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Private Credit 

Shubham Saharan

Peter Benson

Starting on 8 March, numerous members of Barings global finance team left the firm with the intent to build a shop at Nomura-backed Corinthia Global Management.

In the ensuing weeks, a lot has happened: the North Carolina-based firm has faced the suspension of its private credit funds, a lawsuit has been launched, and MassMutual has injected capital into some of its subsidiary’s vehicles.

We’ll keep you updated as things continue to play out, but here’s five big takeaways from the Barings and Corinthia saga thus far:

Over 20 managers from the Barings’ private credit group have left across the US and Europe so far, including Ian Fowler former co-head of Barings global private finance group and Kelsey Tucker, former global head of operations.

It’s one of the larger, if not the largest, team lift seen from an asset manager in years, sources told 9fin. Such team lifts can be surprising in the world of private credit.

As private credit has grown over the last few years, large asset managers have sought to gain exposure to the market, either through the acquisition of existing players, or through the hiring of personnel — for instance, the spin out of BlueBay’s private debt team to Arcmont Asset Management (which has since been acquired by Nuveen).

Team lifts, however, are common in the world of banking and insurance brokerage. Just last year insurance company Willis Towers Watson sued competitor Alliant for poaching several employees.

Still, for these types of acqui-hires, it can be a complicated legal exercise to make sure that departing personnel don’t implicate themselves during the move.

“It’s like a game of Operation,” said one lawyer who specializes in team lift-outs. “Lifting 20-something people without setting off an alarm or setting or having a live problem is really difficult.”

Making sure all departing employees don’t take confidential emails, break contractual obligations to solicit one another or clients is often next to impossible, the lawyer added.

“It's going to be very difficult for the team to claim that they didn't solicit anybody,” the lawyer said. “Is it really realistic to think that everybody sort of got the same idea at the same time?”

Since the departures, Barings has made a number of appointments to fill vacancies. New appointments include Bryan High, who has been named head of global private finance, effective immediately, in addition to his current role as the firm’s head of capital solutions.

It’s sudden big change for High, but he’s a long-standing employee at Barings. According to his LinkedIn, he joined almost 17 years ago, prior to the global financial crisis. Fowler, on the other hand, was there for 11 years. And High, according to Barings’ website, has experience in public and private credit, distressed debt and private equity.

Tyler Gately, who has been employed for five years at Barings, will be head of North American private credit. Stuart Mathieson will lead private credit in Europe and APAC, and has more than two decades experience at the institution. Gately has been head of client portfolio management for the last three years, and Mathieson was head of global special situations.

Quite what matters most to LPs in choosing an investment team varies, but Barings will be hoping the experience of High, Gately, and Mathieson can be persuasive enough to new and existing investors alike.

The broader upheaval at Barings has also put pressure on the firm’s private credit fund operations. The departures have triggered key-person provisions across all of Barings’ private credit funds. Once triggered, the funds may make no new investments without investor consent, and if a majority of investors fail to consent, then the investment period will be permanently terminated.

Here’s what Barings has to say on the matter, again from that investor letter sent out earlier this week:

In accordance with and as permitted by the fund documents, we will continue to call capital to pay down financing facilities, to honor previously committed or approved deals, add-ons or unfunded facilities, or for expenses.

In the coming weeks, we anticipate introducing to the investor base proposals for new key persons if required under the documentation. For our commingled private funds and our private segregated funds, regardless of whether a key person event has been triggered, we are pausing on making brand new investments while we continue the transition to new investment leadership. We will continue to fund existing commitments.

Of course the tripping of a key-person clause in the private credit industry happens more often than not, but that can end in multiple different situations, some benign and some more concerning for the fund, according to Lindsay Trapp, a fund finance lawyer at Dechert.

Generally, when a key person clause is triggered, a fund will go into suspension, which means the investment period will suspend investments for a given period of time until another key person is named or the investors otherwise consent to lift the suspension period. Usually, investors have a set timeframe to either approve or to reject a replacement for the key person role.

If a key person is appointed prior to the end of the suspension period or if the investors consent to lift the suspension period, then the fund can resume investments.

If a replacement key person is not appointed within the set timeframe, the next steps can vary, but include possibly removing or replacing the GP, and more commonly:

The fund winds down automatically. This is a pretty normal process. Usually, the suspension period lasts somewhere between one and four months before the investment period is terminated

The suspension period is automatically lifted unless investors or the advisory committee vote to terminate the investment period. In that case, it becomes more of a matter for negotiation for the investors.

So what happens in the possible case that Barings has to wind down its funds?

There’s a few different options here as well: either the fund does not make any new investments and hold its current assets till maturity, or it opts to sell some of its assets off to other managers.

A number of direct lenders are already preparing for the latter scenario, sources told 9fin, with many ready to buy up the best assets.

“Everyone’s doing it — pulling 10-Ks and doing diligence on [Barings’] book,” said the head of one large asset manager.

Still, others are a bit more skeptical as to whether Barings has seen the level of distress it would take to sell a portfolio.

From a managing director at an investment bank:

"[Barings] is not taking those calls. They're not going to entertain those calls. At that point, there's not much more that you can do as a potential acquiring fund,” they said, in reference to firms aiming to acquire Barings portfolio.

“Unless there's some sort of stress or distress that this kicks off, which I don't see happening, there's not really an angle for most of these groups once they've been told no."

At the end of the day, the relationship between GPs and LPs is all about trust. LPs lock up their capital for up to a 10-year period based on, at least in part, a specific group of people who have a track record of generating returns.

If those key people were to leave, it makes sense that LPs could begin to get skittish. In Barings case, it seems like at least some investors are beginning to re-evaluate their partnership.

For example, Fresno County Employees’ Retirement System is reviewing the potential tripping of a key-man clause in its contracted private credit investment with Barings, 9fin reported earlier this week.

For LPs, when those provisions are breached, it’s a time to reconnect with the asset manager.

"Every time we've replaced a key person in the recent past it's been with someone that either was on the team of prior key person or someone eminently reasonable,” Trapp from Dechert said.

“Investors talk to the GP about who is this person, what's their track record, and what do they see for this portfolio? It's generally not an unknown person, so it tends to go quite smoothly to replace the persons that have left."

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