A Comprehensive Guide to Private Credit

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For Professional Investors and Qualified Investors use only.

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
  • 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
  • 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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Capital Structure

Loan position in the capital structure, loan to value, leverage and interest coverage.

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Yield

Sustainability of the yield premium is driven by supply/demand and convenience factor for borrowers.

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Risk and Return

Risk and return have historically outperformed most other asset classes.

Not all direct lending is the same

Size Differences & the Middle-Market

The middle-market of private companies represents a significant economic force. It may offer favorable spreads, lower leverage and less competition.

Sponsor vs. Non-Sponsor

Sponsor-backed companies can provide scalability and general partners (GPs) can give capital support during difficult times.  Non-sponsor-backed companies can fetch better economics and stronger lender protections.

Flexibility in Allocation

Different flavors — small, mid, large; sponsor, non-sponsor; U.S., Europe, Asia — offer varying risk-adjusted returns.

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.

Read the guide in full

For Professional Investors and Qualified Investors use only.

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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.