Development, expansion and opportunity
Direct lending private credit, regarded as an established yet dynamic asset class, may offer unique opportunities for investors seeking risk-adjusted returns, yield and diversification.
Until recently, direct lending has predominantly been the purview of sophisticated institutional investors. Now, the investing public can access direct lending products more easily via new fund structures with minimal lockups, no queues or capital calls and more transparent reporting structures.
“Driven by investor demand, regulatory shifts and the need for flexible lending solutions, we believe this asset class will play a vital role in funding growing companies and economies into the future.”
- Raj Dhanda, Partner, Global Head of Wealth Management
In this comprehensive guide, we highlight the key aspects of direct lending’s historical development and its characteristics and placement within investment portfolios, as well as its future prospects. As the asset class evolves and expands in size, choice and sophistication, direct lending may play an important role in well-diversified portfolios.
Key Highlights
Making the case for direct lending private credit
While it may feel like direct lending has recently burst onto the investing scene, this is not a new asset class. Rather, it is regarded as an established asset class that has lived outside the mainstream media limelight and represented a longer-term opportunity for investors.
Structural Shifts in Supply and Demand for Private Capital
- Continued bank retrenchment
- Structural shift from public to private capital
- Increased reliance of private equity on direct lending for deal financings
Expansion of Average Issuer Size in Loan and High-Yield Markets
- The growth of the leveraged finance markets and the increase in average issuer size expand the addressable market
- Especially during periods of dislocation, private capital providers continue to take market share
Credit Markets Are Less Liquid
- Growth of passives with structural duration mismatches drives greater volatility in liquid markets
- Dealer inventories and market making reduced
- Private solutions represent an attractive alternative
Defining the opportunity –
characteristics to understand
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Not all direct lending is the same
Core considerations for investment success
Good underwriting
Historical performance is crucial for benchmarking.
Deep borrower relationships
Active origination through networks.
Incumbency
Growing with a firm and sticking with it as it grows.
Investment team scale
Covers diverse markets and sponsors.
Flexibility
Selectivity across flavors; adapts to market conditions.
Diversification
Smaller average position sizes can enhance risk management.
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AccessAres is the thought-leadership and educational division of Ares Wealth Management Solutions. The materials distributed by AccessAres are for informational purposes only and do not constitute investment advice or a recommendation to buy, sell or hold any security, investment strategy or market sector. Ares Wealth Management Solutions is a global brand of Ares Management Corporation.
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AccessAres is the thought-leadership and educational division of Ares Wealth Management Solutions. The materials distributed by AccessAres are for informational purposes only and do not constitute investment advice or a recommendation to buy, sell or hold any security, investment strategy or market sector. Ares Wealth Management Solutions is a global brand of Ares Management Corporation.
You are now leaving the AccessAres website
AccessAres is the thought-leadership and educational division of Ares Wealth Management Solutions. The materials distributed by AccessAres are for informational purposes only and do not constitute investment advice or a recommendation to buy, sell or hold any security, investment strategy or market sector. Ares Wealth Management Solutions is a global brand of Ares Management Corporation.