Understanding the Breadth of Investment Opportunities in Capital Solutions

“Capital solutions” is a term that has become increasingly popular as a way for asset managers to describe flexible, often credit-focused strategies that provide investors access to unique or bespoke deal flow and investment opportunities. But it’s not always easy for investors to wade through a sea of varying definitions to get to the core of what a manager actually means when they describe their strategy. In this paper, we provide insight into the rationale for capital solutions strategies and background on why they are gaining so much traction in the market today. We also describe how we, at Barings, define our Capital Solutions strategy and where we expect to see particular opportunities in the years to come.

The history of capital solutions strategies and distressed debt strategies is almost indistinguishable. A decade ago, even as far back as the financial crisis, these more credit-focused “opportunistic” strategies were almost entirely focused on buying broadly syndicated loans and bonds at discounts for a pull to par trade, or looking for opportunities to restructure a company’s balance sheet and swap debt for equity to achieve targeted returns. But much has changed since then. The massive growth in private credit markets, combined with structural changes in public markets, have created new opportunities to use creative financing structures that go beyond buying discounted public debt or swapping debt for equity. Moreover, while distressed debt strategies of the past often were more appropriate late in the business cycle, the market today offers a compelling range of investment opportunities throughout the entire cycle. The objective of this more comprehensive approach is to generate equity-like returns through a diverse universe of credit opportunities—both public and private—that should be less correlated to traditional equity and fixed income markets.

In terms of portfolio positioning, a capital solutions offering today can be viewed as complementary to existing public and private credit strategies. While much of capital solutions’ appeal results from a potential to generate equity-like returns, its investments largely lie along the credit spectrum and may be more appropriately considered an extension or enhanced variant of traditional direct lending or private credit.