Private Credit: Winners & Losers

Greg Campion: Investor returns across private credit markets have remained remarkably steady in recent years. Even amid a global pandemic and more recently in the face of high inflation and rising rates. But are we about to see a watershed moment in this asset class that creates clear winners and losers?

Ian Fowler: You've got over 80% of the managers out there have never experienced a cycle before. They don't have the playbook. I'm not saying they're not skilled and they aren't sharp investors, but they're coming from different asset classes. They're coming from capital markets, they're coming from the large lending market, and you get your hands sturdy working with these companies. I think this asset class is going to become a permanent allocation within institutional investors portfolios, and the amount of capital that flows in this asset class is going to be enormous. So I think this is a watershed moment for the asset class, and I think for some managers it's not going to be a lot of fun.

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 today's show, co- heads of Global Private Finance, Ian Fowler and Adam Wheeler explain why they see the potential for continued strong growth in the private credit asset class, but how structural trends unfolding may result in clear winners and losers among private credit managers. All right, Ian Fowler and Adam Wheeler, welcome to the podcast. Very excited to have both of you guys here, excited to dive into private credit. It's been a little while since I've had both of you guys on the podcast and there's no shortage of things to talk about. So in this conversation, I'd love to hear about your latest thoughts on the market and also I think given the tenured careers that both of you have had in this space, I'd love to hear you put today's markets into long- term perspective. So with that quick intro, Adam, I might turn it over to you and just ask you to set the stage for us a little bit. If you wouldn't mind, and just talk to us a little bit about the overall backdrop you're seeing in private credit markets today and how the asset class is really positioned against an economic picture that's pretty uncertain. We don't know if it's a slowdown, but we do know that we still got inflation, et cetera. So talk to me about the overall landscape you're seeing out there today.

Adam Wheeler: Yeah, sure, Greg. I mean I think we've seen a lot happen in the direct lending market and in all markets over the last six to nine months. Maybe just a little bit of background and then we can talk about what we're seeing. I mean, I think we've seen through our portfolio, I mean we now have exposure to well over 250 names in our portfolio, and we've certainly seen the impact of the economic backdrop on those portfolios. I think over the last six months we've seen this is supply chain issues, some wage inflation flow through into the portfolio. What we have also seen is companies being able to pass on price increases to their customers. So that suggests that demand has remained fairly robust across the book, which is somewhat surprising. You would've expected the economic backdrop to start to have an impact. I think through Q4, companies have tried to pass on further price increases as we've seen costs continue to increase. Now I think we're going to see whether companies can hang on to those price increases in Q1 and Q2 this year. So I think Q1 and Q2 are going to be some interesting reporting information from companies that we're lending to. So I think your question around the backdrop, I mean, I'm sure we'll talk more about interest rates early days, I think in the impact on the portfolio that I think the portfolio we have is really well positioned as we go through the last six months and into this year.

Greg Campion: Yeah, yeah. And Ian, anything you would add to that, just more specific to the North American market?

Ian Fowler: Well, I think, and Greg, great to be with you after all this time and by tenured, I just want to make sure you're speaking regarding experience and not age. Just to be clear.

Greg Campion: Absolutely. Seasoned, tenured, whatever word you want to use.

Ian Fowler: Exactly.

Adam Wheeler: Unfortunately there's a high correlation between those two things.

Ian Fowler: I know that's true. But we have seen a lot and I think that's going to bode well for us as a platform in terms of the playbook and working through a conventional recession. But I think Adam did a great job in terms of talking about the companies and really looking at it from a micro perspective. And I would say in North America we mirror that quite a lot. Adam referenced 250 accounts, portfolio accounts outside of North America. If we add North America, we're over 550 portfolio companies. So we see a lot, I'm just going to spend a second just taking it up a level and talk about from a asset level perspective, more macro. And I think the key here is that, this asset class is resilient. And what's attractive now in this market is, because it's floating rates, it's obviously a riskier environment, but investors are getting paid for that risk with higher total yields. We now have yields for senior debt between 10 and 11% all in North America. We have higher fees, we have lower leverage, and we have enhanced structural protection. So at the end of the day, the market I think is adjusting to the environment that we're dealing with now. And as long as you have good companies with good sponsors and a lender that's in alignment, the company's going to make it through a cycle. And if you look at where we are today versus the great financial crisis, this asset class is in some respects better off with a lower loan to value of 40 to 50% versus 60 to 70% going into the last recession. Better interest coverage, albeit, and it's definitely getting compressed, as Adam said, based on inflationary pressures and rate hikes. But still better going in. And there's just more liquidity in this asset class today than there was pre- financial crisis with asset managers having a lot of capital versus the landscape back in 07, 08 was really because and insurance companies with limited balance sheet capital. So I think the key is, and Adam said it's already baked your portfolio, you're going to go into this environment. And I think as long as you've constructed attractive portfolio with a lot of diversification, I think you're going to be fine.

Greg Campion: I think there's still even so much uncertainty around what the macro picture that we're going to be facing in the months and years ahead really is. I mean it seems like every piece of economic data that comes out conflicts with the last, and there's a lot of question marks about whether or not we are actually edited into an economic slowdown or what the picture is. But one of the things that Adam mentioned upfront is that companies are able or have been able to raise prices and that's obviously helped the fundamental picture. Curious Ian, as you're looking at the health of the middle market company universe and the companies that you all lend to, do you think higher rates are starting to bite at this point? Are you seeing that? Do you see any trouble with any of these companies in terms of satisfying their debt obligations? Or are they still in pretty good shape?

Ian Fowler: Well, I think we're in a transitory period right now, quite frankly. I mean, as Adam said, if you have good companies that have a reason to exist, they've been able to pass through price increases. And so managers should have good portfolios right now. Mean if you don't, you're in big trouble. Because if you haven't been able to pass through price increases up until now, your portfolio's going to be a disaster going through a recession. So I think on the inflationary side, I think most companies were able to pass through price increases. I think given the cadence of the base rate increases at a certain level, it really does start to bite into margins. And so I think we're seeing the tip of the iceberg on some margin compression due to rate hikes. I don't think you'll see the full effect of that until the second and third quarter financials. But again, I think companies are working on ways to reduce expenses and improve margins in addition to trying to put through more price increases. And we have seen some sponsors from a portfolio perspective with their portfolio accounts incorporate fixed rates and swap floating rates to hedge their position. So again, I think we're probably going to see some bumpy roads ahead. But again, as long as you have constructed, I think a portfolio of good companies and like I said, as long as everyone's working together, I think you'll be in a position to make it through to the other side.

Greg Campion: Adam, how about across the ocean and Europe? Same picture there. And also I know that defaults have been pretty modest over the past several years in the asset class. Curious if, you start to see that change in the coming years?

Adam Wheeler: Yeah, I think as Ian said, it all depends on the quality of the companies you are lending to and also the capital structures that you put in place. So if you think back to 18 months ago, six and a half, seven times leverage was not uncommon in this asset class. A lot of those capital structures were predicated on very, very low base rates. So I think if you have created a portfolio of highly leveraged exposure, you are going to be in some trouble as base rates increase. So I think the first thing is high quality companies, conservative capital structures, and if you've done that well, you should be in a good position to see yourself through the next six to 12 months. Your question about defaults, yes, we've seen almost zero... Well, there have been, people have lost money in this asset class, but there have not been very many situations where things have gone wrong. I think that will change and I think you will see a hell lot a covenant resets over the next six months as base rates continue to rise and flow through into interest payments. So I think that's the first thing you're going to see. And you're going to see a lot of sponsors coming to their lenders asking to pick some of that interest because the increase in the interest cost is well above what people expected to pay. So you're going to see interest cover debt service coverage really, really tight. So I think while you will see a lot of covenant resets, I don't know if that's going to translate into a lot of losses, but time will tell how deep the downturn will be.

Greg Campion: Let's switch gears and talk a little bit about the competitive landscape that you're seeing out there, both among other managers and also other players like banks. So it'd be really interesting to hear you talk about the competitive dynamics that are impacting pricing terms, structures, et cetera. So maybe Ian, it'd be interesting to get your take on that first.

Ian Fowler: Yeah, sure. So I mean there's a number of things going on which is interesting. First, really no banks active in North America and it's been that way for over 20 years. Obviously there's been a lot of new lenders that have come into the market. And quite frankly I'd say probably 80 plus percent of the direct lending landscape are new platforms that have never survived or experienced a conventional recession. So I think we're going to see some challenges there. We definitely saw some challenges during COVID. But COVID was just a speed bump and the platform said had to get rescue financing or defaulted on their revolver draws or had to raise dilutive equity to shore up the balance sheet. I mean they were basically able to get through that dislocation because it was short in duration, but conventional recession of six months to 18 months, that's a different story. But what I will say from a competitive perspective, it's really a tale of two cities. Mature lenders that have a large book of portfolio companies can be very cautious in a market like this in terms of new M& A activity because there's not a lot of new M& A activity. I will say that we're a seasonal business and it's never all that busy in the beginning of the year. January was very quiet, but I think the key thing is, so far this year, quality of deals coming to market have not been that great. And quite frankly, if you had a property and you're in this period where with today's higher rates, everyone's trying to figure out or discover what the true valuation of a business is and there's not enough data to really understand where valuations are going. So why would you bring a property to market right now? So we're all being cautious in terms of new deals, but because we're mature businesses with large portfolios, there's a lot of activity within those portfolio companies in terms of add- on acquisitions that allows us to put more capital out the door and support our portfolio companies ultimately making them bigger, better, more diversified credits. So it's a great way for us to put money out the door. Makes sense for the sponsor because the purchase price multiples are less than what they paid for the original platform. So they're actually reducing their cost basis and that's a great way to hedge their bets in case valuations do drop. And so for us in that situation is great. If I were a new lender today, trying to start off and build a book of business in this environment, I mean, I wouldn't be able to sleep. I mean that's a really tough spot to be in because there's just so much risk. And also if you're a direct lender with a non- sponsored strategy trying to find new M& A activity in this market, again, highly risky. So for us, putting new dollars out the door in companies we know well and understand is very attractive and also less competitive because these are accounts that are in our portfolio. So it really is a tale of two cities. I will say that there does seem to be some limited capital out there also in terms of hold sizes and that's impacting the market. But if you can find good opportunities in your portfolio, it's very attractive.

Greg Campion: And Adam does that's competitive landscape that Ian just described, does that sort of match up to what you're seeing on the ground in Europe as well?

Adam Wheeler: Yeah, I think it's pretty consistent. I mean to build on a couple of things that Ian said, I think we've seen the broadest syndicated loan market and high yield market effectively shut for some time. So a lot of larger cap borrowers that have traditionally gone down that path to source debt have gone to the private markets and I think that has sucked a lot of capital out of the direct lending space. So I think that's definitely the case in Europe and Ian alluded to that in North America as well. So I think the impact of that has been that, the competitive tension to deploy capital is less than it was. And combining that with higher base rates, we've seen leverage levels come down significantly. We've seen pricing so spreads not just total interest payments, but spreads widen out significantly as well. While interest rates are higher, the economic outlook is, how can we put it? Slightly uncertain. Where we can find flow and for those that are sourcing flow, so as Ian said from our existing book of borrowers and for the higher quality transactions that we're seeing, we think the relative value that we're getting and the absolute returns we're GE getting today is actually pretty attractive. Some of the highest absolute returns that I think we've seen in this asset class for a very long time.

Greg Campion: How about in AsiaPac? Are the competitive dynamics similar? Or just given the structural differences in that market is a pretty different.

Adam Wheeler: They're a very different market. It is a bank dominated market. It's very different in the more developed, let's say Australian, New Zealand than it is in the rest of Asia. There is a lot of bank liquidity in Asia to put capital into this space. We're starting to see institutional lenders appear in this space in AsiaPac. It's still relatively nascent, particularly relative to what you see in North America, but it is starting to develop. We've been doing it for quite some time in AsiaPac and now we're seeing some of the people we compete with in Europe or North America starting to move into those markets in which we've been operating for a while. So it's growing and developing, but banks are still a large part of the landscape.

Greg Campion: Got it, got it. So Adam, I guess Ian mentioned or used the terminology at Tale of two cities earlier. So let's talk a little bit about the kind of difference between manager performance. My impression is that through the COVID period at least there wasn't a tremendous amount of dispersion between manager performance. And I'm sure you guys can speak to the different reasons behind that. But let's say we are headed into an economic slowdown, or at the very least we know we're coming on a period where rates have been going up for about a year now and that's starting to bite in different places. But talk to me a little bit about this idea of differentiation between managers and if we will see more dispersion in the coming months and years, and if so, what might drive that?

Adam Wheeler: Yeah. I do think there is going to be a separation of performance between managers over the next sort of 18 months. It'll take time for it to play out, but it goes back to what we're talking about before. Did you position yourself in the right assets? So were you lending into companies that you think are resilient through a cycle or were you focusing on more cyclical businesses and deploying capital into opportunities that were less resilient in nature, had less ability to generate consistent cash flow that comes down to your ability to source assets. So if you are not an established player with good networks, you're going to see less lower quality deal flow and you do what you see in this asset class. So you're going to be loading up on things that are probably more cyclical. And then if you overlay that with how aggressive have you been in your capital structures? So as we were saying before, six and a half, seven times deal for a cyclical business is really going to struggle. And so I think we are hearing lots of stories in the marketplace that there are numerous covenant resets happening now for businesses here in Europe. Because it was predicated on a zero base rate lasting in perpetuity that's certainly not the case now. So people are resetting covenant, so that's an early sign that people are going to have problems. So I think it takes a long time for things to play out in this asset class, but I think it will definitely appear the longer and deeper this downturn is the more likely you're going to see it. As Ian said right at the beginning, we're not going to start to see this until the back after the year at the earliest.

Greg Campion: Okay. So lending to cyclical businesses at higher leverage levels, that's obviously a potentially worrying sign for future performance. What else else is top of that list? I mean, I think about size of platform. I mean, Ian mentioned earlier I wouldn't want to be an upstart in this space right now. I mean, is the size of platforms, does that play a big role do you think going forward?

Adam Wheeler: Well, I think goes back to incumbency. So if you are the incumbent lender, you naturally see a lot of flow and that's the companies we're already lending to. But what we also want to be is continue to lend to companies that we like when they change hands. So when they go from one private equity owner to another. And we've successfully done that for a long period of time. So incumbency and scale today I think are the two most important things you have in a direct lending platform. And that incumbency and scale helps you source more assets and allows you to be more selective about the companies you lend to. So it's not the sort of asset class, you can just go and buy stuff on an exchange. It's all about the quality and your ability to source assets is the way you deploy capital in a sensible way. So if you're really aggressive and you're starting from a low base because you've got to be, that's not a great place to be.

Greg Campion: Yeah, yeah. And another way that managers differentiates themselves is through fee structures, and it's something that probably doesn't get discussed as much in forums like this one, but it's obviously a major component of how our clients and prospective clients are assessing managers. So I'd be curious how you're thinking about fee structures in general today and the idea of creating alignment between LPs and managers.

Ian Fowler: So there's a couple of things to think about there. There's obviously, I mean let's just talk about fee structure specifically. There's some managers out there in today's market that as part of their fee structure, they're basically splitting the upfront commitment fees or OID and the transactions. And I think the issue with that split of fees is that you're not really getting paid on performance, you're getting paid on deployment. And so as a manager, if your strategy is purely focused on filling up your vehicles as quickly as possible, then deployment becomes the main impetus and focus of that vehicle. Because what's happening is, with the splitting fees, the manager will charge a lower fee on AUM to compensate for that. Which again, I think you should have fee structures where there's performance fees baked into the model and in that way you are in alignment. I think that the split of fees together with just payment on a lower fee cost on AUM doesn't really create an alignment of interest between the investor and the direct lender. So I think that's something that we'll see how that plays out. Maybe the market does move to that as a strategy going forward, but I think that's definitely an issue in today's market. I also think that as I spoke about filling up vehicles, I think it's important to understand that as Adam said, asset selection is critical, underwriting's critical account management is critical. But I would add portfolio construction as equally important. And the one thing that we've done on a global basis is we've really tried to enhance diversification within our portfolios. And I think we typically have, whether it's in Europe or North America, twice as many issuers than our competitors. So we're not just focused on filling up the vehicle and moving on to the next vehicle. We're actually focused on getting as much diversification as we can because you can't make up losses in this asset class like private equity. And so to the extent you can maximize or optimize diversification, if a company or two get into some issues or troubles and you have potentially some losses associated with that, you're still going to generate the targeted returns that you promised in investors. So I think that isn't a fee structure per se concept, but it has to do with alignment of interest. And we are principle investors, we're investing our own capital, so we just think about it differently.

Greg Campion: Adam, anything you'd add on that point?

Adam Wheeler: Yeah, I think it's hit it well, diversification is incredibly important. You can't make up for losses. The way you do well in this asset class is avoiding capital loss. And what you're trying to do is build a well diversified portfolio where effectively clip a ticket on a number of investments over time and pay a consistent return through a cycle to the investor base. If you lose money on a couple of assets in a concentrated portfolio, you'd be done. So we very much focus on diversification asset quality.

Greg Campion: Ian, we talked a little bit about what may drive dispersion between managers as we go through this cycle. So just thinking about that, I'm curious if we do see that, so if we do see a real dispersion between the best performing managers, the worst performing managers, et cetera, what are some implications of that? Because that would be a pretty different environment we'd be moving into. It makes sense to me why we may very well be moving into it, but what are some of the big implications of that?

Ian Fowler: Well, having been through this cycle before I think, or having been through an environment like this before and through cycles in the past, I started off our conversation today talking about the resiliency of the asset class. It's not going away. It's a critical component of the US economy, the growth engine, employs over a third of the US labor force. But what can change is the landscape of capital providers. And that has happened several times through cycles. And as I mentioned earlier, you've got over 80% of the managers out there have never experienced a cycle before. They don't have the playbook. I'm not saying they're not skilled and they aren't sharp investors, but they're coming from different asset classes, they're coming from capital markets, they're coming from the large lending market. They've never had to work out a portfolio of middle market loans. When you get your hands dirty working with these companies, it's very labor intensive. And so you need the resources, you need the capital, you need the capital to support the liquidity of your portfolio going through a cycle. It's just not about doing new deals and as Adam said, some of the managers that have moved up market have really committed huge dollars on those mega deals. And the question is, do they have enough capital to support their portfolio going through a cycle? And those companies being large companies are going to need a lot of capital. It's not a 10 or 20 million fix. So I think as you look at a dislocation, and quite frankly, I think we need a reset to be honest. And so I think we'll see consolidation. We're already hearing some managers are having some margin calls by their leverage lenders. So I think that's the beginning sign of some volatility in the market as it relates to the managers not the asset class. And so I do expect to see some consolidation. I do expect to see some opportunities where hopefully we can buy some performing assets at a discount and certainly it should be an opportunity where we can attract some new talent from other platforms where those platforms are having issues. I don't think the landscape's going to change from asset management. I think this is the perfect vehicle for institutional investors to access this asset class. And what I do see happening is when investors that have been investing in this asset class for the last 10 years and less see the performance of the underlying asset class and how attractive it is, I think this asset class is going to become a permanent allocation within institutional investors portfolios. And the amount of capital that flows in this asset class is going to be enormous. So I think this is a watershed moment for the asset class and I think for some managers it's not going to be a lot of fun.

Greg Campion: Adam, for the landscape in Europe in APAC, do you expect to see consolidation there as well?

Adam Wheeler: Oh, I completely agree with Ian. I think it's going to happen everywhere. And when we talk about consolidation, I think what's going to happen is people just can't raise capital and they're going to wither. And those managers that are successful continue, are going to raise more and more capital. So I think you'll see in LPs allocating more capital, but to fewer managers. You're already starting to see that happen in the asset class. And I think that trend's going to continue. I mean, you could just look at all the investor surveys that have been done over the last couple of years in terms of where allocations are going for pension funds. Another institutional investors, I think the latest one I saw is that allocation's going to double for all the reasons that Ian outlined. I mean, when we talk to investors, the consistent piece of feedback is they are surprised at the consistency of the performance of the portfolios we've created. And I think that just builds confidence in the investor base to keep coming back into the asset class. And it is absolutely going to become a permanent allocation, and therefore when that happens, that just means there's going to be more scale in the asset class. So it's just going to keep, I think there is a structural trend that has been established that is going to continue.

Ian Fowler: And actually I think as Adam said, it'll come from investors allocating to the managers that are performing. It'll also come from the leverage providers to the direct lenders, because that capital is very finite. And so they're also going to select very carefully who they give capital to. And I think that'll be another force that, as Adam said, will create this consolidation where those that are performing, those that are sustainable platforms are going to attract more capital and continue to grow and the others are just going to wither and die.

Greg Campion: That'll be pretty fascinating to watch in the years ahead. So really interesting to hear your take around just the continued strong demand or expected, continued strong demand for the asset class, generally speaking, but some of the shifting dynamics around what the competitive landscape could look like and consolidation of managers, et cetera. I guess I'm curious, Adam, as you start to prepare for this environment or as we talked about earlier, prepare for a potential economic slowdown that may or may not be ahead, are you doing anything different in the day- to- day business? So I guess what I'm asking is, are you changing your lending standards at all? Or how you're constructing portfolios based on your expectations that maybe a tougher economy lies ahead?

Adam Wheeler: Yeah, fair question. Look, I mean, our investment philosophy, it has not changed. I mean, we've been investing in this asset class for a long time. We take the view that we are just going to invest in companies through a cycle. So we've always taken the view that we're going to be deploying money or at least have a portfolio and have to manage a portfolio in an economic downturn. So the way we go about it has not changed. The type of companies we're looking to lend to has not changed. Clearly, we are cognizant of the economic backdrop, and that means that there's just less leverage going into transactions because you want to see the same amount of free cash flow servicing that debt. So that's really the key driver is capital structures have changed given the macro backdrop, but the type of companies we lend to has not changed. And I think that's important, one from an investor's perspective that we're consistent, but also from our interactions with our private equity counterparts that we are consistent with them. So we build strong relationships and acquire quality flow. So I think that's just positive reinforcement in both directions in terms of deployment and managing portfolio and raising capital. Clearly things change around the edges that it's the same companies.

Greg Campion: Yeah, yeah. That makes sense. I mean, I know that your standards have always been to be somewhat more conservative, very disciplined in your lending standards, avoiding highly cyclical businesses, et cetera. So it seems like this is the type of environment that you really see that benefit of that approach coming through. So it makes sense that you're not changing the way that you invest. One thing I guess that has changed, Ian, in the asset class in recent years is the continued increase of ESG and incorporating things like ESG ratchets into the structure of loans that are being made. So I'm curious today, maybe specific to North America to start where we are with integrating some of these ESG mechanisms into loan structures. I know also that there's been some skepticism frankly, about how meaningful some of these features actually are in terms of making real world impacts. So I'd be curious to hear your latest on how you and the team are integrating all these and where you think it goes from here.

Ian Fowler: Sure. Before we go there, just to add on what Adam said, and again, it goes back to our approach and our philosophy of boring is beautiful. And that's how we try to start and when we select companies and build these diversified portfolios that have low volatility. But I think one of the things we are doing also globally is looking at our portfolios and stress testing our portfolios, both from continued base rate increase and looking at the portfolio and its performance and ability to service debt. Our EBITDA cushions and our loan to value cushions. So again, as Adam said, we're starting in a good position, but we're being very proactive in terms of looking at the portfolio and stress testing it. And I think you have to assume the worst and hope for the best in terms of whatever this potential recession might be if it does hit us. Now, regarding ESG, that's a theme that we incorporated at least seven or eight years ago as a platform and really built a process around ESG separate from the investment team in terms of having individuals review transactions before they came to the investment committee. So we've been a proponent of ESG for quite a while. It's obviously more of a focus in some markets than others, and I'll let Adam talk about outside North America. I think in North America it's still somewhat early days in terms of it being a concept that everyone in the market is supportive of. But I think it's important to know that we don't do deals just because they're ESG deals. I mean, we're bottom up investors. We incorporate an ESG filter on everything we do, but we're focused on return and generating the returns and low volatility that we've promised investors. In North America. We had the first ratcheted deal that we offered discounts. I think to your question though, regarding KPIs and just measuring the impact of the ESG focus, there's a couple of things. One, it's still early days. I think with smaller companies it can be more difficult to really measure the full impact because they just don't have the resources that larger companies do. And I think it's important to note that as lenders, we can only have so much influence on ESG, especially if you're focused on sponsored transactions. I mean, it really needs to come from the sponsors first to internally in these companies, create a focus and a ESG theme and make sure that the methodology is there to track KPIs, especially with smaller companies and dedicate resources to it. And obviously our view is the cost associated with that, we can help with that cost by providing ratcheted deals. So we try to do everything we can to encourage it, but the more that private equity gets involved in this, and the more we can work together with companies and really focus on this important theme, I think then you'll see probably a more meaningful impact. But in North America, it's clearly early days compared to some of the other markets out there in terms of its development.

Greg Campion: Mm- hmm. Or early days. But I think you and the team were, as you alluded to, were early movers in terms of actually structuring deals that had ESG ratchets in them. And obviously I think we were early movers, if not the first mover in Europe as well. So Adam, tell me about the picture in Europe, how maybe that you would contrast that or compare that to what Ian just discussed about North America.

Adam Wheeler: Yes. So things certainly developed more in Europe than they have in the US in relation to ESG. I mean, we offer ESG ratchets to our borrowers on every transaction that we do now. I mean, this space continues to develop and evolve at quite a fast rate. So I think the important thing now is around data gathering, reporting back to the investors and engaging with management teams around what they're actually doing on a number of these things we're trying to implement into the loans we have. But to Ian's point, we're a lender, we're not the owner of a business. A lot of these companies are relatively small and there is a cost involved in doing these. So I think we are continuing to push ahead with a lot of this stuff in Europe. And our European investor base is very, very, very focused on a lot of these issues. I think quite different to the landscape in North America.

Greg Campion: Yep. Yeah. Well that will be along with a lot of the other things that we talked about today. I think that'll be an interesting area of the market to follow and to watch it develop in the years ahead. Well, gentlemen, we have covered a lot of ground in this discussion, and I appreciate your time. It is time to land this ship. So I want to just finish it out and get a sense on your level of optimism or pessimism going forward. And also, as we mentioned upfront, both of you have seen a couple of cycles in your career. So I'm curious, as you look ahead and you say, okay, what are some of the biggest challenges and opportunities ahead for this asset class? I mean, what do you think about the picture going forward overall? And if you're more optimistic or pessimistic? Ian, I'll come to you with that one first.

Ian Fowler: Well, I have to say first as lenders, you don't want your lenders to be too optimistic and too excited. You want us to be focused on the downside. And so that's the way we live our lives at least professionally, so boring is beautiful. But look, I think, again, I said it, I think we have to prepare for the worst and hope for the best. Every recession is different, other than there's a beginning and an end. It's very hard to predict who gets hit the hardest during the middle of a recession. And so I think all you can do is have a playbook and start being proactive in terms of managing your portfolio and that's what we're doing. I will say that again, when investors see how this asset class performs through a cycle, a real cycle, I think that's just going to be a watershed moment for the asset class. And so I'm very optimistic in terms of the asset class going forward as it relates to institutional investors.

Greg Campion: Adam, I will give you the final word, optimistic or pessimistic and why?

Adam Wheeler: Look, I agree with my blooded friend, Mr. Fowler. I think we, in the short term, we'll probably have some difficult situations to manage as an asset class, but I think the long term structural trend here is pretty positive. I think you're going to see investors allocating more to the asset class. You're going to see people continue to scale, and I think you're going to see those that are successful, grow and take market share. And I think it's a bit of a, and use the term watershed moment where we're going through, I think a period of consolidation and growth in this asset class, which from an investor's perspective, I think will turn out to be a pretty positive development.

Greg Campion: Yeah, yeah. Well, I can tell you from my point of view, it's been really fascinating to watch the development of this asset class over the last decade or so, to watch your team investing through different market environments. And I take what you say and given your experience, I take very seriously and I think it's a really informed opinion and I hope our listeners get as much value from this conversation as I have today, because I think it's just really great to get your perspective. So let's do it again. I'd like to get you back here sometime over the next year or so to check in on how things are going, but this has been really great. I appreciate both of your time and hope you have a great rest of your day.

Ian Fowler: Thanks, Greg.

Adam Wheeler: Thanks Greg.

Greg Campion: Thanks for listening to episode number four 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 Podcast, 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.