Six reasons for Direct Lending’s Rise To The Top


The market for private loans has seen a surge in popularity over the past few times as investors looking for higher yields seek direct strategies for lending. Why is it the preferred financing option for numerous institutional investors? Martin Reed, Head of Capital Markets – Americas explains.

Private debt funds that are primarily involved with direct loans are not the newest children on the block in the capital market, however, they are definitely one of the biggest on the market following record-breaking fundraising activities in 2021.

Direct lending loans allow non-bank creditors, usually asset owners, with the possibility to invest directly in middle-market businesses – businesses that have between $50 million to 1 billion dollars in revenues. These loans are a crucial funding source for corporations since banks have been restrained from lending channels that were traditionally used prior to the Global Financial Crisis.

Direct lending funds currently account for a large portion of the private market for credit which accounts for about five-fold of the capital that is raised worldwide (a record $112 billion) by credit funds in 2021.

Direct lending is an attractive investment option and what benefits does it offer over other options for financing like bank syndicated loans (BSL) as well as high-yield bonds?

  • Direct lending loans can offer asset managers greater returns than other investment options like BSL bonds and loans, however, they carry less risk.
  • They are more protected from increasing interest rates since they have a shorter time-frame that fixed rate loans.
  • They do not decrease in value when interest rates rise. This is due to floating rate coupons that increase according to the underlying reference rate of the transaction.
  • They have seniority in the lien on assets. Subordinated and senior credit are in the upper tier of the water, ahead of obligations on pay-outs in the event of in the event of default.
  • Direct lending loans provide more protection to lenders as they’re secured by assets of the company. Since they are ranked higher in importance than bonds, the covenants encapsulated in loan agreements offer greater restrictions on the business taking on additional debt, for instance, they require companies to adhere to specific leverage and coverage ratios which are regularly assessed regularly.
  • They have lower risk of loss in default and offer significantly more efficient recovery rates than BSL as well as bonds.

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