Portfolio Finance: Private Markets’ Next Great Asset Class?

In the latest episode of Streaming Income, Head of Portfolio Finance, Dadong Yan helps to define and de-mystify the growing opportunity in Portfolio Finance.

Speaker 1: Two of the biggest trends that we've witnessed in the asset management industry over the last decade- plus have been the impressive growth of private markets and, very much related, the continued disintermediation of banks. Now, it's commonly known that these trends have underpinned rapid growth in asset classes like direct lending over the last 10 years, but what might be less well- recognized is that these trends are also providing the foundation for the expansion of portfolio finance, an established asset class that recently has gained momentum and broader adoption among insurance companies and institutional investors.

Speaker 2: We're very much in the early innings of this growing opportunity set in portfolio finance. It's an opportunity for investors, such as insurance companies and other institutional investors, to obtain incremental yield in their private investment grade part of their portfolio. And this asset class has tremendous runway for growth.

Speaker 1: That was Dadong Yan, head of portfolio finance at Barings. And this is Streaming Income, a podcast from Barings. I'm your host, Greg Campion. Coming up on today's show, is portfolio finance the next great private market asset class? Before we get into the conversation, if you're not already following us and you're interested in hearing our latest views on asset classes like high yield, private credit, real estate, and more, just search streaming income on Apple Podcasts, Spotify, YouTube, or wherever you get your podcasts. With that, here's my conversation with Dadong Yan. All right, Dadong, welcome to the podcast.

Speaker 2: Thanks for having me, Greg.

Speaker 1: I'm excited to have you here. This is going to be fun. We're going to talk about portfolio finance, which is an area that is of huge interest right now, and I think we're going to hopefully do some demystifying and explaining and hopefully helping listeners understand that asset class a little bit more. But before we get into all that, since this is your first time on the podcast, I was hoping maybe you could just talk a little bit about your role at the firm and maybe a little bit about what you were doing before that.

Speaker 2: Absolutely. So, my role is I head up our portfolio finance business, so we're going to jump into that strategy. We've been doing that strategy since 2017. And before joining Barings and our parent company, MassMutual, I was an investment professional at various alternative asset managers. And before that, I was an investment banker in the investment banking industry.

Speaker 1: Okay, cool. Well, let's get into it. I think what you and I were discussing before we started recording was to make this conversation a success, I think we want to do two things. One, we want listeners to really understand portfolio finance by the end of this conversation, and two, really understand why the team at Barings sees such a great opportunity. So, if we can do that, I think this will be a success. Are you up for that challenge?

Speaker 2: Sounds great. Yeah, I'm looking forward to that.

Speaker 1: All right, so let's start out simple and let's just define our terms up front. So, tell me what do you mean when you're talking about portfolio finance? And maybe just as importantly, what are you not talking about?

Speaker 2: Yeah, great question and great place to start. So, let's define portfolio finance. Portfolio finance is simply lending against diverse cross- collateralized portfolios of assets. Now, Greg, our listeners, when they think about financing or lending, the first thing they think about, they probably think about lending to a company, so your typical corporate loan, or they might think about lending to a building or a property, so your typical commercial mortgage loan. Where portfolio finance is different from those asset classes, instead of lending against that single asset, we lend against a diversified cross- collateralized portfolio of assets, which may include exactly what we talked about. It could be a portfolio of corporate credits. It could be a portfolio of commercial mortgage loans. It could even be a secondary's portfolio. So, think a portfolio of fund interests. Or it could also be financing GPs and asset managers themselves. So you can see already how diverse and how broad this area is. Now, to your second question, what this is not. One of the buzzwords that I'm sure you and our listeners, we've all heard probably too much of in the last few years is this whole concept of NAV lending.

Speaker 1: Sure.

Speaker 2: What is NAV lending? I don't think anyone's ever come out and had a very good definition of what is NAV lending, so let's define that right here. NAV lending is actually a very thin slice, a very small part of the overall portfolio finance ecosystem. And when we say NAV lending, what most people in the market actually mean is lending against private equity companies. So, imagine your typical private equity fund. It can own anywhere from eight to 15 underlying portfolio companies, and so most of the NAV loans being referenced in the market is lending to those portfolio companies. Now, where that's different from portfolio finance is you can imagine the risk profile of lending against a small subset of portfolio companies versus lending against 100 first lien middle- market loans.

Speaker 1: Sure.

Speaker 2: Apples and oranges. So, I think it's important to establish right at the beginning that the spectrum of portfolio finance is extremely broad and it encompasses everything from core portfolio finance all the way to the higher risk, higher return part of the spectrum, which is PE NAV lending.

Speaker 1: Okay. Great explanation to start us out, and thank you for addressing the NAV lending right up front because I think that is a common misconception. I think people conflate the two, portfolio finance and NAV lending, but as you said, NAV lending is one part of a much broader universe of strategies, for lack of a better word. Tell me just a little bit more about those areas because I think it would be interesting for people to hear just a little bit more detail about what each of those encompasses.

Speaker 2: Yeah, and let's start with a very simple one, so the private credit financing, where we finance private credit portfolios. So, asset managers come to us for financing against the private credit portfolios they manage as they're seeking to tailor returns for their own LPs. So, for an LPs of an asset manager who are looking for a higher risk, higher return version of the strategies, the asset manager may call us for financing and we would provide that senior financing. Greg, why that's attractive from our perspective is because not only do we have a cross- collateralized portfolio as our collateral, but we're in the senior most position on the capital structure. So, this'll talk into a broader conversation that I hope we'll address, which is why this is attractive for investors is really you are able to go up in credit quality, and instead of investing in single- B or double- B type of credits, you're ultimately able to go up and invest in triple- B, single- A type of credits.

Speaker 1: Okay, so that's a great explanation of this private credit portfolio finance, and I think a lot of people understand that concept of leverage or if there's a levered version or a levered sleeve or something like that, that leverage has to come from somewhere. How about secondary portfolio finance? Tell me what the team is doing there. What does that strategy look like?

Speaker 2: Yeah, and I have to put in a quick plug for an article that we actually, our team, just released. This is hot off the press on the secondary's market. And the dynamic, what we're seeing today is there's a bid- ask gap, and there historically has been as well. But what are the ways to narrow the bid- ask gap in the secondary's market? And what we've seen with a number of secondary's managers is they actually come to us and they use portfolio finance as an additional tool to close that bid- ask gap and allow them to source and execute additional opportunities in the market. So, we're absolutely seeing that as a major driver of growth for the overall portfolio finance market.

Speaker 1: Yes, I just read that piece before this conversation and I'll link to it in the show notes. It's called the Surge of the Secondaries, and it makes a really compelling case about the growth that we've seen in that secondary space. But to your point, and like you mentioned up front, there is a gap in terms of financing available for those transactions. And by all accounts and estimates, it appears that market's really going to continue to grow. And this opportunity to finance some of those transactions and, like you said, bring that bid- ask spread closer seems to be a really attractive long- term opportunity. Okay, so we hit private credit portfolio finance. We hit secondary portfolio finance. How about GP financing? What is that within this overall umbrella of core portfolio finance strategies?

Speaker 2: Certainly. Imagine an asset manager. They have investments in their own funds. And actually, that's very much well- received and welcomed by investors. They want to see alignment of interest from the asset manager with their LPs as well. Imagine for these asset managers, as the size of their funds increase, the GP commits into those funds naturally have to increase as well. That capital has to come from somewhere, Greg, and portfolio finance is an additional tool for these asset managers to get financing from providers such as ourselves to help them make additional GP commitments into their funds. Now, there might be other uses of capital. The asset manager might do M& A. The asset manager might use that capital to see new strategies. So, there's a wide variety in terms of use of capital, but we're finding a very compelling opportunity set to finance and partner with asset managers themselves at the management company and at the GP level.

Speaker 1: And is it the case that asset managers may have created a lot of value or may have a lot of value that is just not liquid? So, if they want to invest in their own fund or invest in their own business, this may be a lower cost of capital way for them to access the capital, I guess, that they need. Is that a fair way to think about it?

Speaker 2: Absolutely. And what this provides asset managers is more choice. As we know, more choice is better because historically for many of these asset managers, they had to sell a GP stake or take dilutive forms of capital, such as selling part of your business. What we're hearing very clearly from these asset managers is they don't want to sell part of their business, but they need capital to grow. So, we're simply solving that capital need of asset managers to better align themselves with their investors as well, as they're often taking this capital and they're going and investing it into their funds alongside the LPs of these asset managers.

Speaker 1: Got it. Okay, the last one you mentioned upfront was you mentioned that we're all familiar with lending against a property in the real estate space, but what you and the team are doing is lending against a diversified pool of properties, so tell me just about that real estate angle.

Speaker 2: The exposure that we're looking to create is, instead of having our investors get exposed to just a single building, what if we could take a diversified cross- collateralized portfolio of commercial mortgage loans, which are not backed by any single property? They might be backed by an apartment building here in Charlotte. It could be backed by a logistics building in Boston. It could be backed by a hotel in San Francisco or in LA. So, think about that inherent diversity both in property types, diversity of buildings, diversity of underlying sponsors. You see the trend here. We're not trying to take single asset exposures, but we're trying to be the senior- most positions against defensible asset classes that are very familiar to our listeners and provide our investors a way to access those asset classes without taking first- loss risk.

Speaker 1: Okay. Let's think about this from a risk- return standpoint. I almost want you to map out what that portfolio finance risk- return spectrum looks like for us and where the different strategies fit on that line.

Speaker 2: Yep. Well, Greg, I love charts, so I'm just going to draw a fictitious chart here in the air and our listeners can follow along.

Speaker 1: And I think they may be able to find a version of this in one of the pieces that your team has written, which, by the way, I'll link to any of the pieces that we reference because your team's written a couple of great pieces.

Speaker 2: And exactly on this chart. Actually, you will find that same chart on the piece that we put out, which is missing a$ 100 billion opportunity set, it has actually this chart. So, what this chart dictates is on the X- axis, effectively you have risk. So, as you move farther right on the X- axis, it's riskier investments. And on the Y- axis, you can already guess, it is returns. So, what you would expect as you move higher up on risk, you should get compensated for higher returns. If you think about portfolio finance as an overall asset class, farthest to the right you will have, actually even before we touch NAV lending, you will have equity and preferred equity solutions. So, there are players in the market who target specifically that equity- like strategy. That is not what we do. We're much more conservative and we're focused on investment, great credit. So, we acknowledge there are players in that preferred equity part. And then if you take half a step to the left, so still higher risk, still higher return, you have the spectrum of NAV lending, which is exactly what we described. Now, let's demystify another part of NAV lending, because again, so much has been written about the space. Most of NAV lending is actually below investment grade, so these are certainly higher risk investments that asset managers are making. But a subset of NAV lending, as we continue to go in our chart here to the left, the lower risk part of NAV lending, which is what we do, is the investment grade part. So, think instead of lending against just three to four portfolio companies, you're lending against a much more diversified. So, think of a flagship fund with 12 to 15 underlying portfolio companies, all cross- collateralized, that certainly feels better than lending against two or three companies. And if you're able to lend at lower LTVs, Greg, and I think our listeners are going to be shocked at how conservative and how low these LTVs are, where we target the LTVs can be as low as 5%, 10%, up to 15, 20%. So, very low LTVs compared to the common misconception in the market of what people are doing in the below investment grade strategy, which can get as high as to 50%, 70%, 80% LTVs against a couple of companies. So, very quickly you're starting to see this entire spectrum unfold. Now, let's take another full step to the left, and this is the area where we defined at the beginning of this conversation as core portfolio finance.

Speaker 1: Yes.

Speaker 2: It's lending against these portfolios of corporate credit, of commercial real estate loans, secondaries portfolios, GP financing, that encompasses the midsection of this portfolio finance spectrum, which is core portfolio finance. And if you think about relative risk, that is typically single- a type of credit quality. And that's the focus for our team and our strategy. And if you take one more step, and then again I'll highlight just for comprehensiveness, that there is an area where we don't play. It's actually a very big area, and our listeners will know this most likely as cap call lines or subscription lines, subscription line financing. Typically, banks do this. Banks do this very well. And we've seen the returns and the spreads in sub- line financing as lower than what we can achieve in core portfolio finance. It has been an effort from ours to focus on core portfolio finance, given the better risk- adjusted return of where we play versus going down to the lower returns of sub- line financing.

Speaker 1: Got it. All right, so you mentioned banks, and I want to talk a little bit about the development of this market. As I see it, there's two big trends here that we've seen not just in your asset class, but across a lot of the private markets. One is just the overall growth of private markets, it's been incredible to watch over the last decade or so, and then the very interrelated trend of bank disintermediation. And I know that these are both major drivers for this asset class as well. So, just tell me a little bit about the development of this market, where we've been over the last decade or whatever timeframe you think is appropriate, and how we got to where we are today because it seems like we're at an inflection point and I want to talk about that too.

Speaker 2: This asset class has existed for many decades. It has historically been done by banks on bank balance sheets. However, think about the growth that we've witnessed in private assets over the last decade and last 15 years. It has been tremendous growth. With that growth of private assets, what that necessitates is additional financing. You need additional capital to finance the growth of private assets. Think about historically where that financing of capital has come from. It's come from bank balance sheets. What do we know about bank balance sheets? One, they're not going to be able to grow as fast as private markets. Bank balance sheets are constrained. And certainly as we look at Basel III, there are additional headwinds facing bank balance sheets. There's also been bank volatility less than two years ago.

Speaker 1: Sure.

Speaker 2: We all remember, as I'm sure our listeners remember the events of Silicon Valley Bank, First Republic Bank, Credit Suisse, that all happened within a span of just a few months. So, not only do you have limited bank balance sheet growth, you have volatility amongst banks as well. What that creates is your classic supply demand mismatch. So, you have the supply of capital not able to keep up with the demand for financings from asset managers globally, and so what that creates is your classic funding gap, which necessitates non- bank lenders, such as insurance companies and institutional investor capital, to fill that funding gap.

Speaker 1: Okay, so I think that's a great description of the long- term trend that's been in place. Let's talk about what's changed recently. And if you want to look at this through a Barings, MassMutual lens as well, because I know that obviously where your group sits has changed, and so I think it would be interesting to talk about that because it seems like maybe for the first time, this asset class is becoming broadly available to institutional investors. But I don't want to put words in your mouth. You tell us.

Speaker 2: That's absolutely been the problem facing investors over the last few decades, is even investors who have previously looked at this asset class, been very interested in this asset class, they've never had an access point that is designed specifically to their needs. Because again, as we talked about, banks have just been doing it and they've structured it in ways that are designed for bank balance sheets. Nobody designed transactions that are better suited for insurance companies and institutional investors. And that was how our team started, is our team was started within MassMutual, taking initially MassMutual capital into this space, but as we've witnessed the unprecedented growth in private markets and we continue to see that growth certainly continuing for the next few decades, this has been an extremely exciting opportunity to open up our strategy to third- party investors, including third- party insurance companies and third- party institutional investors. So, that's what's really changed, is we have now opened this up and provided investors an access point to this asset class.

Speaker 1: So, I think you and the team started the business back in 2017? Is that right?

Speaker 2: Yep, we did our first transaction in 2017.

Speaker 1: Okay. And then moved over to Barings in early 2024. And the idea there was that basically... Well, you tell me. Was the idea basically that you were originating or able to originate so much product that it made sense to open it up to third- party investors?

Speaker 2: Certainly. And it could be summarized in one key sentence, which is, think about it, this opportunity set is far bigger than any one company or any single balance sheet. And so that, from that very simple concept, is why it made sense for the business, which originally sat at the parent company of Barings, MassMutual, to move to Barings and exactly open up the strategy to investors and clients of Barings to capture this growing opportunity set. And the fact that we're still in very early innings, I would guess we're probably in the first or second inning, that's what makes this such a compelling conversation that we're having with investors. And we're also hearing from a lot of investors that they've wanted access to this asset class for a number of years. They just haven't found the right access point, and they haven't found someone who is able to structure and deliver exactly what they're looking for.

Speaker 1: Interesting. Okay, let's talk about that then. Let's put ourselves in the shoes of an institutional investor for a minute. I'm an institutional investor. I've just gotten access to this asset class for the first time in a way that makes sense for me. You've alluded to some of the attractions of the asset class, but let just ask you point- blank, why should I care?

Speaker 2: Yeah, it's a great question. And this is a problem. So, consistently, Greg, throughout all my conversations with investors, all investors, it doesn't matter if you're a pension, a sovereign, an insurance company, all investors are facing a tremendous problem today, which is that yields are low and spreads are extremely tight. So, in order to back the liabilities, whether you're a pension or an insurance company, you have liabilities you need to back, but you look around across asset classes and you say, " Well, a lot of asset classes are priced to perfection. Am I being compensated for the risk?" And if you need higher returns, you have two options, Greg. You can either stretch for yield and go lower in the credit curve. Effectively, you're taking more market beta. Or your other alternative is to look for asset classes that deliver alpha. And so without taking more credit risk, are you able to capture incremental spread and incremental returns through an alpha- focused strategy? So, let's unpack that a little bit. What I mean by an alpha strategy is that you're not reliant on riskier lending or simply taking more credit risk. You're dependent on factors such as direct origination. We know there is alpha in controlling a transaction, in delivering speed and certainty of execution, and candidly delivering a better value proposition to our borrowers, we're able to deliver alpha for our investors. We also know, and there's been tremendous research written about this, that there is a sustainable source of alpha in the complexity premium. If you're able to unravel that complexity premium, that is a sustainable source of alpha for investors over time. That is certainly true in this portfolio finance asset class. And lastly, it goes back to what we just talked about. Think about this asset class, which has been traditionally dominated by bank capital, the presence of insurance and institutional capital, which oftentimes have longer duration than bank capital. Think about your checking account, Greg. Think about your checking account, my checking account, think about how short that duration of liability is versus an insurance company who has whole life insurance policies or a pension who is going to be paying out to their policy holders for many decades. So, you can imagine that the presence of these longer duration permanent capital sources presents an opportunity to capture structural sources of alpha in this space. So, as we unpack all this, this ultimately comes to the heart of the question, why should investors care? Investors should care if they're looking for alpha strategies and if they're looking to obtain higher spreads and higher yields through an alpha strategy as opposed to simply taking more market beta.

Speaker 1: Got it. Okay, I like the concept of the complexity premium as well. We talk about that in some other asset classes like capital solutions, which is a much more bespoke offering than something like a plain vanilla direct lending strategy. One thing I'm interested in, you mentioned that the strategy we're talking about here, the asset classes in terms of how you and the team look at it today, we're talking about an investment grade opportunity, right?

Speaker 2: Yep.

Speaker 1: Now, talk to me just a little bit about, so I think you are comparing what you're able to achieve versus single- A publicly traded credit. Is that right?

Speaker 2: That's correct.

Speaker 1: What does that premium typically look like? And how is that oscillated over time, I guess?

Speaker 2: That's a great question, and we've been able to deliver over 200 basis points of spread premium consistently over time. And that's something where I think it's important for our listeners, if they're interested in this space, they should certainly do their homework on the managers, their track record, and ask the very pointed question, " Have you been able to deliver your returns and your spreads consistently?" So, that's something that's often overlooked. It comes back to what we talked about momentarily ago about the direct origination strategy. If you directly originate transactions and you control transactions, you can be a price setter. And that is the only way you are able to maintain a spread premium consistently over time. If you're just part of a syndicate, if you're just a minority lender, you're very much at the whim of the market. And if the markets have tightened, then the returns you receive are going to tighten. So, this goes back to fundamentally you have to be a direct origination strategy in this space in order to deliver the returns that investors expect.

Speaker 1: Okay. Thank you for planting those seeds because I want to come back to origination and the competitive environment. But before that, let me just ask you this. Going back to putting ourselves in that investor or LPC, where are investors bucketing this asset class, and does it differ by the type of investor?

Speaker 2: Yeah, Greg, this is a two- part answer. Part one, if you're an insurance investor, this fits really neatly into the private investment grade part of your portfolio. So, that's easy. Part two, unfortunately is much trickier. So, if you're not an insurance company and you're an institutional investor, so let's say you're a pension fund, you could be a corporate pension or a public pension, let's say you're a sovereign wealth fund, you're an endowment or a foundation or another institutional investor, some of these investors will have a private investment grade allocation. So, for those investors, there is no bucketing challenge. It goes neatly in the private investment grade bucket. For a lot of other investors, interestingly enough, we've seen them bucket this in terms of their private credit allocation, and how they've viewed this is this is simply higher quality private credit. As we know, typically private credit is below investment grade, so they're viewing this as the investment grade portion of their private credit allocation. And then the third way that investors are bucketing this is actually from an absolute return perspective and an uncorrelated strategy perspective. So, what I mean by that, investors can almost think of this as a hedge fund replacement. They're looking for absolute returns that are uncorrelated from public equity markets. So, irrespective of the S& P goes up 30% or goes down 30%, they're looking for stable, secured absolute returns, so almost as a spread premium to treasuries. So, depending on how the investor looks at their strategic asset allocation and the buckets they have, we see investors bucketing this slightly differently.

Speaker 1: That's really interesting. All right, let's pivot a little bit. I mentioned I wanted to come back to origination. So, we talk a lot about origination on this podcast in various asset classes, whether we're talking about middle- market direct lending, real estate debt, capital solutions. I'm interested to hear about origination in this asset class, so obviously it's relationships with asset managers. Tell me a little bit about how that works.

Speaker 2: Yeah, so Greg, I think it's even more before we dig into the details, it's a core philosophy. And let's back up and define that core philosophy. Why we are so keenly focused on direct origination is we firmly believe only through direct origination can you accomplish two main goals for investors. Number one, it's the relative value. So, again, what we talked about previously, controlling the origination channel allows you to be a price setter, not a price taker. So, that's one. Investors are very concerned about returns, so certainly they want to make sure that managers are able to deliver their returns through direct origination. But even more importantly, and I think that highlights the focus of this team and the focus of our strategy, we firmly believe that direct origination leads to better credit quality. Let's unpack that. What I mean by that is through direct origination, you're able to control the structure that we're lending against. You're able to control the terms of the financing. And just as importantly, you're able to control the legal documentation, because we've been in a very benign credit environment over the last number of years. When the credit cycle turns, investors do not want to be a passive minority lender in transactions. You need to be controlling the transactions, you need to have a seat at the table, and ideally you need to be working with documents that you drafted. You need to know every single word in a 200, 300- page loan agreement because that is ultimately what is going to deliver capital preservation for investors. So, that is why we philosophically believe it is so important to pursue a direct origination strategy for asset managers globally. And we've partnered with over 55 asset managers, we've done over 100 transactions, and ultimately we've deployed over$ 40 billion of financings in this portfolio finance space. So, people know us, we have credibility and we have that track record, and we've delivered that speed and certainty of execution.

Speaker 1: Before we finish up, I wanted to ask you a little bit about the competitive landscape here that, we've alluded to it here and there, but as we think more broadly, I guess, about private asset classes, and I think about an asset class like direct lending where we've seen so many new entrants come into the space. We've seen so much capital raised in this space, a lot of interesting trends that are going on there. Who knows what the outlook is for some of the smaller players as we're seeing more and more capital consolidate around the larger players? But I'm curious, everything that you've described about this asset class, I can imagine it would be an interesting place for other alternative lenders to set up shop and try to get involved here, so I'm curious what you're actually seeing there on the ground and in terms of new entrants and just how you're thinking about competition, broadly speaking.

Speaker 2: Yeah, we're absolutely seeing more entrants in the space. And specifically, as we go back to the chart that we just described, we're seeing most of the entrants come into exactly that NAV space.

Speaker 1: I see.

Speaker 2: So, the NAV lending space, there's a number of asset managers who have set up shop and are looking to compete in that space. Back to that spectrum that we talked about, we see most of the competition coming into the below investment grade strategy as they're still chasing higher yields and they're willing to give up some credit protections that we're not willing to give up. And that's why we see most of that competition coming in the below investment grade space. But even taking a step back, Greg, the fundamental landscape of portfolio finance has not changed even with these new entrants. The reason why is the main competitors have not changed at all. It's still the banks.

Speaker 1: Still the banks, yeah.

Speaker 2: The banks still view this as extremely attractive relative value. So, there's nothing wrong with the banks. It's just their balance sheets cannot keep up with the growth of this asset class.

Speaker 1: I see.

Speaker 2: So, the fundamental competition with banks has not changed. And most of the competition has come into the below investment grade PE NAV space, which, where we're sitting, focused exclusively on the investment grade part of the spectrum, our competitive dynamics haven't really changed over the last seven, eight years.

Speaker 1: Okay. And do you see where competitors are setting up here? I'm curious, you hear this concept of tourists in certain asset class. I know you have a 30- person team. You described your incumbency status and how the team has been in existence coming up on eight years now. Are you seeing other managers set this up as part of an asset- based group? I'm just curious, how are others approaching that? I'm just thinking about the pros and cons of different approaches like that.

Speaker 2: Well, certainly I can say we have never seen any other asset managers set up a 30- person team dedicated to the space. Where we see people dabbling in the space or potentially working on deals off the side of their desk, we see typically just a few professionals who do this part- time, but they cover a much broader landscape of private credit or other asset classes. And I think that's a risk that we certainly see in this market, Greg, of these tourists in the space. They see the overall attractiveness of the asset class, but they're not as equipped and they don't have either the experience or the depth of the team to underwrite deals and they lack the expertise to structure deals, and they lack the scale of capital in order to speak for entire transactions. So, those are pockets of risk in this market where we're concerned some tourists in the space are extending on risk, they are taking unnecessary risk, and there may be losses in this asset class because of people stretching for yield. And I think that's actually fundamentally good for the asset class because you're going to see bifurcation and you're going to see dispersion amongst performance between people who are focused on capital preservation, on the investment grade part of the curve, versus people who are simply chasing yield and are willing to forego some of those credit protections to hit their target return bogey.

Speaker 1: Yeah, I see so many parallels there with what's going on in direct lending. And our team has really stuck to their knitting in terms of focusing on that core middle- market space, senior secured loans, covenants on every transaction. And it's like during the good times, it's like that's not so exciting, but when the market turns-

Speaker 2: Exactly.

Speaker 1: ...then it becomes a lot more exciting, so I think that's really interesting to hear that that's how you're thinking about it as well. I think that's really an ethos that goes throughout the firm. Okay, well, I think we've covered a lot of ground here. I want to turn it over to you just for any parting words that you want to leave our listeners with today.

Speaker 2: Yeah, certainly. I would say I think we've summarized a lot of the key terms, but I would leave our listeners with three key facts. Number one, hopefully they have a better appreciation of what portfolio finance actually is, and just as importantly, they appreciate how big this opportunity set is. And what is so exciting using that direct lending analogy, we see this as very much in the first second innings of a story that is going to play out over the next couple decades. So, think about where direct lending was 10, 15 years ago. That's exactly where this asset class is today, so it's an opportunity to be early and an opportunity to continue to participate in the growth of this asset class. So, that's one. Two, I go back to that very important theme for our investors to think about. Every investor, you have a choice. If you want more returns and if you need higher yields and higher spreads, you have a choice. You can either take more beta, and if you don't want to take more beta, then you need to find asset classes and asset managers who can deliver alpha, because ultimately it's those two options. You have to get your returns through beta or alpha. And lastly, while we're excited about this asset class, I urge our listeners and investors to proceed with caution. I urge our listeners to do their homework. Look at the track record of the asset manager you're looking at. Look at their team. Do they have a dedicated team? Do they have the scale of the team? And do they have the capabilities internally of the team to both structure, to underwrite, to manage? Because we know there's a tremendous amount of work with day- to- day management of these transactions. So, I definitely leave investors with that thought of just doing their homework and digging into this strategy because ultimately, this is a very attractive asset class, but you need to partner with the right asset managers.

Speaker 1: Yeah, makes a ton of sense. I like the way you summed it up there. I think at the start of this conversation, we started out with a goal to educate about the asset class and hopefully convey some of the benefits and why you and the team are so excited about it. Hopefully, we have done that. We will let others judge us, but I think we've managed to do that. Listen, this is the first time you've been on the podcast, but I hope not the last time. As I go through these topics and think about all these different nuances and areas, there's so much to dig into, so I hope this can be the start of an ongoing conversation with you and your team because I'd love to dive in more. And like you said, I think this is going to be an opportunity that's just got a really long runway for growth ahead, so I think there's going to be a lot to talk about in the years to come. But Dadong, this has been great. I really appreciate it. Thank you.

Speaker 2: Thanks, Greg.

Speaker 1: Thanks for listening to or watching this episode 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 debt and equity, make sure to follow us and leave a review on your favorite podcast platform. We're on Apple Podcasts, Spotify, YouTube, and more. And if you have specific feedback, you can email us at podcast @ barings. com. That's podcast at B- A- R- I- N- G- S. com. Thanks again for listening, and see you next time.

 

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