(Bloomberg) -- Barings LLC recently combined its public and private investing teams for asset-based finance, an organizational change it says will help it navigate the increasingly blurred lines between public and private credit markets.
Formed in September, the $70 billion-plus platform consolidates Barings’ corporate private placements and public and private commercial, consumer, and residential asset-based finance teams globally. As part of the revamp, the firm also named Yulia Alekseeva head of consumer ABS and CMBS. She was previously investment-grade portfolio manager and head of securitized credit research at the firm.
Alekseeva spoke to Bloomberg in a series of interviews ending on Nov. 18. Below are condensed and edited highlights of the conversation. Barings’ asset-based finance team is separate from its direct lending team, which lost more than 20 of its staff earlier this year to Corinthia Global Management, a new private credit manager backed by Nomura Holdings Inc.
Why is Barings integrating its public and private teams?
The goal is to seize the growth opportunity in asset-based finance by taking a more holistic view so that we can invest wherever relative value is greatest across markets. We’ve been investing across both public and private asset-based credit for decades, and what we’re seeing is a gradual convergence.
For example, originators of asset-based debt that need to finance a pool of assets often now pursue a “dual path” approach: they engage both public and private asset-based finance investors at the same time to determine whether doing a public or private deal is the optimal approach.
High interest rates and retreating bank capital helped spark private credit growth. What’s sustaining it?
First, investors are looking for uncorrelated or less correlated income streams and return drivers. Asset-based credit helps provide that because it’s not monolithic and it’s distinct from traditional corporate risk. There are so many flavors and exposures beyond the plain vanilla sectors such as auto loans and credit card receivables, including collateral types ranging from music royalties, data centers, fiber network receivables and beyond. As a result, we’re seeing more capital allocators rethink their approach to portfolio construction, moving away from the traditional 60/40% equity-to-debt portfolio, to something close to a 40/40/20% portfolio, where the 20% is the alternatives basket that includes some of these unique, innovative things inside asset-based finance.
Second, we see demand from the insurance channel becoming a crucial component of the asset-based finance ecosystem. Insurance companies have long focused on matching assets to liabilities. For example, life insurance products tend to be matched with long-dated investments. But over the last few years, we’ve seen a surge in shorter-dated annuity product sales due to higher base rates and an inverted yield curve. This has been fueling the demand for asset-backed products, particularly on the consumer ABS side, because they tend to have shorter durations which align very well with the shorter annuity tenors.
Annuity sales soared partly because rates are high. If sales slow as rates drop, will there still be lots of demand for asset-based finance?
We believe interest in asset-based finance will continue to grow and remain resilient. Even before annuities became an important driver of capital inflows into the asset class, insurers were seeking to diversify their investment-grade exposures and add less correlated income streams to their investment portfolios. Today, there’s a greater variety of underlying collateral types — from solar leases to digital infrastructure — that are being securitized, so the asset-backed investment universe will keep growing.
Beyond the insurance channel, we believe the market will continue to see interest and demand from other types of investors, who are looking to deploy cash into high quality assets supported by unique cashflows. So, while annuities are part of the equation, even if there’s a slowdown in annuity sales or a shift from three-year to five-year products as the curve flattens, it still won’t displace the need for the broader diversification that asset-backed credit provides.
What investments look compelling?
Non-agency CMBS is shaping up as an interesting area of opportunity. In 2024, year-to-date, it generated its best excess returns in over a decade, catching up after two consecutive years of underperformance. With corporate credit nearing historic tights and credit curves flattening, high-quality CMBS looks attractive from a relative value perspective. Bidding activity has picked up materially, valuations have largely stabilized, office fundamentals appear close to be bottoming out – all suggesting a positive inflection point for the sector.
(Updates with context on earlier departures from direct lending team in third paragraph.)
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