2026 Global Private Credit Outlook

Greg Campion: Hello and welcome everyone to Barings' 2026 Global Private Credit Outlook. My name is Greg Campion. I am a managing director here at Barings, and host of the firm's podcast Streaming Income. I am absolutely delighted to be co- hosting this outlook today with my colleague Trevor Slaven. Trevor is our global head of asset allocation and multi- asset portfolio solutions. Trevor, welcome. Are you ready to do this thing?

Trevor Slaven: I'm very excited. Fire it up, Greg.

Greg Campion: All right, let's do it. One quick thing I want to address with you, Trevor, before we get started, in the run- up to this conversation, there have been some claims have been made allegedly by you, possibly by me, that this conversation would be, quote, " awesome" and, quote, " not boring." Just wanted to get your quick reaction to that.

Trevor Slaven: I got to tell you, Greg, my only concern about a boring conversation would be if it was just you and I up here for 45 minutes. Fortunately, we have three incredible guests, senior portfolio managers, business leaders from three very different asset classes. So I'm convinced that they're going to be very compelling.

Greg Campion: That's right. That's right. All right, we'll move it along and we will get to the true stars of the show very shortly. And as Trevor said, we're going to be talking about direct lending, asset- based finance, and portfolio finance, and we have some really fantastic guests joining. But before we dive into all that, I just want to turn it over to you, Trevor, maybe to see if you can set the stage for us for two minutes or so in terms of some of the big themes that you're seeing out there that are kind of setting that landscape for global private credit in 2026.

Trevor Slaven: Sure. Absolutely. Our theme for 2026 is looking for signals in the noise. And there is certainly a lot of noise out there today. But I also, again, convinced we're going to get great answers from our guests. To me, the three big themes that I'm focused on and sort of thinking about for 2026 first is there's been incredible growth in the private credit landscape. Just a ton of demand in terms of money and capital coming in the door. We're seeing that growth in direct lending, in portfolio finance, in infrastructure, and investment grade asset- based finance, or ABF, which is the top kind of last bar on the last chart on the right here. That in and of itself could be a multi- trillion dollar market in the years ahead. And this rapid growth, it's really raising questions in terms of is there too much capital chasing too few deals? Is that compressing spreads or premiums at all? Is it loosening underwriting standards in any way? And so I think that's going to be important to address as we go into 2026. I'm very excited to hear about how our teams are kind of managing their investment process and finding ways to stay disciplined and delivering value through what is a pretty tricky cycle. The other factor, which I think is so critical, is the economic divergence that we're seeing today, which is on the second page. Most notably, and this is a very hot topic, is the corporate investment boom that we're seeing in AI and all the infrastructure around that, at the same time that the labor market is arguably the softest it's been in years. And to me, embedded in this kind of macro landscape is an incredible opportunity for creating alpha with security selection, finding the winners, but also looking for opportunities and ways to avoid those weaker segments. So I'm very excited to see how our teams are managing that. And I do think that it highlights the value in having a breadth of expertise across multiple asset classes to be able to go into those areas of strength while de- emphasizing some of the pockets of weakness. And then the final thing is really talking about noise. We've got a Federal Reserve that's at a pivot point today. We've seen just recently, you have descent in both directions in terms of what governors think they should be doing with policy rates. To me, the couple things I want to point out here is, one, what we've tried to highlight here is the last 10, 15 years, you've had policy rates that have gone from aggressively easy to tightening to aggressively easy to aggressive tightening again. And so there's been a lot of policy volatility in the last 5, 10, 15 years. And so I'm curious to hear how that volatility, frankly, has influenced, if at all, some of the trends beneath the surface for these different asset classes. Has it led to financial engineering? Is it changing underlying credit quality? And then finally the last point related to the Fed is, if they are on a sustainable cutting path over the next several quarters into 2026, how is that influencing how our portfolio managers are thinking about valuations, thinking about flows, or again, thinking about the possible change and underlying fundamentals. So those are three, I think, big kind of macro themes. But I'm looking forward to hearing what our guests have to say.

Greg Campion: Yeah, that's a great overview and a great start to this discussion. Lot to dig into there, rapidly growing market, economic divergences everybody's talking about, and obviously everybody has eyes on what central banks are doing, most notably the Fed here in the US. So let's get into all of that. And maybe with that, that's a good segue. Let's bring on our first guest.

Trevor Slaven: Let's do it.

Greg Campion: All right. I see our first guest has just joined. Orla Walsh, welcome, joining us from London. How are you today?

Orla Walsh: Not too bad. How are you doing?

Greg Campion: I'm doing great, doing great. So Orla, you are head of European credit portfolio management. I think you are the perfect person to have this discussion with, and I think we're going to start here with direct lending. We're going to cover a broad swath of private credit today. But I kind of want to just come out right out front here, and let's address a little bit of the elephant in the room here. I want to say that private credit, and I guess credit markets overall have been a little bit in the crosshairs recently. There's been no shortage of headlines. There's been discussions around everything from high profile bankruptcies that are making headlines to we're seeing a lot of rhetoric in the press around CEOs going back and forth of who's seeing cockroaches, who isn't seeing cockroaches, all this kind of stuff. So I thought I would turn it over to you and ask you maybe just talk to us a little bit about how you perceive the level of risk today in the direct lending space, and in how you and the team are kind of navigating that.

Orla Walsh: Yeah, sure. Look, great topics. My favorite topic, private credit. And a lot of headlines, a lot of headlines recently, and quite noisy headlines. And I think best to sort of hit the nail on the head there and say that actually the two deals in question, one was an auto parts transaction, US transaction, bank led transaction, bank diligence transaction. And so actually has very little to do with private credit generally. And also from a strategy perspective, looking just at our own strategy at Barings, very different as well. So just to remind everybody, we focus, US, Europe, and developed APAC, we focus on core mid- market lending. And so what's the difference there? The difference being that a lot of these sort of off balance sheet financings that we saw ultimately lead to the downfall of these US businesses that have been discussed. Our balance sheets, the businesses with the balance sheets that we lend to don't facilitate for that. These are very low complexity structuring. We're talking about firstly in performing senior secured, pretty straightforward balance sheets, full look through on cashflow. And so the ability to sort of add incremental financings is really quite restricted. It's restricted under the loan documentation that we have that really reflect risk adjusted return for core mid- market lending strategy.

Greg Campion: Yeah. That makes a lot of sense. And I know that's a lot of what's being discussed with some of these specific situations is debt that existed off balance sheets, and obviously in some cases, they're talking about alleged fraud, which is very different than credit stress. I guess one question I would have for you on the back of that is have you seen any change in your market, even very recently in the last couple of weeks, given as some of this rhetoric has kind of increased, have you seen any changes in terms of pricing or structuring in terms of the deals that you and the team are involved in?

Orla Walsh: Yeah. So look, I think to the positive, one of the good things to come out of this is it does, and you referenced the fraud piece, what that does is it does cause a bit of a jar. Because no matter how much you could diligence something, you could never fully diligence away risk. And so good reminder for the broader market that, hey, fraud can happen, it does happen, and we should all be eyes and ears open. So I wouldn't say that that's a negative thing. I would say that's actually a positive thing to come out of this. And when you say around pricing and what the impact there has been, I don't think there's been a direct correlation. But what I would say is that it has caused a bit of hesitance in the market. So we're having some of our peers in the space potentially not be as front- footed as we have seen them or as aggressive on terms as we have seen them. We ourselves are looking at pricing. We did see a couple of pretty low dips in the summer for those really top tier assets. Have some of those started to come back a bit? Yes, I think is the short answer. And for ourselves, not just around things like pricing leverage levels, we are seeing those being more moderate, but we've been seeing that, I would say, really for about 12 months now on the leverage side of things. What we're really focusing on is the documentation itself. So things around permitted indebtedness, things around baskets, things around reporting requirements. That's been another huge emphasis off the back of the big F word, fraud. Just making sure that actually we are getting into our documents, legally contracted what it is that we want to see from management teams and sponsors. So I would say re- emphasis of focus.

Trevor Slaven: Orla, if I can follow up with some of the noisier headlines out there, certainly I would say the prior few months leading into some of these headlines you just discussed is there is tremendous growth in the asset class, and there has been for the last, call it, couple of years. You're managing a big and growing business. How are you thinking about the runway for, hey, this is frothy today versus, no, there's a multi- year runway for this to continue to grow, and not only grow, but grow in a durable disciplined way.

Orla Walsh: Right. So look, I think it's a great question. The way we think about it is that private credit is not really something new. We can say it's newer in Europe. If we look at the growth trajectory in Europe specifically over the past 10 years, you have seen that real acceleration, particularly in the past five years, facilitated further off the back of COVID, for example. Taking the step back, if we look at the US market, you're sort of 90 to 10 non- bank lending now. So that's sort of a very mature market. In Europe, we're about 50- 50. So if I'm to assume that Europe continues in the same vein as we've seen on the US side, we still have a way to go. So what does that mean? For us specifically, it means that we want to continue to grow in line with the market. We want to capture that opportunity set. We want to capture that good risk adjusted return. We don't want to be ahead of the curve. We don't want to be behind the curve. We want to be just growing in line with market. And the reality is that we can discuss frothiness or not, but the demand for financing by non- bank partners is still there. Those M& A activity levels are coming back. We've seen it's up quarter on quarter, it's up year on year. We saw still the negative impact of market shocks on a bank's ability to be able to lend. We saw that in March of this year, we had a number of portfolio companies that were looking to go back to banks and get bank financing. Some of them were quite large, and they could get cheaper economics from banks. But guess what? We had tariff shocks, and then the banks couldn't provide that certainty of funding execution. Private credit can provide certainty of financing execution. And so I think those couple of factors combined. Our expectation is this market is going to grow, it will continue to grow. We won't deviate from our strategy, which is focusing on the risk- adjusted return. We are a little bit more conservative than the broader market. And yeah, we'll proceed on that basis.

Trevor Slaven: Orla, can I follow up briefly on two things you mentioned in the last couple minutes? One, you touched on sort of the different maturity of the European market versus the North America market. You also touched on tariffs. One of the big sources of noise and geopolitical uncertainty this year has been tariffs. Obviously Barings, the direct lending business is a global one. How are you thinking about the opportunity set in North America versus Europe versus Asia- Pacific where you're having these sort of regional divergences or differences in terms of how tariffs are impacting economic trends there?

Orla Walsh: Yeah, yeah. So look, another great question. The short answer to your question is we operate a global platform. So what does that mean? That means that we can see broadly and deeply across all of those markets that you've just mentioned. And I think from a franchise perspective, the US market is also incredibly well established. We have incumbency, we've got scale in that market. We've got a long track record there, and a pretty great portfolio to boot. So that's one thing to note. Europe, like I said, just from a market perspective, is somewhat behind the US, but it has really come up the curve, and it's got more growth to go. Developed APAC region, really great businesses that you can finance down there, but it isn't necessarily a high- volume market. So you've sort of great risk- adjusted return across the three regions. If we're looking at it today, so what is the impact of tariffs been? The tariff impact for core mid- market businesses has been slightly more enhanced on the US for obvious reasons than it has been for certain of the European portfolios. And so that's a theme. That's something that you can look to and think about as you continue to construct portfolios. I think pricing also matters. We're seeing a lot of, call it, efficiencies in the market on the US side. We're seeing downward pressure on fee and margin. We're seeing it on the European side as well, but sort of less pronounced. And so if you're thinking about building portfolios from a geographic risk adjusted return perspective, having that global reach means that you can be thoughtful about where you want to construct and how much, et cetera. So it provides dynamism, I think, having the global view. The US continues to be the largest market for corporate direct lending. We talk about, well currently as of today, risk adjusted return may be better in Europe for the reasons we've just discussed. Does that mean then we suddenly don't look at our largest market? No. But it is just helpful for portfolio construction to have that dynamism and to be able to tilt what's happening in developed APAC, what's happening in Europe, what's happening on the US? And having a holistic view.

Greg Campion: I think we could spend probably a couple hours diving into all these topics. But in the interest of time, I think I'm going to move us along here, and I want to just do a quick lightning round maybe as we come to a conclusion here, Orla. So many different topics. So I'm just going to throw out a couple of terms or phrases. Let me get your instant reaction, maybe like 30 second reaction to each one, and then we'll go from there. So first one, M& A. M& A outlook.

Orla Walsh: M& A outlook. Look, I don't think we're going to see the floodgates open. I think we'll continue to see what we saw last quarter, previous quarter, and year on year. The growth is there. We are seeing movement in M& A volumes for sure.

Greg Campion: How about on defaults?

Orla Walsh: On defaults, look, I think we have to acknowledge the macro that we're in, which is not without its challenges. Could we or should we theoretically see defaults going up over the next quarter or two? I wouldn't be surprised if we did. I think point to note around that is just being quick with the red pen to mark it up when you see it coming.

Greg Campion: This one's being talked about a lot these days. A lot of headlines around PIK, payment in kind.

Orla Walsh: Right. Thoughts around PIK. Structurally, it's not something that we see a huge amount of in our portfolio. So from a strategy perspective, it's not really what we like to do. We like, firstly, performing senior secured cash pay. In Europe, we have most of our underlying borrowers have the ability to PIK if they want. There's a certain pre- baked mechanisms within portfolios. We don't see a huge uptake on that because the minimum cash pay is about 4%. Could it continue to be a feature of the market over the next three, six, 12 months? Yes. Do we do a huge amount of it? No.

Greg Campion: Got it. Last one. Sponsored versus non- sponsored lending.

Orla Walsh: It is infinitely more efficient to provide financing packages to sponsor owned businesses. Is it to say that non- sponsored businesses are not good? No. Probably requires about 3x the diligence from a manpower, from a time power perspective. Yeah.

Greg Campion: Yeah, yeah. Okay. Makes sense. All right. Last, last question. One bold prediction for 2026. What do you have for us?

Orla Walsh: I don't know if it's bold or not. European private credit will continue to grow. It's going to continue to mature, to develop. We will continue to take market share from the banks.

Greg Campion: Okay. I like it. I like it. Orla, this has been awesome. Thank you so much for joining us. Longer conversation coming at some point in the near future. But thanks for jumping on with us.

Orla Walsh: Thank you for having me.

Greg Campion: She's fantastic. Any quick reactions to anything that she just said? Anything surprising for you there?

Trevor Slaven: Yeah, I'm glad we have a global platform, and are able to take advantages in Asia in addition to the US. And so I think as she described, feel pretty good about the outlook, particularly for Europe, as she mentioned, against this noisy backdrop going into 2026.

Greg Campion: Yeah, makes a ton of sense. All right, cool. Let's move things along. I want to move the discussion to another area, an area that's been hugely in focus recently, and that's asset- based finance. So let's bring on our next guest if he's there. And there he is. Jim Moore, head of private placements and asset- based finance, joining us from New York City today. Jim, how are you?

Jim Moore: Good, guys. What's up? Good to be here.

Greg Campion: Good to have you here. Yeah, appreciate you joining. And yeah, your space, I don't know if this is the right word or not, but I think has become kind of trendy these days. I don't know. It seems like there's no shortage of headlines about asset- based finance, I'm seeing so much talk about it. And I know it's not like a new space, but it's very interesting that it is so in vogue these days. So I want to get into all that, get into the discussion of where you think things are going, where are the risks, where are the opportunities, et cetera. But maybe can you just start, I feel like this is one of these spaces that can be a little bit ambiguous, can you just start by talking to us about how you and the team define asset- based finance, how you scope it, categorize it, all that kind of stuff?

Jim Moore: Yeah, absolutely. Well, thanks for having me on. Yeah, trendy. Maybe that's a bit of a aggressive word. I'm not sure my kids would agree with that. But for us financial types, it's fair for sure, and definitely topical. And you're right, Greg, it's really a term or an acronym. It's not a defined market. And so as a result, if you ask 10 investors, 10 managers, how they define it, you're going to get at least eight different answers. There's going to be some core components, but you're going to get a bunch of different answers. And in terms of the size and the scope of the market, you're going to get wide- ranging answers as well. So anything from three to five trillion to 30 to 40 trillion. And what's included, it really runs the gamut. Either way it's a massive opportunity. The way we think about it at Barings is we define it as residential consumer and commercial asset finance. And within that latter category, there's a bunch of double- clicks there as you widen out the lens. So beyond traditional commercial ABS, so commercial ABS, think whole business securitizations, certain equipment finance such as aviation. But it also includes things like infrastructure, different types of equipment finance and fund finance. So to us it's a massive category. It's underpinned by collateral. So think both hard collateral and financial assets. On the hard collateral side, think homes, planes, trains, automobiles, and on the financial asset side, think receivables, royalty streams, financial assets when it comes to fund finance. So it really runs the gamut. And in our view, securitized is a big, big part of it. I think when you ask those same 10 investors or managers what ABF means, securitized credit is always going to be part of it. But we think it's bigger than that. Again, there's other areas that share the same attributes, whole loans for example. A lot of entities buy whole loans. They don't necessarily securitize them. Project finance. If you think about infrastructure, a lot of that is traditional project finance, just a different structure, but still very much asset- based finance. And then things like ABL, asset- based lending, against some borrowing base. Again, not securitized but very much ABF. The other aspect is it runs the full gamut in terms of returns. So anything from AAA to equity. So think low 100 spread over Treasuries for AAA, give or take, round numbers, all the way out to 20% type returns if you're buying the equity portion of some of these transactions. So from an investor perspective, you can really tailor to what you're looking to achieve. And I think it's that size and that breadth that's creating all the hype around ABF. And having said all that, maybe it is trendy, I don't know, but it's definitely something that's early innings and we think's going to be around for a long time and an interesting asset class for all types of investors, whether it be institutional wealth, and who knows, maybe retail down the road.

Trevor Slaven: Hey Jim, one of the major macroeconomic trends that we're seeing that we think creates a lot of noise going into 2026, but also creates a lot of opportunity is what we talked about in terms of the economic divergences in this so- called K- shaped economy. You've touched on it, ABF, it can spin dozens of different collateral types. You have a full capital stack available to you. How are the economic divergences, whether that's labor market versus what we're seeing in terms of corporate investment, whether it's low income consumers versus wealthier consumers, how are these economic divergences influencing how you're thinking about the opportunity set for 2026?

Jim Moore: Yeah, it's a great question, right? Because it's definitely that K- shaped economy right now and that top part of that K seems to be very one- dimensional, and then it gets very noisy. I'd say, Trevor, I'd call us net cautious, and let me get into sort what I mean by that. There's just tons of noise and uncertainty around the consumer, whether it's sentiment or that consumer on that lower part of that K where we're seeing in our own data, we get a lot of data of all of our underlying transactions, all the individual loan data. And what we're seeing is some stress there. So it's not only sentiment and stress in that spot. Employment's a wild card. You're seeing we're on a sugar high on the AI front, yet employment is uncertain. We're seeing a lot of different trends in employment. There's a ton of political volatility, as we all know. And you put that all together and then you put it alongside the fact that spreads are at, across all credit markets, but it's the same in ABF, at or near their historical lows across credit markets, it puts us in sort of a net cautious position. It doesn't stop us from investing because I think the beauty of ABF is you can pick your spots in terms of attachment point and credit. And so you're not out of any sector at any time. You may just be up sector in certain cases. I think the expected rate hikes will help moderate some of the consumer weakness sentiment perhaps, or maybe after a bit of a sugar high, it just fans the flames a little bit around the frothiness of what we're seeing in the markets and the aggressive buying. So as I think of 2026, I'd probably call our approach balanced growth. And so what do I mean by that? You talked about the consumer. Right now we're up credit in consumer, not necessarily consumer adjacent to residential, but a lot of other consumer sectors, we're up credit. Doesn't mean we're not buying, we're just not fully comfortable given the data that we see going down the credit curve. That's going to change over time. But at the moment, we want that extra shock absorber to the extent that that consumer continues to deteriorate. Honestly, if you look across all markets in general, and this is a very general comment, you're not really getting paid to go down credit right now. And you can see that in any market, look at triple B to single A differentials, and it's just squeezed in. And I think a lot of that is due to just aggressive buying for liability side of insurance reinsurance where, again, it's that annuity game where there's a bit of a chase on yield, absolute yield. Think raw material yield going into an insurance manufacturing plant, and you're trying to get that extra yield. There's not a lot of triple B pieces in these deals. And so those triple B's are getting bid down. So even if we're comfortable with the credit, frankly we see more value in the single A's and above. The other thing is we're going to pick our spots. I think the risk of ABF or any kind of opportunity like this is you get floods of investors who haven't been in it for a long time chasing yield to fulfill growth. I get it. We want to grow as much as anybody. But ABF, it's not one homogeneous asset class. So I think specialization is really key, and we're not going to be the best at everything. So we got to pick our spots. We're going to focus on where we have track record, where we have history, where we have specialization in terms of a team and track record, and frankly where we have visibility to really focus on things down the credit curve. So for us, that means resi, anything resi adjacent is a sweet spot for us. You're going to see us continue to be really active there. Equipment, again, long history in equipment. So you're going to see us be active across the piece in equipment. Things like aviation where we just have a lot of history within Barings, within MassMutual, around aviation that we can leverage. That's really important in that particular space as you go through cycles, and that industry certainly does. So we're going to focus on that. We're staying disciplined on structure. If you think about anything private IG historically,'08, '09, COVID, everything before that, it's that structure, it's those covenants, it's the over collateralization, it's the security that's the hidden alpha. And no one really calculates it. It's hard to calculate until you actually go through one of those periods of time. So we're going to stay disciplined on that. It's super important. And the last thing I'd say is, and it kind of goes along with structure, is risk management. Nobody gets carried around on a chair, we don't go out for drinks when we do a good job in risk management. But it's super important. It's not like origination where it gets all the hype. A constant focus on the upfront part of risk management, and importantly, on the ongoing part of the risk management process. Data in this space is our friend. We get loan level data for everything we do. We got to use it. It provides early warnings from a playing defense perspective, whether that's credit ratings, just problems, potential frauds. But it also helps us on the offensive side because it helps dictate where we want to originate. We may see things in our data that's different than headlines. And it gives us an advantage in terms of origination. Equally we may see things that takes us up credit because we're seeing things that we don't want to do down the credit curve. So we're going to stay focused on that. But again, I think into 2026, we think of it as balanced growth.

Trevor Slaven: Love that. I was going to ask for maybe your two or three preferences, but I think you just answered that in the last couple minutes there. Do you want to do a bold prediction?

Greg Campion: Yeah, let's do a bold prediction. Jim, one thing that you're thinking about for 2026, we're looking for bold, we're looking for a prediction. What do you got for us?

Jim Moore: So I don't know how bold this is, but my view is I think it's a tale of two halves. I think the first half we're going to continue with the sugar high. We're going to get some rate cuts. The AI hype is not going anywhere, and by the way, it shouldn't. It's just it's not determined how it's really going to play out over time. It's not going to be a straight line in my perspective. And you're going to continue to see strong demand chasing this ABF space, chasing that unicorn that everybody's trying to find. So spreads are going to grind tighter. I think sometime in the second half, I don't know when, I don't know why, my guess is it's macro political noise as opposed to something fundamental to ABF, but you're going to see a pull back in growth in 2026 at some point. And that will inevitably cause concern around the consumer, which has a really massive impact across all things ABF, some more than others. But I think the consumer, when you think about the US, it's just such a big part of everything we do. And ultimately that'll create some rebalancing, which I think is good and healthy in terms of supply and demand in terms of risk return. We're in ABF for the long term. We think it's early innings. But I also think, just like AI, it's not a straight line, and we're going to have bumps in the road. I think that's healthy. I think it's a good thing. If you manage risk and focus on structure, you'll get through those bumps in the road and it'll create opportunities to grow.

Greg Campion: All right. Sounds good. A tale of two halves, 2026. You could be writing our midyear outlook for us at this point here. We'll see. Jim, I hope there is a Streaming Income Podcast episode in your future, so we got to get you here to Charlotte or I need to get to New York at some point in the near future. Because I think we need to do a deeper dive on all things ABF. But thanks so much for joining. This was hugely helpful. I'm sure our audience really appreciated it as well. And we'll look forward to talking to you soon.

Jim Moore: Great. Thanks guys. Appreciate it.

Greg Campion: Thank you. So asset based finance, such an interesting and maybe trendy space right now. Any immediate reactions to what we just heard there?

Trevor Slaven: Yeah, there's an incredible breadth of opportunities. I thought the risk management piece that Jim mentioned was one of, we're entering this point in the cycle where it's probably just as important to avoid the losers as it is to pick winners. I think that will be a key theme as we go into 2026. And then I also know, I know Jim, rate cuts in his early comment there talking about the Fed, very understandable because of all the policy volatility we've been getting. That's something I want to talk about with Dadong in our next segment.

Greg Campion: Yeah, yeah. And I mean there's just so much talk about the ABF space right now. I thought it was really interesting how he positioned it as kind of being very much a diversifier to direct lending, and that's how people are kind of using it. And then the kind of tail of two halves really struck me. And I know that's something that a lot of people are struggling with right now, given where valuations are in so many asset classes and given some of the economic divergences that you mentioned up front. So well with that, let's get to our next guest. I am excited to welcome in person Dadong Yan. Dadong heads up our portfolio finance group, usually based in Boston, but is here in person today. We're very lucky that schedules aligned. So welcome, Dadong.

Dadong Yan: Thank you. Thank you for having me. Great to see you both.

Trevor Slaven: Absolutely.

Greg Campion: Great to have you here. So I think this is actually perfect timing to have you follow Jim, because we just talked about an area that's, I don't know if I would say new to people, but is certainly gaining a lot of attention right now, and that's asset- based finance. I would put portfolio finance in very much the same bucket as something that's gaining a ton of attention right now with investors. Frankly, if you had asked me a couple of years ago to explain portfolio finance, I'm not sure if I would've been able to do it. I feel better positioned to do that today. But I'm not going to take anything for granted here. So the first question I want to ask you is help us understand what is portfolio finance? Before we get into the outlook and all that kind of stuff, help us just define our terms up front.

Dadong Yan: Yeah, it's a great place to start, and actually it's a continuation of the conversations we've been having with both of you as well as with Orla and Jim is we've witnessed the unprecedented growth of private credit and private markets in general. Alongside that growth, the financing needs to private markets have grown tremendously as well. At the same time, if you think about the traditional providers of financing, clearly that would be the banks and the capital would come from bank balance sheets. That's been more or less constrained, and certainly not able to keep up with the growth of private markets. Especially when you think about, it's only been two years ago, we had the period of bank volatility, we had some major bank failures, we had one global large scale bank failure. So that continues to put pressure on the bank capital typically financing these private market assets. So what that creates really is a funding gap, and that's where we enter with portfolio finance. If you think about what portfolio finance is at the most basic level, what we're doing is actually very simple. We're financing private market assets, except we're doing it on a diversified cross- collateralized basis as opposed to the traditional way to gain exposure to private markets, which was to either own a private company, like a private equity investment, or a single loan backing that company, a private credit investment, or for example, a single building. You could own that building, you could lend against that building. All of those are very traditional ways to gain exposure to private markets. For us in portfolio finance, we're taking the approach that we want to mitigate those idiosyncratic risks associated with single assets, and ensure that we are lending on a diversified cross- collateralized basis and in a senior secured position. So that's a very easy way to think about just that really conservative defensive exposure to private markets that portfolio finance provides.

Greg Campion: Okay, great. I like that. Nice succinct explanation. That may rival the animated explainer video that we just did on portfolio finance. So let me ask you the same question that we asked Jim about ABF. Who's investing in this space, why are they investing, and maybe are you seeing any changes along that front?

Dadong Yan: Yeah. And just to level set, traditionally as we discussed, it was banks, from bank balance sheets. But increasingly as we've seen the attractiveness of the asset class and also as we talked about the supply- demand imbalance in favor of this asset class, we've seen institutional investors across the spectrum be very interested in this asset class. And that includes everyone from insurance companies, it includes pensions, and we've seen a tremendous amount of interest both from corporate pensions as well as public pensions. It also includes endowments, foundations, sovereign wealth funds, as well as family offices. So a very strong representation across the institutional investor community. And if you take a step back and you think about why that is, it actually makes a lot of sense. So for some of these institutional investors, they're seeing this allocation as very complementary and providing a diversifier to their existing private credit exposure. And part of this is also some investors and their desire to go up in credit quality on their private credit exposures. So instead of exposing yourself to single B type of credit risk, wouldn't it be much more conservative, much more defensive to have triple B, single A type of credit risk? So we're clearly seeing that theme. On the other side, what we're seeing is for most of these institutional investors, they will have a core fixed income bucket. And that bucket has been extremely challenged if you think about spreads. I'll share with you one statistic. I was actually shocked. I pulled it three times and then I looked at it again this morning just to make sure we had the right stat. The single A corporate index by the Fed, the Fed publishes this data, hit a low, a tight of 61 basis points earlier this month. When I looked at that data, I said, well, that feels really tight. I'm pretty sure that's the tightest it's been in the last couple of years. So I checked. Yes, it absolutely is the tightest. I was like, it probably can't be true for 10 years, could it? Went back 10 years. It is the tightest it's been in 10 years. Went back even further, went back 25 years. You would have to go before the year 2000 to have that level of tightness in the single A corporate spreads. And what that creates is a lot of pressure on the core fixed income allocation for many institutional investors. So we're seeing that trend of these investors looking to improve on their returns, generate a spread premium, and generate spread alpha on the core fixed income part of their allocation. And maybe the last thing that I think our listeners would find really interesting is we're actually seeing some investors view this asset class and this opportunity set almost as an absolute return or a hedge fund replacement type of allocation. Because if you think about it, what are they trying to achieve for those types of allocations? They're trying to ensure that they have a steady return, irrespective if the S& P goes up 30% or it goes down 30%. If you think about what this asset class delivers, it actually delivers that type of risk profile. So you can see it fits into many buckets of institutional investors, and that's why we're seeing increased interest across the spectrum.

Trevor Slaven: Dadong, I want to follow up on two of those points. One, you just mentioned the very tight valuations, certainly in credit markets, we're seeing lofty valuations in equity markets as well. And you talked about the ability to have stable returns regardless of what public beta may do. Talk about that a little bit in terms of what are the key risks at a moment when public asset valuations are so rich. How does that lead into or how do you think about it leading into the risks that you're underwriting in your portfolios?

Greg Campion: Yeah. And I'll caveat all this by saying potential steady returns, just to think about all this from a compliance standpoint.

Dadong Yan: I absolutely, so the key risks that I would highlight for our listeners, number one is I think true for all credit markets, which is credit risk. Even though we've discussed that we are on a diversified cross- collateralized portfolio of assets, there is still underlying credit risk. We think we've mitigated that through structure, through underwriting, through what we've heard from the prior speakers around selecting out the bad assets and the bad apples. But certainly there is credit risk, and you see that across most or if not all credit asset classes. So that's the first risk I'd highlight. The other risk is actually more for private market assets. It's something that's certainly top of mind for most of our investors who have allocations to private markets, and that's really deployment risk. If you're a investor and you've committed a certain dollar into private markets, you want the certainty to know that that capital is drawn and put to work. I think one of the key pain points for numerous investors is they've committed quite a considerable amount of capital to private markets, but they're unsure if that capital is being put to work, how fast it's being put to work. And also if ultimately that$ 100, that hypothetical number, if that entirety will be called or only a small portion of that will be called. So we think of that as deployment or ramp risk, which is something we're very conscious of as we've tried to design our products and our solutions for our own investors, trying to help investors mitigate that risk in the market. And lastly, I'd say this is more as we think about macro and systemic wide, there seems to be a repeat of this risk, and it happens every so often. And we think of it as simply ALM risk, which is asset liability match, or in this case mismatch, which we see very much in the bank community. Now, if you think about this, this has happened so many times. If you think about bank runs, bank cycles, 2008, we can go on and on, but it really stems to a very basic principle. And that is if you have short duration liabilities, you should be using short duration or liquid assets. What you should not be doing is using bank deposits to back long duration assets, and basically have that mismatch. That has proven true so many times in history. It is also true with our asset class. As we see a broader systemic risk of many of these same banks using short- term demand deposits and backing private market assets, which is why coming in with a solution that Barings as well as the broader institutional investor community has brought to our market, which is using much more stable long- term institutional capital, which is better suited to invest and finance private market assets.

Trevor Slaven: And I know, I was going to turn to Greg too, do you think there are any misconceptions around your market? Anything to add to that, Greg?

Greg Campion: No. Yeah. What's the biggest misconception out there in your space do you think?

Dadong Yan: Yeah, this probably comes up too often, and it comes up regularly when we have dialogue with our investors is there's just a misconception about, Greg, to your first question, the definition of this market, what do we actually do? And oftentimes we see what we do here at Barings get confused with the broader fund finance universe. And so let's unpack that a little bit. Why we intentionally define our market as portfolio finance and not fund finance is because we are only one sub- segment of the broader fund finance universe. In fund finance, you'll see other asset managers and typically banks participate in a sub- asset class, what we define as subscription line financing. Capital call lines, sub- lines, goes by many different names. But that is a area that we do not play in. And that was a conscious effort by us since inception not to target that universe. And that's largely because banks do it really well. If you think about our strategy, we are looking to play where we have an advantage, we can deliver potentially higher returns and more attractive spreads for our investors. And we don't want to compete where the banks are strong. We'd much rather compete where the banks are weak. And we would certainly agree that a subscription lines, capital call lines, that is the forte of banks. They do that really well. And so we've really left that market to the banks. Now, the other part of fund finance where we see people, new entrants especially, targeting is really the concentrated NAV lending part, which is extremely high risk. It is typically below investment grade, and oftentimes we see people taking risk, let's say it's just three portfolio companies, potentially one portfolio company is 80% of the underlying value. And we see new entrants in the market trying to play in that space. We have historically avoided that because of what we described. It is below investment grade, it is significantly higher risk. And we feel that strategy is very much stretching on risk and trying to pick up that incremental basis point of spread, but potentially being exposed to catastrophic risk and potentially losing your principle. So we've kind of bifurcated both tail ends of the fund finance universe that we don't play in, which leaves this giant middle space, which is our core competency and where we focused our strategy, which is portfolio finance, right? It is lending against these diversified, cross- collateralized defensive assets and doing so in a senior secured manner.

Greg Campion: That's great. And I know that you and your team have been on a mission to clear up a lot of these misconceptions out there. And so quick plug, there are lots of podcasts, papers, videos, blog posts on Barings. com and our LinkedIn channels and all that kind of stuff that explains all of this in much more detail. But I think you and the team have done a great job sort of helping the broader investor community get an understanding of this space and what it is and what it isn't, probably just as importantly. All right, well let's finish up here, Dadong, I'm asking everybody for one bold prediction heading into 2026. So I want to leave that with you for a minute and see what you've got for us here.

Dadong Yan: I've come up with a few, but let me actually think about one which I think will be really interesting for our listeners. And that comes back to when we look at this market opportunity and the size of this opportunity. Now, Greg, one of the things you reference is actually one of the thought leadership pieces our team put out last year. It wasn't even that long ago, it was a little bit over a year ago. We sized the market and we put out a piece with a very catchy title. It said missing a$ 100 billion annual opportunity set. At the time, that's a big number. It's a big number. And we actually, in that paper, which our listeners can find on the Bearings. com website, we actually went through a bottoms up analysis to arrive at a number, which was actually over 200 billion. It was 218 billion market size. Again, that was just last year. Now looking back, I would say we were by far way too conservative with our estimate. At the time, when our team went through that analysis, we thought we were conservative, but we said better to err on the side of conservatism and put out too low of a number. Now, a year later, we're looking at that and we think it is a order of magnitude potentially larger. And the key part that I think we even underappreciated, and certainly the market has underappreciated, is that portfolio finance is not just dependent on the growth of private market assets. That's what for us and most of the other market participants, that's what they base their projections on. No, actually increasingly there is a multiplier effect in that we see private market asset managers using portfolio finance increasingly as a portfolio management tool. So as you can imagine, that puts an additional multiplier on the demand for financing. And so as we think about potentially putting out a new piece later this year or next year, I certainly think that the total market size and the opportunity set is going to be significantly larger. And so I'm really excited. And I think for us and our team, we're really well positioned to continue capturing that growing opportunity set.

Greg Campion: All right. I love it. I won't try to pin you down on a specific number, I guess, but we know it's going to be bigger than what you've said in the past. Dadong, this is such an interesting space. It's been, I've really enjoyed getting up to speed on it myself, and appreciate you joining us today and shedding a little bit of light on this. And I'm sure our viewers and listeners can follow up and have additional conversations with you. But thanks so much for being here.

Dadong Yan: Yeah, thanks for having me back.

Greg Campion: All right. Dadong is always fantastic. We're lucky to have him join us. I'm glad we got a chance to talk about portfolio finance in this conversation because it's an area just with so much interest right now. As we land the plane here, Trevor, let just ask you, are there one or two takeaways that you have from this conversation overall?

Trevor Slaven: Yeah, I'm going to give you three. One, I thought it was an incredible set of conversations. To me as we looked to 2026, I think the first thing is it's obvious that I think it's going to be a year of dispersion in terms of underlying performance across asset classes. So I think having an investment platform with expertise across these very varied asset classes is going to prove more valuable than ever. I think the proof will be in the pudding as we get to this time next year. I think the second thing is the opportunity for security selection alpha, I think is the best it's been in quite a while. We mentioned along the way avoiding losers as opposed to just picking winners. I think that's going to create a lot of difference in terms of investor's experience over the next year and beyond. And then I think the third thing is our team's heritage of discipline and diligence. I think it has them well positioned to deliver sustainable performance as we look through the cycle in what is a noisy and tricky cycle.

Greg Campion: All right, cool. Well, hopefully folks, we've helped to identify some of the signals from the noise. It is a noisy world out there today. And I think the way that we're thinking about this is, rather than this being the end of the conversation, we're very much thinking of this as being the beginning of the conversation. So there's a lot of places that we would invite you to follow up and engage with us. We'd love for you to follow us on LinkedIn where we're always publishing our latest thoughts and viewpoints pieces, et cetera. We've actually just launched a monthly LinkedIn newsletter called Where Credit is Due, where we talk about public and private credit markets every month. We'd love for you to subscribe to our podcast Streaming Income, where I have an embarrassment of riches in that I get to talk to folks like Jim and Orla and Dadong, and many other very talented people all the time about all these topics in much greater detail even than we talked about today. And I'd like to give a plug to Trevor. I'd love for you to go follow Trevor on LinkedIn. Trevor's publishing some really great quick snappy thoughts on what's going on in the market on LinkedIn. And he also will remind you when his markets call is, which is a great monthly overview of what's going on in the macro economy and how it impacts public and private asset classes. It's developing quite a cult following at this point, and I think it's about to go vertical. So follow Trevor as well. So with that, on behalf of Trevor, on behalf of all our speakers, on behalf of the whole team here at Barings, I'd to thank you very much for your time today. We really appreciate it and thank you so much for your continued trust and partnership. Thanks so much.