Private placements present a “growing opportunity” for investors thanks to strong returns, diversification and downside protection, according to Barings.
The asset manager said that institutional investors are increasingly considering investments in illiquid private markets, including private placements, given the relatively higher yields on offer.
Private placements are notes and loans sold only to qualified institutional buyers. They tend to have intermediate to long-term maturities and are mostly fixed rate.
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For issuers, the benefits of financing via the private market rather than the public market include confidentiality considerations and greater flexibility.
“As the market has evolved, institutional interest in private placements has grown,” Barings said in the article, written by Ernesto Chesculescu, head of European private placements origination and Ben Jones, head of corporate private placements.
“Insurance companies have traditionally been the most active investors in the market, attracted to the liability matching characteristics, such as longer tenors and prepayment protection.
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“Investors seeking to enhance yield and portfolio return, such as pension funds, have turned their attention to the asset class more recently. At the same time, the investor base for private placements has become more global, with demand from both Europe and Asia growing as investors continue their respective searches for attractive yields and greater diversification.”
Unlike public debt which is heavily concentrated in the industrial, financial and utility sectors, private placements span rates and unrated public and private debt and a wide range of industry sectors, Barings said, giving investors greater diversification.
Furthermore, private debt investments have strong negotiated covenant structures unique to each deal and are typically senior in an issuer’s capital structure, offering better downside protections than public bonds, Barings added.
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The asset manager also noted that losses for private placements have historically been lower than those for public corporates of a similar credit quality.
“Given the strong downside protections, private debt assets have exhibited resilience over time, including through periods of market volatility and economic downturns,” Barings said.
