Buy and maintain: Interview with Phoenix Group’s Michela Bariletti

With £10bn invested in illiquid strategies, Phoenix Group is already bullish on private credit, and Michela Bariletti (pictured), chief credit officer and head of global investment research, expects to see even more growth in the market. She tells Alternative Credit Investor what she looks for in a private credit fund manager, and how the UK’s largest retirement fund approaches credit risk.

Alternative Credit Investor (ACI): Could you tell us a bit about the work that Phoenix Group does?

Michela Bariletti (MB): Phoenix Group is the UK’s largest retirement business. We manage around £280bn on behalf of about 12 million customers. Approximately £240bn is managed on behalf of our customers, so these are workflow pension schemes and defined contribution (DC) pension schemes, mainly. And then we have £40bn that we manage on the balance sheet, and they are assets that back our defined benefit (DB) pension scheme. We are very, very active in private markets on that side of the business.

ACI: What percentage of Phoenix’s portfolio is invested in private credit currently?

MB: We have about £10bn of illiquid assets. We consider private credit to be an illiquid asset, so when we talk about that £10bn share of the assets, those are private credit but at an investment grade. On the shareholder asset side, by the nature of us being a Solvency II investor, all our private credit investments are investment-grade.

In relation to the DC pension scheme, then it could be a variety of private credit in terms of credit risk profile and a mix of investment grade and non-investment grade.

We are a buy and maintain type of investor. When we do an investment, we need to be absolutely comfortable that it’s something that we can maintain, and particularly when it’s illiquid in case there are situations where the investment is not performing.

ACI: What is your typical investment horizon?

MB: We will be looking at any maturity depending on our liabilities, but we can go out all the way to 50 or 60 years depending on the type of asset that we are looking at. Of course, it has to be an asset with a long term profile. So you are potentially looking at real estate infrastructure projects or social housing, an asset that can be sustainable over a long period of time.

ACI: How can you ensure that sustainability?

MB: Over the past three years we have built a very strong internal desk in terms of credit risk management capabilities, with the ability to assess not only the credit risk, but also the sustainability of the assets and the investments that we are looking at.

Read more: BBB and Phoenix invest £500m into Schroders LTAF

Predicting 50 years is very challenging. I’m not saying that we will always get it right, but you look at the essentiality of the asset, the economics, and the nature of the cash flow that will be generated. At the same time, you look at the sustainability from an ESG perspective, and also which type of service the asset is providing and which are the counterparties that are involved in the business. All of that will then inform our decision about the longevity of the investment.

ACI: Which private credit managers do you currently work with?

MB: The way we originate assets on the shareholder side is both directly and with external asset managers. We work with Abrdn, MetLife and BlackRock, among others. We tend to choose the asset manager depending on their skills and capabilities in a specific asset or sector or geography. We have relationships with US-based asset managers as well to ensure that we have access to additional opportunities in the US. And we have a specialised real estate manager in the UK. So it’s really a variety.

ACI: You recently entered into a joint venture with Schroders to create Future Growth Capital – how did this come about?

MB: Schroders had the capability and the positioning in terms of size and scope to give us confidence that we had the capability to originate the assets that would be suitable for our policyholders. I think also the size of the two companies fits very well in terms of creating the right balance of decision and influence. When you are in a joint venture, you need to ensure that you’re comfortable with your partner, but also that the power is balanced and that you are aligned in what you want to deliver.

ACI: Are you currently looking to onboard any other managers?

MB: When we look to award a new manager, we’re looking at their capacity and capability to originate certain assets. We will look at their experience and track record in terms of performance and ability to originate those assets. And of course, the ability to manage the credit side of things is extremely important. We spend a lot of time with our managers understanding their credit risk management process, and particularly if there are any checks and balances internally from a line one versus line two perspective, and also ultimately into their workout capabilities. The workout capabilities are extremely important when you’re playing the private credit side because we are trying to create some liquidity.

We are buying and maintaining, and we expect our private credit managers to have the ability to see through the life of the investment from its inception till the end, whether it is a good end or a workout situation.

ACI: Do you have any concerns about private credit at the moment?

MB: The most important thing when you’re playing private is your underwriting standards. And that is something that we take quite seriously. We want to ensure that the transaction is structured in a way that enables us to have a conversation with the borrower if things go wrong. So we like covenants that give us the ability to take the borrower to the table and to have a discussion when things might not go as planned. You want to be there as early as possible to understand the strategy, how they’re going to manage it, and how they plan to recover so that you can be a partner in the journey rather than being caught by surprise. To me, underwriting and covenants are extremely important.

Read more: Phoenix Group hires new head of private markets

The other thing that we look at when we are lending or co-lending with other investors is the position of our co-lenders in terms of liquidity, particularly. Because when you lend, you don’t want to be in a situation where your partner or someone that is co-lending with you is in a force-selling situation because of liquidity constraints.

ACI: What is your outlook on private credit for 2025 and beyond?

MB: In terms of origination, I think it’s positive. I think the outlook for 2025 is still fairly benign. Of course, there’s a lot of uncertainty around what the Trump administration will mean for the global economy. Therefore, we would take a cautious stance when we look at new opportunities to understand how they might fit within the global headwinds that we can see.

We talk a lot about the golden era of private credit. Everyone is expecting it to continue to grow and I totally agree. I think private credit will continue to grow.