A conversation with Matt Hansford, European Head of Portfolio Finance at Barings, on a >$200bn annual opportunity.
Traditional banking capital sources are lagging behind the private markets – bank balance sheets are expected to grow at just 4% each year, compared to 9% in private markets AUM, according to Barings. This creates a funding gap for asset managers seeking Portfolio Finance – which, in turn, creates a tremendous opportunity for institutional capital.
Portfolio finance involves various strategies that offer financing routes for private market portfolios, and is designed to create high-quality, investment-grade private fixed-income investments – expanding the investment-grade options available to investors in a defensible, scalable solution.
It is a relatively untapped market, which Barings suggests has an annual potential of in excess $200 billion.
“Whether in direct lending, buyout, infrastructure, secondaries, real estate or other strategies, portfolio finance at its core is diversified, providing cross-collateralisation – underperformance in one asset can be offset through collateralisation of others,” explains Matt Hansford, the European Head of Barings Portfolio Finance, highlighting the favourable risk-reward equation in the space.
Prior to Barings, Hansford served as the European Head of Direct Private Investments at MassMutual, where he led a team that originated, structured, executed, and managed investment-grade portfolio and GP financing transactions. Barings is a subsidiary of MassMutual and the team transitioned to Barings in January 2024 in order to expand the portfolio finance offering to Barings clients.
Portfolio Finance isn’t a new concept, Hansford explains, but there is a prevalent knowledge gap within the investor community.
“This has predominantly been a bank-led market, and similar to private credit many years ago – portfolio finance is going through a transition into being a mainstream private investment grade credit investment for institutional investors.
“We know the story of bank balance sheets – they’re not growing at the same speed as private markets. Banks are also becoming more regulated, which is unlikely to change any time soon. As such, it’s going to be a tremendous challenge for them to keep up with the pace of financing demands in the private markets.
“The challenge for us is to educate institutional investors on the size of this opportunity, and how it can fit within their wider portfolio.”
Breaking it down
While portfolio financing has predominantly come to be associated with NAV lending into buyout portfolios, that represents just one aspect of the broader landscape. Barings highlights three sub-strategies:
The first, private credit portfolio finance, refers to financing strategies that use a cross-collateralised portfolio of private credit assets tailored to specific investor goals and return targets, allowing for separately managed accounts or leveraged strategies. The private credit market’s growth, allied with investors want for tailored investments, suggests strong potential for this type of financing.
The second sub-strategy, secondary portfolio finance, involves lending against cross-collateralised portfolios of LP interests in private funds, benefiting from extensive asset diversity – the secondary market is expected to reach $140 billion market in 2024 and is forecast to grow to over $350bn by 2030.
Finally, GP financing allows GPs to invest their capital in alignment with LPs, even when they may lack available funds as they grow. This enables GPs to invest in their funds without diluting equity, supporting platform growth, succession planning, and other capital-intensive activities.
Get ahead of the game
In an environment marked by geopolitical tensions and economic fluctuations, Portfolio Finance serves as a strategic buffer against volatility, offering investors the opportunity to have a diversified pool of investments – not just individual but geographical, asset class, and even within the underlying GP.
Hansford says: “No one has a crystal ball, but I don’t think anybody would say the world doesn’t have an unsettled element to it.”
“Portfolio finance is a good protection against macro uncertainty, not just through cross-collateralization, but also through structural seniority – in terms of where you sit in the cap stack as well as in terms of the cash flows that come off the underlying investments.”
Further, Hansford says, this is an asset class with large transactions, which enables people to deploy at scale.
“It’s quite an interesting take on tailoring portfolios, or investment mandates, for investors – not just investing in the asset class, given the breadth of sub-strategies, returns, and durations available” he says. “There’s an element of pick’n’mix for investors – a kind of sweet shop where you get a bag, and you can put different sweets in depending on your particular taste.”
