Navigating Policy, Private Markets and AI with Barings’ David Mihalick (Podcast) – Corporate and Company Law

Podcast Guest

David Mihalick

Co-Head of Global Investment

Barings Capital Management

Barings is one of the world’s leading investment managers,
with a platform that spans public and private markets, fixed
income, real assets and capital solutions. In this episode, we sit
down with David Mihalick, Co-Head of Global Investments at Barings,
to explore how the firm is navigating today’s complex
investment landscape.

David shares insights on Barings’ multi-asset investment
strategy, the knock-on effects of tariffs and current U.S. policy
decisions and how middle-market companies are adapting to economic
headwinds. We also discuss the evolving role of AI in private
markets and its implications for human capital.

Peter Antoszyk: Welcome back to Private Market
Talks. I’m your host Peter Antoszyk. Barings, a subsidiary of
Mass Mutual, is a global asset management firm with approximately
$442 billion of assets under management. David Mihalick has served
in various roles at Barings and is currently co-head of global
investments, responsible for the oversight of Barings global
investment platform, spanning public and private markets and fixed
income, real assets and capital solutions. Prior to entering the
financial services industry, he served as an officer in the United
States Air Force and worked in the telecommunications industry for
seven years. David holds a BS from the United States Air Force
Academy, an MS from the University of Washington and an MBA from
Wake Forest University. During our conversation today, we discuss
Barings’ investment strategies, the impact of tariffs and other
policies of the current administration, how middle market companies
are managing under current economic conditions and the impact of AI
on human capital and private markets. As with all our episodes, you
can get a full transcript of this episode and other helpful
information at privatemarkettalks.com. And if you enjoyed this
episode, drop us a note. We’d love to hear from you.

And now, my conversation with David Mihalick, co-head of global
investments at Barings. David, welcome to Private Market Talks.

David Mihalick: Thank you very much for having
me.

Peter Antoszyk: And thank you for your
service.

David Mihalick: Well, thank you. It was a great
way to start my career. It seems at this point, like it was a long,
long time ago, but definitely a foundational part of who I am as a
professional and helps shape the way you think about the world.

Peter Antoszyk: What did you take from being an
officer in the Air Force that you’ve brought to your
professional life?

David Mihalick: The leadership things you learn
at an early age, graduating — I went to, as you mentioned,
undergrad at the Air Force Academy — so, I graduated and was
commissioned as a second lieutenant and, at 22 years old,
you’ve got people working for you dealing with real life
problems, not just work problems in the military. You get involved
in all aspects of someone’s life to ensure readiness. And so, I
think it forces you to mature pretty early on, think dynamically,
learn how to work with people from different backgrounds. So,
it’s a great way, just, you know, not, obviously not financial
services, but just kind of being a professional, being flexible,
being thoughtful in your approach and learning how to work with
different people.

Peter Antoszyk: For the benefit of our
listeners, can you give us a snapshot of Barings’ investment
strategies?

David Mihalick: Sure. Barings is a $440 billion
asset manager. We are 100% owned by Mass Mutual Life Insurance
Company. You break down our AUM into big buckets, we’ve got
public fixed income, which is about 215 billion of AUM, a bucket I
would call private fixed income and capital solutions, which is
about 137 billion of AUM, and then a real assets business that is
about 70 billion of AUM and that would include our real estate debt
and equity businesses, as well as an infrastructure debt business.
So, that’s sort of the pie, if you will, of everything that we
do. As I mentioned, we’re owned by Mass Mutual. So, we’re a
private company owned by a mutual company. So, I think what that
leads in terms of philosophy and how we think very long term so
we’re not reporting quarterly earnings. Mass Mutual has been
around for 170 years. Mass is invested in — I always hesitate
to say everything or 100% — but 99% of what we do, Mass
Mutual is invested in as well typically. So, we have that alignment
with our third-party clients, and they know that we’re thinking
very long term, and we’re thinking about investing. So, that at
a high level sort of summarizes to me how I think about our
platform.

Peter Antoszyk: And can you break that down a
little bit in fixed income? What are you, what are you doing?

David Mihalick: Sure. So, in our public fixed
income business, we have traditional investment grade corporate
bonds that’s for a life insurance company, obviously our parent
company, that’s a big part of their portfolio. We’ve got a
very big liquid high yield platform, that would include loans and
bonds in the U.S. and Europe as well as structured credit. We put
our CLO platform, we put in our high yield and structure credit
business, so under the public fixed income business. So, those are
the big buckets. We’ve also got an emerging market sovereign
and emerging market business that we manage within that. So,
that’s the bulk of that franchise.

Peter Antoszyk: And the private strategy?

David Mihalick: In our private business, we
have traditional private placement. So, if you think about it, the
way the markets have evolved, a lot of those things you mentioned
on the public side, you can sort of get access to very similar risk
on the private side. So, we have a large private placement
business, for example, which is very similar in terms of risk
exposure to our investment grade corporate bond book. It’s just
you pick up an illiquidity premium in the private markets.
Similarly, we’ve got a large direct lending business, so
providing capital to middle market, leveraged buyout. So, the risk
there is very much like our, our high yield loan and bond business
just in private form. So, you get a bit of a spread premium in that
market. We’ve also got an asset-backed finance business. I
mentioned an infrastructure debt business. And then, something we
call “Capital Solutions,” which is a term that I think
people use a lot, but I think anytime someone says that you have to
ask, “What do you mean by that?” It’s a very generic
term. That business for us grew out of our distressed lending
business back 15-20 years ago, and as there’s been sort of
episodic default issues but not really a large corporate default
cycle over the last — really, since the financial crisis.
Again, there’s been things that have happened in specific
sectors or you had COVID, of course, but not a traditional deep
recession that resulted in broad based defaults. But that business
evolved from focusing on sort of workouts in the financial crisis
to really being a flexible source of capital. So, think about
potentially non-sponsored deals or anything that doesn’t fit in
a traditional bucket that we described earlier is something that
that team may look at. We also have a small private equity
business, think lower middle market private equity business, that
does co-investment alongside some sponsors as well as fund
investing, and in terms of capabilities, we tend to call that
“Capital Solutions” as well, which I think is an
interesting area when you think about the ability to provide
continuation vehicle capital to sponsors and some of the things
going on in private equity now. So, “Capital solutions,”
it’s a label we put that’s pretty broad, but it really is
those flexible situations where it doesn’t fit neatly into one
of the traditional buckets that someone might think about.

Peter Antoszyk: And just to round it out, the
real asset component of your investment strategy would include
what?

David Mihalick: We have real estate equity
capabilities globally. So, we have a team in the U.S., a team in
Europe and a team in Asia PAC. The team in Asia PAC was a business
we acquired a couple of years ago called Altus Property Partners,
based in Sydney, so we’re excited about that added capability.
And then just a few months ago, we augmented our U.S. equity
capability with the acquisition of a firm called Artemis Property
Partners. So, real estate in general is an asset class we’re
excited about and investing in. So, that’s our equity platform.
We also have a large real estate debt platform. Obviously, Mass
Mutual as the life insurance company has always had appetite for
real estate debt. We’ve got a really nice growing third-party
business there as well. We’re seeing a lot of interest in real
estate debt as an alternative to private credit, and I’m sure
we can get into some of those market trends we’re seeing. And
then, we’ve got an infrastructure debt platform that’s the
business we’ve been in a little over 10 years, it was
originally Mass Mutual acquired a portfolio out of a bank. We have
a team, and we’ve now over the last several years been
investing in that team and adding third-party AUM as well.

Peter Antoszyk: When you look back over the
last say five or 10 years, what has been the driver of growth for
Barings?

David Mihalick: I’d say the biggest organic
growth we’ve seen was in our direct lending business. I mean,
at least the last couple of years, a headline every day about the
private credit market and whatever it is — 1.7 trillion, and
however people bucket it, that’s a business we grew organically
starting in the 2012-2013 time frame. And so, we’ve seen really
nice momentum that’s 35 plus billion of AUM and close to 45 or
50 billion of commitments. Our core high yield franchise has grown
as well very nicely over the last 10 years and that’s really
been about evolving the product offering there from single sleeve
strategies to more multi-asset strategies. I think we were early on
in that, so recognizing that when you’re looking at corporate
credit risk in developed markets, it’s very similar in terms of
the U.S. investing versus European investing, but there are nuances
and technicals of the market that can create opportunities to get
outsized return in one market or the other. So, we had a big
platform in each area and we’re able to bring those
capabilities together in a global platform and that was appealing
to our clients over the years. And then more recently, I’d
point to real estate as something where we’ve seen nice organic
growth in our debt business. And then we’ve augmented our
equity platform with a couple of acquisitions where we see it’s
obviously a big river asset class. We had the disruption in the
office market associated with COVID and the rate move, but
long-term, we think there’s a lot of opportunity there, and so
it was an area we wanted to invest in. Again, we’ve seen
organic growth, but we knew to really position ourselves for where
we wanted to be longer term, we needed to augment our capabilities
with a couple of acquisitions we did. So, we’ve seen growth
there. I’m really excited about the potential for that platform
over the next five to 10 years. We’ve been in that business for
decades.

Peter Antoszyk: Looking forward now over the
next five to 10 years, where do you see the greatest opportunities
for growth?

David Mihalick: If I look across our platforms,
I would expect what I would call our sort of core franchises,
leverage finance franchises, so our high yield and structured
credit teams and our private credit teams to continue to grow. So,
we feel good about those; they’re scaled capabilities
today,—— and we should continue to hopefully capture
market share, so we’re continuing to invest in those. Then
beyond that I look at our real estate platform, talked about that a
bit earlier, good size there. But I think we can get a lot bigger
and those acquisitions that I mentioned that we made, we’re
really excited about those. So, we’re in the process of
integrating the more recent one, the agent pack deal with smaller
— but it’s been integrated at this point and then
they’re looking at some organic build out opportunities outside
of their core markets in Australia. So, real estate overall,
I’m excited about. As I mentioned real estate debt with some of
the issues that have gone on with banks, we’ve seen a lot of
interest, a lot of opportunities from an investment standpoint
there and a lot of interest from clients as a diversifier away from
traditional corporate credit. So, you get a similar risk premium in
that market to what you might get on a private credit deal but
you’re exposed to a different underlying risk. Similar story
with infrastructure. So, all of that real assets bucket that we
talked about earlier, we’ve got a lot of exciting growth
opportunities there and then probably an emerging area, and
you’re hearing a lot about it in the last couple of years is
asset backed finance. And so that’s an area where we’re
spending a lot of time right now thinking about, I think about like
we’ve got all the ingredients in the cupboard, if you will, and
that all the things that people talk about in ABF we do, and we
spent a lot of time over the last year and over the next year or
two thinking about how we organize, how we create product around
that. There’s some unique origination that you need to invest
in associated with that so that’s a big focus area for us, but
something that I think has really big long term growth tailwinds
and again, we’re not unique in that, you’re seeing a lot of
headlines around that, but like I said, we’ve got all the
capabilities that you hear about in the market. They’re at
different sort of levels of readiness, if you will, today, but
we’re really focused on making sure we have that platform
right. I think it will be a big growth driver for us over the next
five to 10 years.

Peter Antoszyk: So David, as a global platform
how are you thinking about allocation of capital
geographically?

David Mihalick: I would say it varies by
strategy. And I think that’s a really good question for a
strategy, right? Like we don’t have that as a firm but I would
say on average, if you think about the U.S. markets being, on
average, traditionally the biggest, most liquid developed markets
in the world, which is great for access to capital, but they tend
to be a little more efficient. And so, as I mentioned earlier, like
in our leveraged finance business, when you can get exposure to
comparable risk in a market that maybe is not as liquid or as deep,
so Europe versus the U.S. and the syndicated loan market, you tend
to get a bit of a risk premium, and I would say similar when you go
into Asia PAC, as we’re investing there, very similar risk,
maybe not as big or as deep of a market, but you can get a return
premium because of that. And so, I would say if you if you look
just sort of thematically how we think about things, having that
global scaled capability, and if you take the U.S. as sort of the
baseline market, when you can find very similar risk outside the
U.S. market and either less efficient markets, again this is
painting with a really broad brush, but on average, you can pick up
a risk premium. So, we would tend to look for those opportunities
as differentiators in our clients’ portfolios that give us that
global mandate.

Peter Antoszyk: When you’re looking at the
U.S., how do you think about the economic headwinds facing the U.S.
in terms of the impact of tariffs and geopolitical considerations
and conflicts, inflation, supply chain change, general economics or
all of those things that we read in the headlines.

David Milhalick: I’m co-head of investments
at Barings with my colleague, Martin Horne, in London, and
we’ve worked together for 15 years and so let’s go pre- the
current administration, and when we would have talks around
relative value in the economy, whatever was going on in the U.S.,
Martin would say, “You guys are a little too dour compared to
what’s happening in Europe.” So having that perspective
matters. Now you get into 2025, and, of course, we’ve got these
acute headlines and a lot of uncertainty that’s come in over
the last couple years: rates, inflation, and the resetting of the
real estate market, now tariffs’ impacts on trade, and then
headlines versus what’s actually happening. I would say, like
everyone else, when we get into these periods of uncertainty, my
instinct at least as a historical credit investor is to focus on
the fundamentals. And so, when we’ve got a large team of
analysts across the platform, when you get into these periods of
uncertainty, it’s really important, it’s too late to make a
lot of adjustments to your portfolio, particularly in private
markets, you sort of own what you own, so you need to be thinking
about this kind of stuff early and often. And the example I’d
give of that on our platform is our private credit team, as soon as
the tariffs were announced, had a full robust analysis of our
entire portfolio expected impact on tariffs, and the reason is
because they started that work in January, and that’s because
part of the president’s campaign or platform was tariffs. Now,
did we anticipate the way that he did it, the amplitude of some of
the things that were announced? No. But we had done a ton of work
heading into April in anticipation of some change in tariff policy.
And so, that sort of bottom-up approach, if you will, is just
foundational to how we think about investing at Barings. And so, in
terms of your question around the economic outlook, I mean when we
look at our portfolio, we still feel pretty good about how
companies are performing but recognize there’s more stress in
the system today than there was three or four years ago. The
combination of higher rates, potentially a little bit weaker
economy driven by all the different policy changes, it’s really
a time to, like I said, buckle down, focus on fundamentals, make
sure you have a theme to how you’ve built the portfolio and
then trust that that the hard work you’ll do through any
volatility will deliver good returns for your investors.

Peter Antoszyk: In terms of looking at new
investments, however, how do these factors factor into your
underwriting strategy and also risk tolerances?

David Mihalick: I think it’s funny. Risk
tolerance, I think, is the right word to always keep in mind,
right? Because, you know, history would tell you that when things
look the worst is when the best returns are to be had. Right now,
you have to take measured risk. You have to be thoughtful. But when
times are bad, the deals that are getting done, particularly if
you’re on the credit side, right, someone still wants to do
that deal. Someone’s probably writing a bigger equity check
maybe than they would have before, and they’re going to pay a
bigger premium for the debt. It means they’ve got a lot of
conviction on the deal. So, the ability to partner with people
you’ve been in business with for a long time through those
uncertain periods, I think is a hallmark of how we think about
being a solutions provider to our clients, whether that’s our
investor clients or our sponsor clients we may be doing deals with.
And that’s where I had mentioned earlier in the conversation
that alignment with Mass Mutual. Ingrained in our DNA is not
thinking about the next six months. I mean, you got to get through
the next six months to live for the next five years, but we’re
thinking about that longer term model so that that to me is a
foundational part of how Barings as an institution thinks about
investing.

Peter Antoszyk: And how do you think about just
general levels of debt?

David Mihalick: It’s the lifeblood of the
economy, right? In general, everyone that buys a house or most
people that buy a car, they’re using some form of financing
and, hopefully, they’re doing it responsibly. I think when you
look at aggregate, there are headlines around a bit of stress with
consumers and things like that. And we’re watching that.
We’ve got a big book of residential mortgage exposure. So, we
have insight into some of those things. When I look at corporates,
I feel like we’ve been in this higher rate environment for a
number of years now. If you have a good company with a reasonable
amount of leverage and a strong sponsor, they can figure out a
higher rate environment. We’ve seen that in our portfolio. As
rates rose, you saw interest coverage come down. Maybe there’s
some decisions made on capital expenditures or M&A because a
little bit more had to go to service debt. But that’s largely
stabilized, and we’ve been in a relatively stable rate
environment for a period of time now. And back to what I said
earlier, the deals that you’re seeing get done in this rate
environment, in this economic period of uncertainty, are generally
good deals, and so we’ve we feel pretty good about the
opportunities that we’re seeing in the market and feel like
debt in general is at a reasonable level in most deals. When you
get into bigger picture macro discussions around the deficit and
national issues, that’s probably a different conversation and
that has an impact on rates over time and things like that. But
when we look at the investing environment that we’re operating
in today, we feel reasonably good about it.

Peter Antoszyk: To your point, David, debt is
the lifeblood of our economy, and has been particularly for private
equity, but there is some concern that private equity has lost
steam. How do you think about the state of private equity as it
impacts your strategy for growth and direct lending?

David Mihalick: That pressure to return capital
for private equity sponsors is there. I think we have seen that
increase just anecdotally through dialogue with some of our
partners, and I think you’ll continue to see it increase. I
think the market for secondary opportunities is going to continue
to grow as a result of that. The benefit we’ve seen in terms of
having the big book of business we have and the partnerships we
have with sponsors from an origination standpoint has really fueled
our business the last few years in terms of add-on activity.
You’re maybe seeing a little bit less of that more recently,
but still pretty robust in a diverse portfolio. But offsetting
that, you have more corporate buyers coming into the market,
strategic buyers versus financial buyers. The headlines are real.
But again, I think for good companies, there’s an option.
It’s whether the seller likes the level or not. But a lot of
them again have spent three or four years doing out on
acquisitions, working on cost efficiency in the business. And so,
if they’ve owned an otherwise good business, even though they
may have bought it for 15 and it’s only worth 12 today, the
things they’ve done to do both on acquisitions and improve
operationally, still can generate a good return. And if they think
there’s a longer-term story there that the availability of
capital, those continuation vehicles and things like that. So,
it’s taking longer to achieve the return; there’s more
pressure from LPs to get dollars back. They’ve got to execute
on that to get to that next round of fundraising, to your point.
But good sponsors with good companies will figure out a way to
generate good returns, and we want to be partners with those types
of sponsors.

Peter Antoszyk: One of the things you talked
about is that you have a fairly extensive and substantial portfolio
of middle market companies, and you touched upon a little bit of
their resiliency in the current economic environment. I’d like
to drill down in that a little bit more and get a sense of —
and this goes to your comment earlier, which is what are you
hearing versus what is actually happening — I’m kind of
curious as to how you see these companies navigating the current
economic environment.

David Mihalick: I’d say if I think back,
there’s sort of the current administration and policy and then
there’s to me what’s happened sort of post-COVID with rates
and inflation, which they’re both interesting stories. And so,
the rate increase — I think we got a lot of questions around
could companies adjust, and we saw companies adjust. We would
underwrite, say, in the lower rate environment, three times
interest coverage, maybe two point something coverage after CapEx,
capital structures that had flexibility to deal with higher rates.
Now, as I mentioned earlier, as rates increased, that three times
went to two times, but still, the ability to service that and make
capital expenditures to invest in the business. Now, that higher
rate, though, impacted valuations as well. So, back to the ability
to exit, I think our portfolio weathered that and where we’ve
seen stress, it was around companies that have that and something
else happening. They had an operational issue or they had some
other variable that then was a tripping point for them.

Peter Antoszyk: Or and tariffs hit
or—

David Mihalick: And now more recently, and
tariffs, right? And so, they’ve sort of done what they can to
pass prices through. They’ve done what they can to run their
businesses as efficiently as they can. And now they’re dealing
with tariffs.

Peter Antoszyk: Yeah, but I guess I’m
curious. Are you finding that your middle market borrowers are able
to pass on these cost increases?

David Mihalick: They have some ability, right?
They have the ability to sort of manage their cost effectively and,
if it’s a critical business service or software solution for a
company or they’re making a part for a bigger company
that’s critical to what they’re doing, they have some
ability. They can’t get egregious, but people all understand.
And if you’re a critical vendor, you’re able to do some of
that. There are limits to that, but we definitely saw companies do
that, but there are limits to it. And then you put tariffs on top
of it. Now the tariff issue, that’s one of the benefits to me
of investing in middle market companies in general. They tend to be
more domestically focused. Again, on average. There are some that
import all of their costs, and those are challenged. But when you
go back to services businesses, software businesses, light
manufacturing, that imported piece of the cost can be on the lower
end compared to a larger international company. So, they’re a
little bit more insulated on average than maybe bigger companies
from the tariffs. They’re not immune to the second-order
effects of the impact on the economy. But we’ve certainly seen
that. And then the other thing about middle market companies, for
sponsors to exit, there’s a lot more options to exit a $30
million dollar EBITDA business than a $300 million EBITDA business,
right? Like you can be a lot more nimble in terms of what you do
with it. And so, I think the middle market, relative to larger cap
private equity or being a lender to those types of companies, I
think there’s a lot more flexibility in what the sponsors can
do with those companies.

Peter Antoszyk: There’s been reported by
some of the credit agencies that there has been, across private
credit, a deterioration of interest coverage ratio and net profits
among some businesses. Broadly speaking, I’m curious from your
perspective what you’re seeing in terms of default rates in
your portfolio relative to historical, and what you’re
anticipating going forward.

David Mihalick: I would say today it’s
still very manageable, and where we’ve seen issues, it’s
not as much rates, it’s rates and something else happening. And
if rates were still at zero, those something elses may have been
more manageable, but cash flow is a bit tighter. There’s some
challenge in the business, and there’s just not as much
financial flexibility to deal with it as the sponsor thought when
they underwrote it in a zero-rate environment.

Peter Antoszyk: Certainly, a zero-rate
environment is a very forgiving environment.

David Mihalick: Yes, very forgiving. Still more
it’s one-offs versus a broad base issue. Now, and as I
mentioned, I think we’ve seen interest coverage come from three
down to two and sort of stabilize there. If you get another uptick
in rates, that would be a concern and a challenge. So, if inflation
and rates continue higher — most people are calling for rate
cuts this year, I’m not in the business of forecasting rates.
Whether it’s the consumer, corporates, I’m not sure that
rates can go a whole lot higher before you have probably real
challenges in the economy.

Peter Antoszyk: What kind of questions are you
getting from your LPs?

David Mihalick: I mean, certainly now it’s
around tariffs, right? And that’s where, again, we started
answering that question in January. Thankfully, to the credit of
our team, it wasn’t a directive of David Mihalick to go do
that. That’s just how our teams wired. It’s like,
“Okay, new year. What are the risks for facing this year?
Let’s start looking at them.” So, that’s probably the
top question. And people love to talk about, “Where’s the
10 year going? How many times is the Fed going to cut?” We
have tended to say — look, if we had that figured out,
we’d probably be doing something different for a living. We
answer that question by going back to saying, “We’ve
underwritten these portfolios for a range of possibilities.
We’re partners with these sponsors. We would partner through
any stress in the portfolio.” But we always get asked about
the health of the portfolio. So, tariffs, what’s going on with
rates in the economy and then what are you seeing in the specific
portfolio are probably the three thematic things that I can think
of that we talk about a lot. And then for more strategic
conversations, that then becomes, “What are other things I can
invest in that achieve the same objective but diversify my
underlying risk?” And then, that’s back to things like
infrastructure, real estate, our CAP solutions business. When
people say they’re stressed, a sophisticated investor would say
that’s the time to increase my risk tolerance a bit, not the
time to get conservative, and maybe I should look at your
alternative strategies because it could be a great time to deploy
into some unique situations and drive outsized returns.

Peter Antoszyk: There was a period of time
where distress funds were raising significant portions of capital
expecting a downturn, which never quite never quite
materialized.

David Mihalick: You’ve seen a lot of the
larger cap stress issues and all the issues with documentation and
how creditors have turned against each other and all that kind of
stuff. In my former world in the liquid part of our business, we
were involved in some of those types of situations. And that’s
one of the advantages people point to in the middle market, that
even if you have a club group of lenders, everyone’s aligned.
Now again, you’ve still got the, “You’re equity, and
we’re debt, and you’re fiduciaries,” and you got to
look out for your investors first and foremost, but for shorter
term things you can have a much more solutions-oriented approach.
If the company is broken and the cap structure doesn’t work,
then you have to ultimately protect your investors, first and
foremost. But if you’ve got a six- or twelve-month liquidity
crunch that you can work together to see the other side of, then
you can be flexible in the capital structure. You may pick some
interest. You do things to help, you do that in conjunction with
maybe the sponsor putting in more equity, things like that. So, you
work together to achieve the optimal outcome for the enterprise and
for both of your respective investors.

Peter Antoszyk: And you presumably in your
deals hold all or a very significant portion of the debt and that
is a very different dynamic than in a large cap, almost syndication
style.

David Mihalick: And those syndicated deals, the
challenge you run into is you could have a billion-dollar deal and
there’s 20 or 30 million of it that gets traded and takes the
mark down 20 points because there’s no marginal buyer and it
gaps down. Doesn’t mean that’s fair value. I guess it’s
fair on that trade, but it doesn’t mean you can’t
underwrite to something that’s worth a lot more than where
that’s trading, and that’s what our liquid team does every
day. It looks for opportunities in those types of situations. But,
in the private space and in Europe in most cases, we’re the
sole lender or one of two. In the U.S., it’s a mix of club
deals, sole lender deals, just depending on the size of it, but
it’s usually a bank group that all sort of have experience with
the sponsor. And again, I would emphasize, we’re still looking
out for our investors first and foremost. There’s sort of that
collegial nature, but if there’s truly a stress situation and
the fundamentals of the businesses have changed in a way that was
not anticipated at underwrite, sponsors, I think, understand that
you got to look out for your investors first and foremost. And like
I said, when it’s that sort of temporary thing, you can work in
partnership, and you get through that together.

Peter Antoszyk: One of the mega trends in the
industry is developing products and the means to access the private
wealth channel. What is your strategy?

David Mihalick: I think we are definitely
looking at it. As you say, that’s in the interest and retail
wealth channel getting exposure to privates is there, and we have
the manufacturing capability, if you will. And so, we’re
looking to bring that into other — we’re mostly in the
institutional insurance channels. We certainly want to grow in the
wealth channel. We announced the partnership with Invesco recently
where we’ll be developing products together, multi-asset credit
products to distribute through their network.

Peter Antoszyk: How will retail investors
evaluate managers? They’re going to be relying upon the advice
of financial advisors who may not fully understand the private
markets and may not have the ability to effectively vet asset
managers. That may lead them to default to the largest asset
managers. And wouldn’t that lead to a potential convergence of
returns?

David Mihalick: You see that in the space
already. And we, with our BDC, tracked this, which is overlapping
portfolios, and you look at the biggest scaled ones, and
there’s like 50% overlap. Now, offsetting that, those guys are
able to put the money to work because the other issue for the
smaller managers is, “Okay, I give you my money because I
think you’re unique.” And if they raise a lot of money,
then they can’t put it to work in the same type of deals that
actually drove you to invest with them, right?

Peter Antoszyk: And I actually think that the
core issue becomes when you’re evaluating managers, how do you
distinguish among managers when it has been a momentum market?

David Mihalick: Well, and the issue is, you
have that exact same dynamic which I live with forever in liquid
markets. When spreads are tight and everything’s great, you
can’t outperform. You outperform when you go through some sort
of spread widening event. And either your portfolio performs, and
what we would tend to find is our portfolios frequently would
underperform on the downside because we tended to have a little
more risk in it, but the active portfolio management during that
time, when you came out of it, that’s where you could buy
mispriced assets. Now, the issue in the private markets is you
don’t have that daily feedback. You don’t have that
opportunity to reposition. You live with what you’ve got and it
takes time. And back to the partnership approach of you’re
going to work with the sponsor up and to a point, and so it could
take several years of they put in an equity, you maybe pick a
little interest, but you don’t know until ultimately it goes
bad. And the problem is if you wait too long, when it goes bad, it
can go really bad.

Peter Antoszyk: Absolutely, and then you’ve
got a whole issue of owning it and running it, and now you have a
PE portfolio of troubled credits, which are incredibly time
consuming, forget about capital.

David Mihalick: And that’s back to small
managers tend to not have the professionals to deal with that and
they would tend to maybe do a second — they just got to get
out of it.

Peter Antoszyk: So, David, assuming the private
credit industry successfully taps into the private wealth channel,
are you at all concerned about the ability of the industry to
effectively deploy this additional capital, or do you think
they’ll see a race to the bottom in terms of structure and
pricing?

David Mihalick: Origination is key. And
everybody would say they have proprietary or unique origination,
and we would say that, but we need to continue as we grow to invest
in that and grow that. Partnership with sponsors is key. So,
I’d say this. You see two things. You see spread compression
for the good deals, because everyone wants those. And then you see
a deterioration in credit quality because the bad deals are still
getting done. Someone’s doing them. And so, they come with more
spread premium, and they may have a higher yielding portfolio out
of the gates, but it’s probably a riskier portfolio that’s
not going to fare well when we get to economic stress. This is a
hard business. It’s the type of business that sounds good in
headlines. It sounds simple. You give me money, I achieve a
liquidity premium. I put your money to work and give it back to
you. That the headline. But doing it is hard. That’s where,
again, having scale, having the institutional approach that we have
— we think we’ve got the right toolkit to be able to
deliver it.

Peter Antoszyk: Well, thanks, David. I just
have two final questions for you. As an employee at Barings —
and it could be any one of the functions of analyst, underwriting,
origination, portfolio manager, investor relations, risk
management, compliance, legal, pick one — which function will
be replaced by AI first?

David Mihalick: Me, the talking head. I
don’t know, man. You had to know I’m not going to answer
that question. It’s a great question. You know, there was my
miss on the whole interview when you asked what are the topics we
get asked about most, I can’t believe I didn’t mention AI,
so I’ll go back, and we’ll edit that out, maybe, but
certainly AI is evolving and incredibly interesting. Our CEO was
traveling, doing some client meetings, and he came back last week
and one of the clients mentioned they have an AI bot that is in
their investment committee now. And so, it’s not voting yet,
but they intend to train it to the point where it’s a voting
member of the investment committee. That’s interesting, right?
We’re, of course, looking at RFPs and mundane tasks and how can
we use AI to do it. And the other example — maybe I’ll
say your job. There’s a tool that we’ve seen and use, and
you’ve probably seen this, where you can take an annual report
from a company and you upload it and it creates a podcast. And it
sounds like two people talking and says, you know, “Hey, Bob.
How was the drive in today?” And like, “Oh, let’s
talk about the Mass Mutual annual report,” and it’s a real
podcast, and it sounds super credible. But, if everyone does that,
they’ll all have the same podcast, so, I don’t know how
interesting that will be over time. I know you know I wasn’t
going to answer that question. So, no. That’s my ramble about
AI.

Peter Antoszyk: So, final question. Given the
impact that AI could have in the various areas, without identifying
which one it would be first, what advice would you give to young
professionals, either in your organization or elsewhere, looking to
have a long-term career in this industry?

David Mihalick: Be part of it. Embrace it. If
you can see my whiteboard, literally on the bottom it says,
“AI intern project.” So, one of the things we’re
talking about with AI is I’m 52 years old, I can understand, I
think, where it’s going, but I’m — it’s like the
kids being digital natives, right? This generation, at some point,
they’ll be AI natives. So, don’t be so proud as a leader or
someone with experience that you can’t embrace young people
that come into your organization and have no idea what you do and
say, “How would you solve this problem?” I mean, it’s
literally written on my whiteboard over there is how do we get our
interns plugged into AI? And so, people have to embrace it. I
believe, and you’ve probably heard this analogy before, when
Excel came out, people thought, you don’t need accountants
anymore. There’s more accounts than ever, right? Excel works,
it does the math, now what do you do with it? And I think AI
probably goes somewhere around that, right? Like it can put
together the underwriting memo, you can upload all the information
you have and say give me 15 pages of why I should do this
investment or not, but then someone has to decide to do the
investment. I’m sure people will have AI—

Peter Antoszyk: Maybe. Maybe not. Because you
have the AI agent on the investment committee. I don’t
know.

David Mihalick: Maybe not. Maybe not. But then
someone, I guess someone has to train it over time. And maybe we
all just work 25 hours a week and life gets easier. Who knows where
it will go.

Peter Antoszyk: That would be a beautiful
thing.

David Mihalick: So, yeah. To a young person,
certainly you have to — I mean, frankly, at any age, right? I
think anyone with a with a sense of what’s happening, even if
you’re later in your career, you need to embrace it because
it’s not just changing your professional life, it’s
changing your personal life. If you have kids, it’s changing
their lives. So, I think you have to embrace it and be a part of it
and think about how it can be done responsibly.

Peter Antoszyk: Well, David, this has been a
great conversation, and I very much appreciate you being on Private
Market Talks.

David Mihalick: I’ve enjoyed it. Thank you
for the time.

Peter Antoszyk: And thank you, listeners to
listening to this episode of Private Market Talks.

Navigating Policy, Private Markets And AI With
Barings’ David Mihalick

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