With competition high and signs of mispricing of some assets, Eric Lloyd of Barings stresses the importance of a global and diversified approach to portfolio construction.
What trends are you seeing in global mid-market private credit markets?
The most consistent trend we’ve seen is increased competition. Across Barings’ global private investment platform, we saw strong volumes in the first half of this year in the U.S., Europe and developed Asia, but the amount of dry powder, or capital that needs to be put to work, also continues to increase. Those factors are leading to greater competition among direct lending capital providers.
As purchase prices stretch higher and leverage multiples rise, we have also seen documentation become a bit looser from a terms perspective. In this environment, it is critical for managers to maintain discipline. Rather than focusing on how much capital is being deployed this quarter or next quarter, we believe a focus on robust, long-term, through-the-cycle performance will be a big differentiator.
Are you seeing many new entrants into the middle-market space?
There are some new entrant in the market but, in many cases, their capital base and scale tend to be smaller than the more established participants. We are also seeing firms enter the market that have traditionally only played in liquid credit – they are not necessarily new entrants but they are new to our market. These firms tend to take more of a capital markets approach, working indirectly with private equity sponsors, usually through an intermediary. At Barings, we focus on directly originating assets primarily through private equity firms, a fairly different approach.