Private Direct Lending Offers Attractive Yields

Investors seeking higher yields and relatively low risk, and are willing to sacrifice liquidity, will find attractive opportunities in interval funds that invest in senior secured, middle-market loans, such as those offered by Cliffwater.

Before looking at those funds, let’s review the history of middle-market lending that drove those opportunities.

Over the past decade, there has been a fundamental shift in the fixed income landscape. Banks have been central to the creation of credit, driven by their ability to take in low-cost deposits and to loan money at higher rates. While non-bank loan channels have always coexisted with traditional banking, these channels were historically small niches in the overall economy.

That changed after the great financial crisis when new regulations limited the ability of banks to make traditional loans to U.S. middle-market businesses (generally defined as companies with EBITDA, or earnings before interest, taxes, depreciation and amortization, of between $10 million and $100 million and which are considered by many too small to access capital in the broadly syndicated market in a cost-efficient manner). “Shadow banking” emerged with independent asset managers funded by capital from institutional investors, replacing banks as providers of secured, first-lien commercial loans.

That trend continues to this day. The principal value of these non-bank originated loans is more than $800 billion.

Primary Market Corporate Loan Participation

As of December 31, 2020
Source: Standard & Poor’s Leveraged Commentary & Data