Direct Lending: Beyond the Headlines

Media Thumbnail
  • 0.5
  • 1
  • 1.25
  • 1.5
  • 1.75
  • 2
This is a podcast episode titled, Direct Lending: Beyond the Headlines. The summary for this episode is: <p>The direct lending asset class, and private credit more broadly, have recently attracted much investor interest and a fair share of media hype. What's real and what's noise? Ian Fowler draws on his 30+ years of industry experience to help listeners get a true lay of the land.</p><p><br></p><p><strong>Episode Segments:</strong></p><p><br></p><p>(01:42) - Thoughts on the "trendiness" of direct lending</p><p>(06:05) - Assessing the performance of the asset class in 2023</p><p>(10:40) - The nuances of deal origination when LBO activity is light</p><p>(14:28) - How pricing and structures look today</p><p>(19:04) - The default outlook for middle market borrowers</p><p>(24:46) - The implications of many new entrants into the asset class</p><p>(28:44) - Trends in LPs' appetite for direct lending</p><p>(33:57) - The bull &amp; bear cases for direct lending from here</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>23-3143522</p>
Thoughts on the "trendiness" of direct lending
04:32 MIN
Assessing the performance of the asset class in 2023
04:34 MIN
The nuances of deal origination when LBO activity is light
03:46 MIN
How pricing and structures look today
04:34 MIN
The default outlook for middle market borrowers
05:41 MIN
The implications of many new entrants into the asset class
03:56 MIN
Trends in LPs' appetite for direct lending
05:02 MIN
The bull & bear cases for direct lending from here
03:10 MIN

Greg Campion: If you follow financial markets, you've undoubtedly noticed that direct lending, a subset of private credit, has risen from relative obscurity to suddenly being a trendy allocation choice for many investors, arguably for good reason. But beyond the obvious attraction of the potential to earn an illiquidity premium relative to public markets, and to do so with potentially less volatility along the way, investors are faced with an increasingly complex investment landscape to navigate, given the expanding opportunity set, a host of new entrants, and an ever- shifting macro backdrop.

Ian Fowler: The reality is, look, there are a lot of people operating in this asset class that haven't been through a cycle. And yes, while we are believers in the long- term structural growth case for a direct lending, we do think there will be clear winners and losers along the way.

Greg Campion: That was Ian Fowler, co- head of Global Private Finance at Barings. And this is Streaming Income, a podcast from Barings. I'm your host, Greg Campion coming up on the show, digging beneath the headlines to understand the real opportunities and risks in today's direct lending markets. All right. Ian Fowler, welcome back to Streaming Income.

Ian Fowler: Thank you, sir. Good to be here.

Greg Campion: Yeah. Excited to have you here. And I think I need to congratulate you upfront here because something very special has happened, and that is that after operating in the middle market lending space for some 30 years of your career, you can finally say that you are in a trendy asset class in that direct lending, or private credit, or middle market lending, whatever you want to refer to it at, is now the hot place to be. How does that feel after so long in this space?

Ian Fowler: Well, it feels like you just hit me with a tsunami with that question. So, a lot of things go through my mind. I'll come back to the word trendy when I wrap up my answer to this. As I think about it's surreal on one hand. I can remember being a senior leader at GE Capital thinking, did I want to spend the rest of my career in this esoteric finite asset class? And thankfully, I decided to stay in it. But when I step back and think about it, you look at the asset class and the attractiveness has always been there. It was there. The world didn't know about it. It was there for insurance company, it was there for finance companies. So, insurance finance companies, FinCo were all doing it. They were all investing in this asset class, and they saw the benefits and the attractiveness of the asset class. But it wasn't accessible to a lot of institutional investors outside of that. And so, I think when you look again at some of the other trends, the migration of public to private, which has happened on the equity side and the amount of private equity that's been raised, and how strongly correlated we are to private equity, that's a natural progression. So, all of that makes sense. And I did found a company that raised third party capital prior to the great financial crisis. But it was actually a great financial crisis that was the catalyst to really opening up this asset class. Because if you think about it, after that crisis, it was the search for yield. And BDCs were able to... That group of investors really grew with that search to yield. And then you had the migration of all these balance sheet lenders to asset managers because the institutional investors were looking for that yield to improve the returns in their fixed income bucket. And so, yeah, you step back and you're like, well, it makes sense now. The only thing I'll say to the point about trendiness is this asset class has been around for a long time. It's proven itself. The asset class itself is not trendy. It's just that now it's being accessible on a much wider basis than it's ever been.

Greg Campion: That makes sense. That makes sense. Yeah. I mean, fundamentally it hasn't changed. I can remember back probably eight, nine years ago, working with your team and working on some content to get out to our investors at the time, educational stuff where we were explaining the basics of illiquidity premiums and things like that. And that felt very, still very niche and esoteric almost back at that stage. But now, it's almost a little bit surreal to see turning on CNBC and Bloomberg every day, and seeing people talking about private credit.

Ian Fowler: True.

Greg Campion: I think at that time we were like, well, private credit, you don't talk about private credit on TV, right?

Ian Fowler: No. No. And direct lending. And what's great about that is throughout the last 20 something years, whenever you talk to someone about this asset class, you had to explain what is this asset class? Well, why aren't banks doing this? So, all that's gone away. Now you're actually getting into specifics around the asset class and track records, and things like that. And so, the conversations that you're having with investors are, to, me a lot more interesting because they're a lot more sophisticated conversations. And I'd much rather have a conversation with an investor that's very sophisticated and we're having discussions about the asset class and performance, and they're asking good, tough questions than me having to do a one-on-one.

Greg Campion: Yeah. Yeah. Yeah, that makes sense. We've done one- on- ones before, folks. So, if you're listening, we could probably dig it up out of the archives for you.

Ian Fowler: Exactly.

Greg Campion: Well, let's talk about the performance of the asset class. So, direct lending has, I think, had a pretty strong year thus far. And let's define our terms. We're talking about loans that are made to middle market companies. This is a subset of the overall private credit umbrella, which includes a much broader set of asset classes that Barings is involved in. But right now we're talking about direct lending, your area of expertise. And tell us a little bit about just how the market's performed this year. Maybe if anything has surprised you, that'd be interesting to hear.

Ian Fowler: Yeah, so let's start on the front end. Let's talk about the origination side and LBO activity. And not surprisingly, the market's been slow this year with rates being elevated, companies being faced with... Initially in'22, we saw the continuing supply chain issues not being able to keep up with companies demand. And so, that created inflation. Then of course you had pent- up consumption demand, which further increased inflation. That's how we've gotten into the position we are today with respect to inflation. And so, for a lot of private equity firms, they have to be thinking about margin contraction in that environment. And then on top of that, the fed's response to all that was increasing rates dramatically, most dramatic and almost in history I think. So, all of that together, you have to stand back and say, " Okay, what's that going to do to valuations? And do I really want to catch a falling knife if I'm a private equity firm in terms of going out there and buying?" So, not surprised that the market hasn't been extremely active in terms of new activity. So, it has been rather slow in terms of new activity. I think when good companies do come to market, it's a little bit of a feeding frenzy around them just because there's not a lot of supply. And there is a lot of money on the sidelines that's trying to be put to work. Again, I'm not surprised by any of that, but I think what private equity has seen is that really valuations haven't really changed that dramatically. And so, my expectation is that we'll continue to see lower than average deal flow this year. But it could certainly pick up in the back half of the year as you see the performance in companies dealing with the rate increases. Now, on the portfolio side, I think the two key things is one, when you're in this space, I mean, obviously we all talk about asset selection. And if you've been disciplined and you have been good on the asset selection, you've picked companies with true fundamental value that have pricing power because they do have that fundamental value, they've been able to increase prices. And so, what you've seen with companies like that is they've been able to deal with margin contraction initially from inflationary pressures, higher costs through the supply chain. And they've been able to put through price increases. And then as rates came through, they've been able to adjust their pricing again. And if they've been able to get away with that, then they've actually been able to stabilize margins. So, if you pick the right companies, they've been able to do that. The other thing is from a portfolio construction standpoint, if you were disciplined and then over lever the companies that you were investing in, then that also helps deal with the rising rate issue. So, if you had a portfolio where your average weighted leverage is around five, maybe five and a half at the top end, then you're able to muddle through this. But if you're at six times high octane leverage, those companies are really having a tough time. So, the thing that surprised me is that weighted average leverage in our portfolio has always been around five times, give or take, on either end of that. And we've been very disciplined in focusing on those companies that have true fundamental value and pricing power, and they've been able to put through price increases. Initially you have the contraction in the margins because costs go up. But then they put through the price increases, the price increases stick. All of a sudden they are able to get back to where they were from a margin standpoint. And so, what I'll say is, I'm not completely surprised. But it's good to see the resiliency of our portfolio in this environment.

Greg Campion: Yeah. Now, just going back to the origination side of things. So, interesting to hear. I mean clearly there's been a big slowdown in LBO activity last couple of years. Uncertain macro environment, higher rates, all of that playing a role there. And interesting to hear you describe that there's a lot of capital on the sidelines. It's been chasing maybe a lower supply of deals. Now, my understanding is there's another dynamic part of that. And that's basically the potential transactions that are embedded within your portfolio and how that can almost be a little bit of an insulation from some of these market forces. Have you experienced that this year?

Ian Fowler: It's actually something that's really attractive about this asset class and especially for those platforms that are mature platforms that have a large portfolio. If you're in that situation, you're not a hundred percent relying on new deal activity to put money to work. And of course when you look at the environment that we're in, and I'm sure we'll get around to talking about the structure and pricing of deals today, you're looking at asset class that's generating 10- 11% returns. And so, of course, all of us want to put as much money to work as we can, because this is going to be a great vintage. And so, one way we've been able to do that, and it's a very effective way of doing it because it's actually less risk than funding new platforms, is supporting portfolio growth. And the main investment thesis has been for private equity firms is consolidating fragmented industries. And so, that means doing add- on acquisitions. And so, effectively what you're doing is you're providing growth capital to your portfolio to help those companies become bigger, better, stronger, more diversified credits in the companies that inside and out. They're your best credits. And so, to be able to do that in this environment is extremely attractive. I would say that historically the average has been around in good markets where the LBO activity was a new deal activity was pretty frothy. I would say that 30% of our output in terms of gross origination was in new platforms. That number has been increasing as the number of new LBO activity has declined. I think at the end of 2022 on LTM basis, we were probably about 50/50 in terms of the mix between new gross origination and portfolio add- ons. This year, we'll be around 70% of our activity will come from our portfolio.

Greg Campion: Yeah, wow. Really significant. Yeah. And I imagine that to your point, that's a big difference if you are a manager who's been operating the asset class for a long time. Has that established portfolio of companies as opposed to a new entrant, where maybe you're a little bit more subject to put money to work in some of these deals that are potentially less attractive given market forces.

Ian Fowler: There's a lot of pressure on those firms to put money out the door again, because the investors are saying, " Hey, this is a great time to invest. What are you doing?" You don't have that portfolio to rely on. So, you are focused only on new deal activity. And again, you've got to be extremely careful. I don't know, I don't have a crystal ball. I don't know if we're going to have a recession. We've talked about the potential of a recession. But the last thing you want to do is back up the truck right before a recession.

Greg Campion: Well, let's talk a little bit about the pricing and the structures that you're seeing out there. I don't know if those differ based on a transaction that's part of a recent M& A deal or an add- on acquisition for a credit that's already in your portfolio. But broadly speaking, as we sit here heading into the year- end 2023, what are you seeing when it comes to pricing and structures in this space?

Ian Fowler: Let's just break up the year into the first six months and then we can talk about what we're seeing right now, because there has been some drift. But in the first six months when really volume was at its lowest in terms of new deal activity, we really saw contraction and leverage as you expect. I mean, again, when you look at the interest rate increases, there's only so much leverage you can put on these companies and these companies can only afford have enough cashflow to cover so much in terms of their debt obligations. So, that's going to be a natural limitation right there. So, we saw leverage really dropping down into the four and a half, five times range from the six times range where the market was and even above in certain sectors. And pricing really increased to as high as 650 basis points or so in terms of spreads. And, of course, documentation tightening as you would expect in a market like this. So, clearly everything was in the favor of the lender side. And again, when you look at where the markets are, that should be the case. I think what's happened is as there are new entrants coming to the market, there are more players out there. There is a feeding frenzy I would say, when you have a good property that comes to the market. And so, naturally it is competitive. And you're starting to see spreads come in a bit. So, we've seen spreads come in, call it 50 basis points, maybe 75 basis points from where they were. Leverage really hasn't changed that much. It's maybe gone up a bit, but again, just given the cost of debt, there's only so far it can move in terms of expanding on the leverage side. The key is really the definition around EBITDA and adjustments to EBITDA, and making sure that's tight enough that they have the cashflow there to basically cover their obligations. So, we're seeing a little bit of tightening, but base rates have still been going up. So, you're still looking at returns in the 10- 11%. And I would just say the reality is it's very attractive, but that's not sustainable. I mean, this asset class shouldn't be generating 10-11% returns. Because if it is, then equity's got to be way higher than... I mean the math just doesn't work. So, we're going to see at some point all in yields contract. I mean that's just going to happen at some point. But even with a little tightening right now on the spread side, you're not really looking at on an all in yield basis that much difference in terms of the total return for investors. So, right now continues to be a great time. My expectation is that for the remainder of the year. And we are seeing a pickup in deal flow. And we are seeing a pickup in better quality deals. Because again, if you look at rates increasing so dramatically in such a short period of time, a lot of buyers want to see the impact in the numbers before they actually buy that company. And so, we're seeing companies come to market that have been able to absorb the higher costs by increasing their pricing, like I said. And those are very attractive properties for a lot of PE shops. And so, those will come to market. And I think as valuations haven't really changed that much, I think there'll be confidence that in the marketplace and we will have a busier back half of the year. How busy it'll get, I don't know. But it'll be busier than the first half.

Greg Campion: Okay. So, potentially in a little bit of a sweet spot right now, just given the higher base rates, there's still high credit spreads that you're able to achieve, there's still a decent amount of discipline in some of the documentation. I know I've heard you talk a little bit about the attractiveness of this vintage right now, so it sounds like we're still in that sweet spot. As you mentioned, there's a lot of implications of higher rates. So, on one side of course, higher rates feeds through to a higher yield in the form of base rates. Great for investor to get that, help them meet their return targets. Of course, it's a double- edged sword. And on the other side, you've got borrowers that have a higher debt servicing obligation. And this being a floating rate asset class that can become potentially cumbersome for some of these borrowers. How are you thinking about the overall health of borrowers today? And I'm just curious if you're expecting any imminent rise in defaults on the back of higher rates or anything else?

Ian Fowler: Yeah, great question. So, I mean, we just went through our portfolio review for the third quarter and we saw from a portfolio basis an increase in gross profit margins. We saw an increase in EBITDA margins from the previous quarter. And we saw interest coverage flat. And so, what that tells me is, again, it goes back to my comment that these companies are managing their way through this environment. I would say a lot of the companies that we discuss in the portfolio review, the management teams feel optimistic about the remainder of the year. That's great if that happens. But of course we're not going to bank on that. But what we're seeing are these companies are adjusting to this higher rate environment and the challenges that they've had. They've been able to put through price increases. The price increases have stuck. And so, I think we have to expect that the higher rates are going to last longer than anticipated, and maybe we have another rate increase or two on the horizon. So, I'm not expecting things to fall off a cliff in terms of our portfolio. And I would think that as long as we always have the demand side of the equation there, the consumption side, then I think you can muddle your way through this. Now, the question is on the consumer side, you can look at a lot of economic data out there and you can see issues, whether it's housing and mortgages, or car payments, and...

Greg Campion: Student loans.

Ian Fowler: ... Financing.So, there's some real issues there. Now, from a portfolio perspective, we just don't like dealing with consumers in our portfolio. So, we avoid industries like retail restaurants. We don't like consumer product companies by nature. So, I think if you are heavily exposed to consumers, I think you have to worry about the demand side because that can't go on forever. But certainly on the corporate side, if you're B 2B, I think again, I think there's a pathway here to muddling through. I also think that everyone's looking at the election next year. And seeing this opportunity that who knows what happens after the election. But no one's going to theoretically allow a recession right before election. So, I think this is this Goldilocks time right now to take advantage. And I think that again, that's going to be beneficial on the deal flow going forward. And I think for these companies right now, there's a pathway to model through this. I think the Fed is, at least from what I can read, is indicating a soft landing. Which means, I don't know when they start reducing rates, I think it's going to be later than sooner. But if that's around the corner and they feel comfortable, we're going to avoid a recession, maybe we'll get through this without any real issues. End result, to answer your question, yeah, there could be an increase in defaults. To me, that's not really the biggest issue out there. It's the loss given default. And if you have a company that is struggling to meet their payments, the playbook is basically you get the private equity firm to kick in some equity, you pick some of the interests, you get paid for picking, and you help that company get through whatever issues they're having. And as long as you have fundamentally a strong business with a management team that's doing all the right things, private equity that's supporting it, and the lending group that's in alignment with all the other constituents, that company's going to get through whatever issues, and you're going to avoid any loss given default. That's what I've seen in 30 years of doing this.

Greg Campion: Yeah. Yeah. Well, I mean that's another attraction, I guess, of the asset class relative to public markets. And we saw that through COVID, where direct lenders had more flexibility to work with management teams and sponsors to amend terms and extend loans if needed, to help them get through periods of difficult time while avoiding a default. So, it seems like you've got a little bit of that flexibility baked into the structure of the asset class. So, I guess it's that. It's like you said, it's the sector selection. And I know you and the team have historically shied away from a lot of cyclical, or fad, or as you mentioned, consumer oriented businesses. So, I think that's helpful context to understand that you may see some of those defaults come through probably inevitable depending on the direction the economy takes. But there's ways to be smart about managing that. And it seems like there's enough cushion in the spread you're earning today to probably make up for that. Okay. So, let me ask you a little bit about the competitive environment. It's been just fascinating to watch. We mentioned upfront that historically we haven't seen a lot of discussion of this asset class on television. And now it seems like it's on the headline. And it's probably in the Wall Street Journal every day. There's an article in CMEC or Bloomberg every day, one of the listed managers is talking about the asset class. So, lots going on. A lot of new entrants. I mean, there's so many headlines around this bank setting up this division, this new entrance, this traditional equity manager or something like that, opening up a private credit division. I mean, it's really something to see. So, I'm curious, put yourself in the shoes of our clients, our investors, from their point of view, what does this all mean in terms of how the competitive environment is shifting? What are the implications for them?

Ian Fowler: Yeah, well, it makes their job harder as an investor, because now you've got so many different potential managers out there. And quite frankly, unfortunately, we really haven't had a major dislocation in the market where it's easier for managers to show a distinction between performance having gone through a major dislocation. I mean, COVID was a speed bump. So, yeah. And I think going back to your first question about trendy, I mean some of these platforms, you wonder if there are hobbyists that are just kind jumping in and jumping out. They're trying to jump on the bandwagon here because the asset class is growing so exponentially. And I think we're still early stages of that, quite frankly. So, it goes back to one of the things I've tried to highlight in every conversation I've had with investors over the last, certainly the last 10 years as I've been talking to institutional investors. And that is you can underwrite the asset class, you can underwrite the manager, their track record and their strategy. But you have to underwrite the underlying platform and the strength of the platform, the diversification of it, where the capital is coming from, its ability to withstand and sustain a dislocation. Because if you were the perfect manager in the world with the perfect portfolio, and you were dealing with a dislocation, if you're limited in your ability to act because of the platform you're in, that's going to impact the performance ultimately. And so, I think investors need to really drill down into the platform itself, the ability of that platform to compete. And they're going to have to go through that competitive analysis. We need a dislocation to really flush out a lot of players in the market. I think if you look at the M&A activity that's occurred today, it's been mainly platforms that are having difficulty raising third party capital, looking for a new home that can help them raise capital. Or it's a platform that is having some issues within the portfolio, and they don't have the ability, whether it's covering margin calls, or they need more equity, or whatever it is to fix their own balance sheet, they need to find a new home. So, those have been the the M& A activities today that have occurred. And so, that just goes to show you that if you look at the market today, we haven't gone through that full test yet to really sort out who should be in business and who shouldn't. And that's the challenge.

Greg Campion: Yeah. Yeah. Curious what you're seeing in terms of trends from LPs, limited partners, in terms of their appetite for private credit. So, we already mentioned several times, tons of headlines every day about more and more demand for private credit, direct lending specifically. Are you actually seeing that from... I know I like to jokingly refer to you as the international man of mystery because I never know which country you're in. But you're always-

Ian Fowler: Sometimes I don't either.

Greg Campion: You're always having conversations with some of the largest limited partners in the world, meeting them where they are, hearing their concerns, talking to them about what they're really trying to do with this asset class. So, what are you hearing from them?

Ian Fowler: Well, first, so on that, and this is obviously very cool. I mean, from my conversations with these investors, they are looking at this asset class now, like a formal core allocation of their portfolio. Which is great. That's the way it should be. Not just a yield enhancement, the fixed income, but its own separate allocation within a portfolio. And I think that is good for the long- term growth of this asset class. And again, when we talk about some of these larger themes that are out there, such as the migration of public to private, and all the private equity capital that's been raised and continues to be raised, and that's a majority of the M&A activity in the world is coming from private equity. So, all these tailwinds are great. And the fact that these investors are saying, " Yes, I like this asset class, I want to be in this asset class." And in the old days was we have two buckets. We got the fixed income bucket and we got the alternative bucket. And you don't fit in either one. And you were trying to explain, but, " Yeah, but it's a really good asset class and everything else." But they're going like, " It doesn't fit." Well, now they're saying it fits. So, that is really great to see. So, I think that's really positive. I think the trend that I'm starting to see, which I think you can understand why this would occur, is now a number of sophisticated LPs are actually looking to co- invest directly in transactions. And we see that on private equity side. Initially, if you go far enough back, private equity was really... The investors were just LPs in a fund. And Then it was, okay, I want co- investments too. I want to access transactions directly.

Greg Campion: Now, do they need to build out more of a private credit or direct lending team within their own business to be able to assess that? Or how does that-

Ian Fowler: Well, I mean that's where we will have to see how this plays out. There's definitely a lot of interest in co- investing. And again, I think that's great as long as they understand the asset class and that it is a liquid. And there will have to be times when you're going to have to work through a situation and you may have to ultimately take the equity in a company. And some of these things can take a while to fully realize recovery on these transactions. And as a co- investor, you're really not in charge. You're one derivative away, one step behind the actual lenders that are managing the credit. So, we'll see how this plays out. But there definitely seems to be more and more interest from investors to invest in these deals directly.

Greg Campion: Speaking of ways that they're accessing the asset class, are you seeing any other trends there?

Ian Fowler: I mean, there's different structures that are becoming more popular, like the evergreen structure. I mean, that's been around for a couple years as people try to figure that out and have figured it out. And I think that's a structure that a lot of people find attractive. Again, as long as you understand the asset class. And yes, you can get redemptions. But it's going to be limited and it's going to be under certain circumstances. And there's going to be a line of others that potentially at the same time. So, all of that needs to be thought out. But from a structure standpoint, I don't see any issues with that structure.

Greg Campion: Same underlying asset class, variety of ways to access it. So, you've got obviously multiple types of funds. I know Barings runs a number of different strategies, global strategies, North America, European strategies, BDCs, evergreen structures, like you said. So, lots of different structures built for different investors' needs. Same underlying exposure to the same loans.

Ian Fowler: Which again, if you take a step back, that's really cool. Because the asset class is developing to meet and be customized to investors' needs. And whatever they're looking for, trying to accommodate that. So, all that's going to do is further the growth of the asset class.

Greg Campion: Yeah. All right. Well, let's finish up on, get your forward- looking outlook here.

Ian Fowler: I don't have a crystal ball.

Greg Campion: All right. Let me ask it to you this way then. Bull case and a bear case. So, what does a bull case look like in your mind today, and what does a bear case look like? Take them in any order.

Ian Fowler: Well, and what's the duration we're talking here?

Greg Campion: For this asset class, why don't we say 24 months.

Ian Fowler: 24 months.

Greg Campion: Yeah. What do you think it should be? Is that the wrong...

Ian Fowler: No, no, that's fine. Yeah, no, that's fine. That works. So, 24 months. So, let me put it this way, I'll break it down. I think the remainder of this year, bear case is the market stays where it has been in terms of new deal activity. Again, that's not the end of the world. We've got a portfolio that's extremely active. And actually one of the benefits of that type of environment is you don't have any runoff or much less runoff. So, you're not out there constantly trying to replace the deals that are running off because they've outgrown you or whatever. So, I think bear case for the remainder of this year is that it just stays where it is. Bull case is that the markets really open up. And I think even going into next year, I would continue with that as people look at the election and trying to get some things done before the election. Because you said 24 months we're going after the election, that makes it a little more complicated in terms-

Greg Campion: That might be too hard to prognosticate on.

Ian Fowler: Yeah, that one, I mean, it's the jump-

Greg Campion: We still a whole election cycle to get through. We don't even know who the candidates are.

Ian Fowler: That's a jump ball. But what I will say is on a mid and long- term basis is that I still believe we're at a watershed moment where this asset class is really hitting an inflection point. And ultimately, at the end of the day, it's just going to keep growing dramatically as... I mean, there's still a lot of large investors that have minimal, if no exposure to this asset class. And this is a great time to be in this asset class, it's going to be a great vintage. And so, those investors are really focused on this. So, that's picking up steam. And then I think if we go through a dislocation, it might be a little muddy in the middle, but I think you'll have real winners come out of that. And I think investors will look at the asset class and see how well it performed during that dislocation compared to other asset class. And that demonstration, I think, will bode well long- term.

Greg Campion: Yeah. Yeah. Well, it's an exciting time to be in the asset class. I appreciate you shedding some knowledge and some insight here. And who would've thought it would be so exciting when... Way back when at GE Capital and all those firms over the 30 years, who would've thought this esoteric part of the market would be so exciting.

Ian Fowler: I'm just glad I stuck with it. Yeah.

Greg Campion: Well, awesome. Well, thank you, Ian. This is a pleasure as always. And hope to get you back sometime soon.

Ian Fowler: Absolutely. Thank you for having me.

Greg Campion: Thanks for listening to episode number two of season nine 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 @ Thanks again for listening and see you next time.


The direct lending asset class, and private credit more broadly, have recently attracted much investor interest and a fair share of media hype. What's real and what's noise? Ian Fowler draws on his 30+ years of industry experience to help listeners get a true lay of the land.