Barings’ co-head of global private finance, Adam Wheeler, is expecting some lenders in the private debt industry to experience a “slow-motion car crash” as the effects of rising interest rates, geopolitical factors and the possibility of a global slowdown begin to flow through the illiquid and opaque asset class.
“It’s highly likely that things will soften, and we’re positioned as well as we could be to weather the outlook,” Wheeler told Private Debt Investor in an interview this week. Although he doubts that the current cycle will be “as uncomfortable” as the global financial crisis, he can’t say that with certainty.
Wheeler’s comments came on the heels of Barings’ closing of its European Private Loan Fund III and associated vehicles, which attracted €7 billion of investable capital and beat its initial target. The fund, launched in 2020 per PDI data, already has deployed €6 billion in the last 18 months across more than 80 transactions. The fund received commitments from a global investor base including public and private pension funds, insurance companies, sovereign wealth funds and family offices. It brings Barings’ total committed capital in Europe to €12.8 billion, with €10 billion invested.
As for the coming difficulties he foresees for some private lenders, Wheeler said that as a debt investor, Barings thinks about investing through a cycle, and doesn’t try to time the market. He says the manager invests in fairly resilient and defensive sectors. At the time of the fund closing, Ian Fowler, co-head of Barings’ global private finance group, said: “We firmly believe a disciplined approach and strong credit selection can continue to offer investors attractive, through the cycle, risk-adjusted returns.”
Wheeler also echoed a PDI story this week that reported European unitranche deal numbers surged 25 percent in Q2 2022. He noted that Barings was “extremely active” in Europe in the second quarter, and that pace continued into the third quarter. “A number of transactions that would have been done in the broadly syndicated market have gone to direct lenders,” Wheeler said, noting that banks, which represent about 40 percent of the capital to support private equity in the mid-market in Europe, had “pulled back significantly” because of geopolitics and market and macro factors.
At the same time, he said that there hasn’t been a significant drop-off in mergers and acquisitions in Europe because of pent-up demand following the covid-related shutdown. He said that many PE firms had been trying to exit a lot of investments they had held for some time.
While Wheeler said that volumes in Europe are strong, “the quality of dealflow is now mixed”. He added that Barings had seen more of a slowdown in North America.
“A lot of what we’re doing is to support companies we already lend to,” he said.
“Incumbency is incredibly important in sourcing transactions, particularly in Europe,” he added, a region where Barings is generally the sole lender of financing to a PE fund.
Barings, based in Charlotte, North Carolina, is a global investment manager with more than $349 billion under management. It oversees more than $78 billion of private credit assets.