Direct Lending – a growing Asset Class

In a world of historical low interest rates and (very) high debt burdens combined with an economic outlook that foresees only moderate global GDP growth, it is a fair assumption that structural inflation pressure should remain tame – at the minimum for the next few years to come.

Moreover, central banks responded to the lackluster economic growth with the introduction of new creative measures and actions to push key rates in some cases to the lowest levels ever. Even when we anticipate that the FED will soon start to normalize its interest rate policy and lift the yield curve, the income generation from “safe” bonds such as high quality investment grade or US Treasuries bonds will remain meagre.

The situation gets even worse when we turn to European or Japanese bonds, earning in many instances negative yields. In this environment, private debt appears like a “yield island” offering an average yield of 7-8% p.a. for senior secured loans of well backed small and medium sized companies (middle market). This alternative investment opportunity gained popularity and has attracted an increasing number of institutional investors.

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