Private placements have become an established source of funding for borrowers. Given the potential for incremental returns, diversification, and downside protection, investors are increasingly turning to this asset class too.
Given the relatively higher yields on offer, institutional investors are increasingly considering investments in illiquid private markets—including private placements. For insurance companies and pension funds, in particular, these markets can offer a number of potential advantages, ranging from an illiquidity premium over public markets to enhanced diversification, risk protection, and positive asset-liability matching attributes.
What are Private Placements?
Private placements are essentially notes and loans sold only to qualified institutional buyers (QIBS). Historically an investment grade (IG) market, private placements tend to have intermediate to long-term maturities, and are mostly fixed rate (Figure 1). For issuers, financing via the private market has potential advantages—from confidentiality considerations to the flexibility of issuing debt across a wide range of sizes, maturities, and currencies.
The market also spans a range of geographies, credits and sectors—from universities, sports-related transactions and financials to more esoteric products such as structured finance, credit-tenant lease transactions and aviation deals.
| Figure 1: Key Characteristics of Private Placements | ||
|---|---|---|
| Private placements | Public Investment Grade Debt | |
| Credit Quality | BBB - and above | BBB - and above |
| Tenor | Flexible, 2—50- year | 2 year to perpetual |
| Income | Primarily | Fixed or floating |
| Structure | Flexible structuring with delayed draw and bespoke maturities | Bullet maturities or scheduled amortization |
| Prepayment | Make-whole provisions for pre-payment | Make whole provisions or call structures |
| Security | Primarily senior unsecured or senior secured | Senior unsecured through junior subordinated |
| Key Features | Engaged working relationship with borrowers, strong conventants, historically low net losses, stable cash flows | Engaged relationship with borrowers, flexibility of tenor and unsecured |
| Source: Barings. As of February 29, 2024. | ||
Any forecasts in this material are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
