Barings goes private for portfolio protection

Given the gyrations of credit spreads in public markets, investors looking for more stability should potentially consider growing their allocations to private market investments.

These assets move in a different pattern to traditional bonds, providing a new level of diversification for portfolios.

“Private markets tend to be more stable and have a more long-term focus,” said John McNichols, head of private multi-strategy investing at Barings. “Rates change more slowly than they do in the public markets. And I think investors plan along a longer-term horizon.”

For borrowers, as they see their spreads remaining relatively stable, they are viewing this as a good time to issue, too, he added.

Finding a new normal

In general, Barings views private assets as less of an opportunity to increase return and instead as an effective way to reduce risk.

“Many of the conversations we have are about customised strategies… so when we talk to people about their expectations, we find the general return buckets are the same,” explained McNichols. “What has changed though, is we are able to offer those strategies to investors with more asset classes within the private allocation and therefore greater diversification – and, both theoretically and practically, lower risk.”

Notably also for investors in private markets are the relatively low default levels, even despite the impact of the pandemic on economies.

This has partly been due to the lower default rates in the wider economy. Having a conservative underwriting philosophy is also a key factor. “Even when we’re in risk markets, we take a conservative stance,” said McNichols.

It helps that private markets are also defined by stronger relationship between borrowers and lenders.

“We don’t have time constraints related to the bankruptcy process and negotiation like you do in the public markets; [investors] are able to avoid defaults if you work with the right partners as a lender,” he explained.

Wrestling with rising rates

Being able to customise the structure of private assets makes them well-placed to add value to investors in the current macro environment.

An example is floating rate product, which investors can access in the non-core real estate space, or via direct lending.

Indeed, McNichols sees relative value in some of the core-plus and value-added commercial real estate transactions.

“We view corporate core mortgages as double-A equivalent assets, core-plus mortgages as triple-B assets and value-added mortgages as double-B. And you can get spreads well in excess of corporate, double-B levels in the value-added segment, with significant asset protection, conservative structuring and the ability to cherry-pick the properties.”

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