Adam Wheeler, Barings
Investors have been facing the challenge of generating sufficient returns in a low interest rate environment, especially during the pandemic. As a result, the private debt market has been increasing in popularity and investment experts believe there are opportunities to be exploited across Apac and the West, according to Barings.
Private debt is typically a floating rate instrument, so it is a hedge against inflation. It provides a yield premium to public market alternatives, and Barings is trying to generate a premium of 250 to 300 basis points on broadly syndicated loans, Adam Wheeler, co-head of Barings’ global private finance group, told a webinar this week.
“If you look into resilient companies that performed through an economic cycle, you can create a portfolio that will have low volatility, as well as deliver consistent returns and consistent cash distributions on a quarterly basis to your investors,” Wheeler said.
The direct lending is concentrated in the sub-investment grade sector, but the size of each deal varies. Investors can provide loans to large borrowers that are liquid and on the edge of investment grade, or to smaller companies that are towards the triple C of the risk spectrum.
“We were seeing a number of institutions increasing the allocation to that asset class, which is driven by a chase for yield,” he said.
These institutions are predominantly pension funds, foundations, and insurance companies, according to Wheeler.
Barings has been focusing on the institutional market, and it does not yet have a mutual fund which is registered and available for the investors based in Asia..
Asian demand
But increasingly, high net-worth investors and the broader investment universe want access to these asset classes as well. The industry is inevitably starting to respond to that, said Wheeler.
In terms of opportunities in Asia, Barings is looking into developed Asia: Australia, New Zealand, Hong Kong and Singapore, because it wants to lend to companies in markets where it feels comfortable with its ability to recover the debt.
“We’re starting to see the development of institutional offerings in Apac. If a structure works for a bank, the bank will be very aggressive. But if it doesn’t work, there will be no liquidity. And that is when there is an opportunity for institutional investors to get quite attractive returns,” he said.
Barings is currently lending to a healthcare businesses in Europe, and globally it tends to lend to software businesses that have recurring revenue streams or IT data centres that have huge, diversified customer bases.
Wheeler said he does not like businesses that have high operating leverage in their models, so he has been avoiding commodity price risks. He also avoids the mining sector, consumer facing businesses, such as restaurants, and high street retail.
