asset private. Barings, like most firms, has seen a lot of growth in our private business. Much of that growth has come through single strategy accounts. Somebody will hire us for direct lending, they'll hire us to do infra, they'll hire us to do CMLs. And so a part of my role is commercializing the growth of the business in which we're doing multiple asset classes for clients and portfolios.

Greg Campion: Yeah. Yeah. So you've got as broad of a view as anyone certainly at this firm I would say, in terms of where that relative value exists across, especially all of these private asset classes, but as you said, into the public markets in some places as well. So I think we have the right person for this conversation and I want to dive into where you're seeing relative value, but maybe before we get into that, let's just talk a little bit about this banking crisis that we've seen. So it seemingly kind of came out of nowhere a few weeks or a month ago. Obviously garnered a ton of headlines, really put investors on high alert in terms of looking at potential risk exposures that they have across their portfolios. So I'd be interested to hear you tell us a little bit about how you kind of reacted to that and then I think it's easy for folks to look at their Bloomberg screens and see the prices of public market assets moving around. Obviously we've seen a lot of volatility in bank shares in particular, but it's less obvious kind of what's necessarily happening in private markets. So be interested just to hear your overall take on the crisis so far and the implications for private markets.

John McNichols: Good question. So when news first started breaking, the important thing, first thing one has to do is try to understand how bad things could get. Right. What's the extent of the problem because ultimately all of this affects private markets. The supply of capital and banks are major suppliers of capital into the market is one half of the equation. Right. The demand for capital is one half, the supply of capital is the other hand, banks are big suppliers of capital. And so we have a pretty strong group of economic and financial services researchers here at Barings and there were a lot of conversations, calls on the weekend trying to understand what is the problem and how deeply could it spread. Our assessment was that it was going to take a while to play out. In the long run was probably going to prove to be somewhat contained in that the banks where we saw immediate crisis were banks that had unusual business models and or unusual deposit bases. Right. So Silicon Valley Bank, Signature Bank, First Republic Bank are not the kind of banks most Americans do business with. Doesn't mean they can't cause systemic problems, but they represent a, each in their own way, a niche financial institution which shared some problems related to asset and liability matching, but that at the end of the day, the big US banks, the top tier banks were probably fine and that the majority of the regional banks were probably going to be okay, but that it would take a while to find out. And what will happen I think in the end are that all banks will wind up taking less risk than they otherwise would've taken because of this.

Greg Campion: Okay.

John McNichols: Banks tend to anticipate what regulators subsequently tell them to do. And so I think it's unrealistic and probably appropriate for regulators to take a look at this and come back with some recommendations on how banks should deal with these kinds of problems. It's just as expected, I think for banks to take the bull by the horns and try to do the right thing early. And so I do think you'll see banks taking less risk than they otherwise would've taken, so there will be less capital at work in many of the markets where we traffic, whether it's commercial loans, direct lending, infrastructure debt, that kind of thing. I will say importantly, although the CS acquisition by UBS is an important global action vis-a- vis bank stability and certainly European banking health overall, European banks are in much better shape than US banks. And so part of my, we talked about the range of asset classes that I look at. We also look at asset classes around the world in private markets and Europe has its own set of problems, in some ways more acute than the US. This is one that I think will affect them less. I think that the European banks were in better shape. The overall European banking sector is not going to react to this in a meaningful way in my opinion. Now that said, they were already pulling back on risk. We have seen opportunities to engage with banks and risk reduction trades already even in the second half of last year. So that's been going on for a while, but they're in great shape. From an economic perspective, central banks around the world are tightening. The US is probably a couple quarters ahead of everybody else. Given the dynamism in the US economy, it's my view that the sensitivity of the economy to Fed action is higher than that in Europe. We've anniversary the one- year point for US rate increases. I think you'll start seeing that feed through. I think growth is going to be lower through the year. You and I have had this conversation before. I am not especially worried that this economic slowdown will produce a very significant credit cycle crisis. I think growth may go negative for a quarter or two, it may not. I think the consensus frankly is that it doesn't go. I think right now if you look at consensus growth expectations, we kind of get to zero about wintertime and then kind of come up. But the variable here that I think is important to keep in mind is that debtor entities be they companies, individuals or governments, traffic in nominal dollars, not inflation adjusted dollars.

Greg Campion: Right. Right.

John McNichols: And we've talked about this in the past. I don't see any situation in which nominal GDP falls below three or 4% growth year- on- year. And I think that's enough to keep in general, a lot of debt laden companies and individuals afloat. You look back to the year, one of the greatest examples I can find is back in the early 70s when inflation was, or mid to late 70s when inflation was really high in the US we had three or four years when there were zero corporate defaults because inflation helps debtors plain and simple. Right. Whether you're a government, whether you're a company, whether you're a person. And so I think the scenario to really be wary of is one in which inflation falls very fast and we kind of get really much lower inflation at the same time as growth is hitting zero or going negative. In that case, you could have some problems, but otherwise I think we'll be able to maneuver,

Greg Campion: Okay.

John McNichols: Through pretty well.

Greg Campion: Okay, that's a great overview. So to sum up sort of slower growth, but you're not predicting a material recession on the horizon and the near future, at least in terms of what you're seeing and what the teams around Barings are seeing.

John McNichols: Overall.

Greg Campion: Yeah.

John McNichols: Obviously there will be parts of the economy that are more affected. If you own an office building right now, you're not feeling very good about the world.

Greg Campion: Of course, yep.

John McNichols: Right. If you own an over levered company in a business in which you don't have pricing power, but your costs are going up, you are not happy about the world right now. But in the aggregate overall, and one of the nice things about a broad global multi- asset portfolio is that presumably you can get access to this broad risk, I think it's going to be okay.

Greg Campion: Okay. There's heightened risks I guess in certain parts of the economy, but where there is volatility, there is also opportunity. We very obviously think about that in public markets where we see the prices of different securities become stressed or distressed and that that represents potentially obvious opportunities. It can be less obvious in private markets. So as I was asking you to prepare for this conversation, I challenged you to offer me three areas of opportunities that you're seeing in private assets right now. So if you're game for it, I'd love to dive into those. So let's start with the first one. Where are you seeing your first opportunity in private markets today?

John McNichols: Well, so the first one I'd mention is one that I know you've heard before from others here, particularly on the CML side, and that's US construction loans. So the way the commercial construction market works or the commercial real estate market works is property owners will either own a piece of land, acquire a piece of land, they'll permit that up, they'll develop plans for a building, and in the course of that they'll invest a ton of their own money. Then what they do is they go out and they borrow money to finance anywhere from 30 to 60% of the total value of the property based upon whatever lending conditions they can find. There are some really large ones, but the majority of these loans fall between say$ 30 million in size and let's say 80 to$ 90 million in size.

Greg Campion: Okay.

John McNichols: That's very unscientific. I go through the IC and I see the deals we bring, and this is sort of the general wheelhouse for the size.

Greg Campion: Yeah.

John McNichols: A big part of the permanent financing for these properties is insurance companies and other long- term investors. The biggest providers of capital for the construction of these buildings is actually the regional banks. The same regional banks, which we spoke about a few minutes ago, who are in risk reduction mode because of the asset liability management on their balance sheet. That's going to leave a big gap and a big opportunity for investors who can tolerate the structural, I'll call it inefficiencies of that market. If you do a$ 50 million construction loan, the money kind of goes out gradually over two, three years as the building is built and then it gets paid down when it gets to be 50 million as they get permanent financing. Sometimes it's outstanding for a year or a little more, but it's not going to be outstanding forever. And so it has an inefficient footprint for a lot of long- term lenders who would rather have their money invested for, the full amount invested for a long period of time. That's the most appealing structure. But if you can tolerate this structure, what we found today that for really a quality properties in multifamily retail, not office, top level hospitality industrial properties financed with less than 50% debt and the basis in the land is also often very low because it's been owned for a while by these equity sponsors. And you can identify, you find opportunities with coupons of upwards of eight or 900 basis points with a couple points upfront fee and then a funding fee on top of that. And you can pretty easily get to, presuming they get taken out after three years IRRs of roughly 13 to 15% on some of these deals. And to me, on a risk adjusted basis, that is as good an opportunity as you can find today.

Greg Campion: Now is that I, so I think we've discussed that once or twice with Nasir Alamgir from our real estate debt team and should probably mention that given your role kind of being able to look across Barings and you kind of benefit from being able to interact with all of these teams and kind of see what they're seeing. And so one thing that we've I think talked about with Nasir a little bit, I'd be interested to get your take on is, is that a pretty counterintuitive or non- consensus idea given where we are in the economic cycle? I mean you said you're not expecting necessarily that we're heading off a cliff economically, but I think most people are looking at a year's worth of interest rate hikes, there's layoffs happening, different parts of the economy, potentially we're heading for a recession. So is it a strange time to be allocating toward construction loans heading toward a recession?

John McNichols: I think you really want to be careful with property type and property location. You don't want to just go out and make loans against any property and in any location. Unemployment's up 3%, right, or 3%. If the unemployment goes up, we're still going to be in an economy that probably needs workers. Consumers have built up lots of cash like cash cushions, but from all the COVID payments and just generally if you're speaking the increase in savings. That has come down, but it's not gone yet. I feel pretty good that consumers will, again, overall weather the coming downturn pretty effectively. And I think what really makes this stand out though is the fact that historically these kinds of risks, if you look at the pricing for a stabilized property, not a property that you're building, but one that's fully leased, same quality in a great location spreads on that are still sub 200. So there you're financing 60%, so you're financing more, still pretty good loan to value. It could be more 60, 65%, but it's already performing at sort of full cash flow level, covering interest a certain amount of time, but you're going to get paid less than 200 basis points in spread for that mortgage. And it's going to be probably a 20- year amortization and a 10- year kind of bullet payment at the end. So much longer, better efficiency because you'll have more capital working for more time. But the difference in value is just stark, in my opinion. That's sort of potentially 10, 12% difference in value between the construction and construction does present risk. Right. Until you get that building built and leased,

Greg Campion: Yep, yep.

John McNichols: You have risk.

Greg Campion: Yep.

John McNichols: But if you can finance the right property in the right location, I think that's pretty modest risk. And again, don't buy an office building in the middle of New York City.

Greg Campion: Yeah.

John McNichols: If you're talking about a new hotel in the best neighborhood in Denver, retail residential complex in a great location in Atlanta or Miami, these are imminently financable properties and that rate is just very high. And frankly, if we didn't have the banks pulling out, I suspect ordinarily those would be sub 10% kind of loans, they'd be sort of eight, 9%. And so I think you're picking up, and I would defer to Nasir on that. He would be able to get more precise, but I think you're picking up a lot of extra money compared to some of the other areas we'll talk about in a sec. For instance, my second one was going to be European direct lending. I think based upon the changing economic outlook for Europe vis-a-vis the US. I think a year ago European economic fortunes looked to be much more negative. You had much closer proximity to the energy shock, you had the war situation, you have much higher inflation as a result, you have economies which are just inherently less dynamic and less productive. I think it looked pretty dire then. Today, gas prices are back to where they were when Russia invaded Ukraine. We're not too far off where we were pre COVID. Inflation remains high, but the central banks there are a couple quarters behind at least the US. And I think one of the things that I think economists will tell you is that because the economies are more regulated and less dynamic, they respond with a less sensitivity to central banks. And so as the central banks raise rate, it's going to be a longer more drawn out process and the growth there is never going to get to three, 4% like it can get in the US, but at the same time, I think the risk of a recession there is pretty modest too. And so I happen to European direct lending. There you can find deals that are at attractively levered, spreads probably in the seven to 800 basis point range on top of base rates that are three, three and a half percent, more than that on a forward- looking basis if you lose the forward curves, which is very cheap. But if you look at it relative to say broadly syndicated loans in Europe or relative to historical spreads and direct lending, it doesn't have the same level of cheapness to itself and to its competitor products as the construction loan does.

Greg Campion: I see. Yeah.

John McNichols: If that makes sense.

Greg Campion: Got it.

John McNichols: But we also like it because the European companies tend to be levered. All things equal tend to be levered a little less. You tend to get paid a little more for per term of leverage, the track record of defaults and so forth in Europe and our direct lending business and our competitors for that matter is just pretty good. It's pretty low.

Greg Campion: So US construction lending, somewhat of a non- consensus call. And I think based on some conversations with our colleague Nasir and that team, I think to your point, sector selection matters dramatically there. And then I think the other point that he's made to me before is that just around the timing of some of these, so a lot of times the timing of making a loan heading into an economic slowdown can be pretty good because of the maturity of it. By the time you're coming out and the building is delivering, you're in theory potentially back to a healthier economic,

John McNichols: That's right.

Greg Campion: Backdrop.

John McNichols: Yep.

Greg Campion: Interesting to hear your commentary on Europe. I think that's a place where it does seem like we are in a pretty different place from an economic standpoint than we were just a year ago in terms of the number of worries that are on your plate. And obviously there's still war going on and that's a major wild card and something for investors to be considering. On the European direct lending side, I mean, do you see more value there versus other geographies, whether it's the US or Asia? And just curious about how valuations kind of compare across regions.

John McNichols: Yeah, Asia had a moment, if you will, at least the way, in our direct lending has a very distinct flavor to it. We focus on first lean, senior secured, true middle market, meaning EBITDA between 15 million and 70 million, 90% of the deals we do fall in that category. We don't do the big deals. We put a covenant in every deal. And so ours has a very plain vanilla, conservative, boring sleep at night direct lending strategy. And so when I speak of direct lending, that's what I'm speaking about. There's a whole other world of direct lending out there, which we'll get into in a minute because I think we'll have some good opportunities there via the capital solutions team here,

Greg Campion: Right.

John McNichols: In which people do non- sponsored loans, they do large middle market companies, they do deals with slightly different structures, more creative structures designed to meet a particular need that a company might have that doesn't fit the more, I'll call it, the more disciplined strategy that Barings pursues, that number of our competitors pursue. When you ask about other opportunities, I think the US and Europe, apples for apples I think are pretty close. I mean I think I like Europe because their spreads are a little wider there now and I think that they've just, US spreads are wider than they were a year ago, but not quite as wide as they are in Europe right now. You have higher base rates in the US. So depending upon your home currency, you might choose to invest in one or the other. Obviously the best place to be now is European credit spreads on dollar currency and that gives you the highest yield of all. But US is good, it's just not quite as good as Europe. Yeah. Asia, we're not doing as quite as many deals in Asia. There was a moment there about a year ago, maybe a year and a half ago when we found a bunch of deals down there as banks were pulling back from financing in that market and it opened up some opportunities that we had not seen for years and years and years. But I think that the general level of activity there is a little less than it was. So while I think still think you can find opportunistic deals, it's harder for us at Barings to go out and say, let's get a lot of exposure here because we're not seeing a lot right now, so.

Greg Campion: Got it. Got it. Okay. So US construction lending,

John McNichols: Yep.

Greg Campion: European direct lending. And then you said there was one more opportunity maybe related to the capital solutions team.

John McNichols: Yeah. And it ties back into your big first question. So we believe, and we have great relationships with lots of banks and investment banks, commercial banks and our capital solutions team in particular has been active. And we think you're going to see lots of opportunities to help these banks selectively pair risk on their balance sheet. That can come in lots of ways and we can choose how we want to do that. I think that you'll see some of these banks pulling back in different areas. You'll see some pulling back in real estate, some pulling back in direct lending, some pulling back in consumer lending, some all three. But either way we are going to have opportunities to participate in that. And just to give you an example, we worked with a large investment slash commercial bank to reduce risk in a particular name. They were not selling the name, they simply had an appetite to reduce risk generally. So they were selling partial positions in a number of different risks.

Greg Campion: This is in a public market credit,

John McNichols: Private credit.

Greg Campion: Private credit. Okay.

John McNichols: Basically a middle market direct loan. But in a company that was bigger than we would typically do.

Greg Campion: Okay.

John McNichols: And we were able to buy that at a dollar price of 90 and an expectation that that deal probably pays out in probably a couple years and an expected IRR on that trade of between 11 and 13%, depending upon when it pays out. The company, I believe it had a spread, initial spread of maybe four to 500 basis points when the deal was done. So pretty low risk company, a good company, a company they liked, but these banks, whether they're large or medium- sized, are going to be reducing risk. And that means more than just not making new loans. Sometimes that means looking at your existing balance sheet and looking for ways creatively to reduce the risk that can be done. This trade happened to be actually literally buying half the loan from them. There are synthetic ways to do this and like I said, you can do it across the different types of risk, whether it's real estate, consumer. And I think that general source of deal flow will be a significant point of focus for us this year. And I think it will provide lots of opportunities. So call it another form of direct lending maybe. And I think it's probably going to happen more in the US than in Europe. I think Europe, like I said, the banking systems in better shape. I don't think they're looking at this SVB crisis and thinking that they've got a lot of wood to chop as a result, whereas I think they do in the US.

Greg Campion: Yeah. The point you were making about working with banks to help them remove risks, I mean, I imagine that could come in many different flavors, that banks may be looking to reduce risk in many different parts of their businesses. And I'm also just thinking about, I think Jamie Dimond put out his or put out their, JP Morgan's investor letter today and he was talking about this banking crisis potentially being something that takes multiple years to play out. Would you expect the same in terms of, I mean, do you think there's a real long runway of potential opportunity here for alternative lenders like Barings to come in and help banks offload risk?

John McNichols: I do. Broadly speaking, that theme of banks becoming less central to the capital origination process and alternative lenders becoming more important, I think is a really important theme to discuss. We're obviously a part of, here at Barings that's a large part of kind of, that it explains why we're in this nice building and why we get all the opportunities we do. I think that's going to continue and I think that's good. If you think about a world in which capital is allocated according to the sort of whims, if you will, of senior credit officers in a dozen global banks, right, it's very hard for them to know exactly where to push the accelerator and where to tap the brakes, right, across all their portfolio, no matter how hard they try because they're one actor. And what's happened over the last, say 40 years is we've gone from these, let's call it dozen actors that grow globally to hundreds if not thousands of actors globally. And we're probably not done yet. And so this is going to be another catalyst. Right. This will be a milepost on that journey. The regional banks are where we're going to feel it the most. The money center banks probably don't have a lot of risk to get rid of that they need, that they'll be forced to get rid of. But I think the regional banks are the ones that'll be really the focus of the next round.

Greg Campion: Yep.

John McNichols: So I don't think in terms of dollars it's not going to be quite as significant, but in certain markets it'll be really important. And I think we talked about real estate being one of them. I think direct lending is one of them. And I think he's exactly right. I actually started to read that, but it's very, very long.

Greg Campion: It's a 40, I think 46 pages or something like that yeah.

John McNichols: I sat down this morning with my coffee and I got through two pages and said, I'll finish it next week I think.

Greg Campion: Yeah, apparently it's one page shorter than last year. So okay. All right, John, well we covered a pretty broad landscape of opportunity here in this conversation. And obviously we didn't go super deep on any of these, but I hope it gives listeners a taste of the type of thing that you and your team are looking at, but also just some pretty current views in terms of where you're seeing relative value across the market today. I guess the last question, and just thinking of it from an institutional investor's perspective, maybe even a wealth investor's perspective. As their trying to navigate this environment in their own portfolios and private assets becoming a greater and greater part of many investors' portfolios I mean, what do you think they should be looking for in terms of a manager, in terms of access to opportunities, in terms of finding relative value? I mean, what would be some of the things that you would advise that they keep an eye out for so that they are capitalizing on opportunities that are rising like the ones we just talked about?

John McNichols: That's a good question. I think it's really hard for the average investor to do the kind of research on a manager that you'd want to do to really ascertain the quality of their relationships and the depth of their origination capabilities. And I think to answer your question succinctly, I would say it's the quality of the relationships and the depths of the opportunities. I mean, that's the answer because private markets are private. Right. And so they work really well for borrowers and lenders, but the opportunity set is as good as you make it. And you've got to be partners with the right people. You've got to find people who, not just people that have the right risk return filter but have one that matches yours. Risk is risk. There's low risk, mid- risk, high risk. And there clearly are people who don't get it right, but there are a lot that do get it right. They just operate at different parts of the market. And as a lender for instance, what I want to do is find whether it's a private equity firm or a sponsor in the infrastructure market or a commercial real estate sponsor, what I want to do is find a sponsor to do business with who shares a similar perspective vis-a-vis risk. And we're at Barings, even when we traffic in risky markets, we're relatively low risk. We pretty disciplined underwriting. We don't have a high tolerance for losses, even if we're in trafficking and investments where we have high expected returns. It's okay if the portfolio bends a little, but we don't want it to break. But finding that investor or that sponsor who has a similar profile vis- a- vis risk as you do because you'll inevitably have a problem. And when you do, you're going to have to sit down at a table and work it out. And the beauty of these markets is that it's in that collaborative process that you preserve value. Whereas in the public markets, you leak value. In the private markets, you sit down with other lenders and the sponsor and you work out a solution in which you preserve the value of the whole and make sure it's allocated appropriately between the different parties. And that's very different. If I'm a high net worth investor, I think I would stick with brand names, I would try to find the lowest fees you can, fees have a big impact on returns in private markets. In general, you find that the managers you charge the highest fees in private markets also take the most risk. There's like a one- to- one relationship or a very 100% correlation between those two things. So try to find the lowest fees you can, try to find the brand names, and maybe I'm talking my book, but I think diversifying across different asset classes is a good thing.

Greg Campion: Yeah.

John McNichols: Right. So if you can find a vehicle, whether it's a private BDC or an interval fund or whatever structure you can find, if you can find one that does a little bit of direct lending, a little bit of real estate, a little bit of infrastructure, I think you'll be better off. You'll have a lower overall risk profile for the same level of return.

Greg Campion: Yeah. Yeah. Yeah, that's great context. And I like your points around risk in particular. So as we mentioned up front, I think a lot of investors are looking at the risk that they have, especially related to banks, assessing that. And I think making sure you're working with a manager whose sort of aligned with you philosophically in terms of the appropriate amount of risk to take, et cetera, is really important. Well, John, this has been illuminating for me, hopefully for our listeners as well. Always great to hear your perspective, your very broad perspective on relative value across private markets. So thanks so much for joining. This was a pleasure.

John McNichols: Thank you. The pleasure was mine, and look forward to talking to you again.

Greg Campion: Thanks for listening to episode number five of season eight 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 and emerging markets, make sure to follow us and leave a review on your favorite podcast platform. We're on Apple Podcasts, Spotify, YouTube, and more. We publish a new episode every other week. And if you have specific feedback, you can email us at podcast @ barings. com. That's podcast @ B- A- R- I- N- G- S. com. Thanks again for listening and see you next time.


Head of Private Multi-Asset Investing, John McNichols describes how the recent banking crisis is impacting private markets and discusses where he and the Barings team are seeing private market opportunities in areas like construction loans and European direct lending.