Barings’ European private credit boss heralds scale and incumbency for direct lending success

Scale and incumbency are highly important when competing in a crowded direct lending market, according to Barings’ head of European private credit and capital solutions Stuart Mathieson.

Lower interest rates on what are typically floating rate products, combined with an influx of new players into the space, have made it more challenging for managers.

Barings’ longstanding private credit platform has a $50bn (£41.4bn) capital base and Mathieson (pictured) says it is this scale and incumbency which give it a competitive edge.

“The incumbency means that not only are we talking to the sponsors all the time, so we are able to see and compete on new platform deals, but we also benefit from significant off-market transaction flows,” he added.

“We have a very diverse mix of capital, which puts us in a very strong position to be competitive. I think it’s a very difficult business to start when you’re small because you don’t have that diversity, you don’t have that incumbency that drives the off-market piece, and therefore to build scale quickly is really, really difficult.”

While Mathieson concedes that some new managers will be successful, he notes that some big brands have tried to enter the space and exited.

“If you think about running a credit portfolio, diversity is a real benefit to investors,” he added. “While there are a lot more fund managers coming into the direct lending space, I think the market is set up for those who have scale and incumbency to continue to take share and be more successful. I certainly think these advantages are somewhat structural and certainly beneficial as we look ahead.”

Read more: Barings confirms private credit focus following staff exodus

Mathieson says long-term partnerships are crucial to running a successful direct lending business and that it is not a market “where you necessarily only win on price”.

Barings opts for the slightly more conservative end of sponsor-backed middle-market direct lending deals, with an aim of building long-term relationships. Its typical deal size is lending to companies with between €10m (£8.3m) and €50m of EBITDA.

The asset manager has been hiring new private credit staff, both externally and via internal promotions, since a number of senior members of its private finance team departed for new entrant Corinthia Global Management last year.

Mathieson said that the team is now “fully resourced” although they are “always looking to hire good people” as they grow the business.

Mathieson, who has worked at Barings since 2002, said that being “a big, scaled incumbent player” with a high transaction flow will help the firm with staff retention going forward.

“We absolutely can show people that transaction flow,” he added. “I think it’s important for employers to show that development opportunity for the team. I’m a big supporter of the idea that if people are ready, we give them an opportunity to step up in their careers. For me, those are the most important retention tools.”

Barings attracted headlines last November when it launched the first European private credit collateralised loan obligation (CLO). The vehicle was backed by a portfolio of European middle-market senior secured loans and was the result of a combined effort between Barings’ global CLO team and Barings’ global private finance group.

Mathieson said that investor appetite was “phenomenally strong” and Barings ended up upsizing the fund from €350m to €380m.

“What I found interesting is the number of investors who have subsequently spoken to me, asking why they weren’t involved and whether they can be involved next time,” he said. “Hopefully, we’ve set the template that others can now follow, and this will be the start of the European mid-market CLO business evolving.

Read more: Private credit CLOs in the US could overtake BSL CLOs

“Certainly, we’ll be looking at another transaction, and we’ve already started to think about what that looks like and when.”

Europe has been slower to see private credit CLOs than the US, which Mathieson thinks is due to the size of the market, as CLOs need sufficient diversity in the collateral pool at the right ratings level.

“It’s much easier to pull together that collateral pool [in the US],” he said. “The challenge in Europe is who can actually pull together the right collateral mix to do this. For this reason, I think that the European private credit CLO market will be slower to grow and I don’t think it will ever quite reach the same scale as we see in the US.

“The different currencies in Europe also create challenges. A dual currency CLO is not impossible, but it is more challenging. Hence why we started out with a single currency product.”