Quick Insights into the Direct Lending Market

In light of continued investor interest in direct lending private credit, here is a quick update on the market today from our viewpoint at Ares:

1. Direct lending and syndicated loan markets have experienced year-over-year growth with syndicated volumes showing a meaningful rebound from multi-year lows in 2023. M&A activity has increased which we think should continue to lead to new loan volume¹.
   1. For example, in the first half of 2024, Ares saw origination volume increase by 3.7x. This outpaced overall direct lending market volume growth largely due to the advantage of having a large incumbent portfolio².
2. As a result, spreads have tightened compared to the elevated spreads of 2023 and overall yields remain elevated.
   1. For example, for new deals in Q2 2024 Ares senior loan yield premium over the BSL market was 220bps³.
   2. Ares is seeing a weighted average yield of senior originations of 10.8%⁴.
3. Industry non-accruals continue to be below long-term historical averages and we are seeing stronger managers showing stable to improved non-accrual levels.
   1. Ares underlying portfolio companies (borrowers) are continuing to perform well with double digit last-12-month earnings and non-accruals declining in 3Q-2024 to just over 1%.

Another observation that continues to persist in the current market is that the level of equity subordination is so much higher and in turn our loan-to-value is so much lower than in previous cycles, which we believe further enhances downside protection should credit conditions worsen.

In 2024 we have observed better risk-adjusted return opportunities in the core middle market vs. 2023 where opportunity abounded in large market loans. We took advantage of that as evidenced by the average EBITDA (earnings) of Ares’ Q2 2024 senior originations declining to $82M in Q3 from $104M in Q2 and $166M in Q1 2023⁵. In the middle market we have seen very little of the deterioration in credit protections that exists in the larger market.

Credit cycles happen, that’s normal, and we have come cleanly out of the latest one (2022-2023). We have not seen anything outside the ordinary that would negatively impact our outlook, giving us confidence in direct lending private credit moving forward.