Direct lending funds most popular for alternative credit investors, finds survey

By Daniel Lanyon on Thursday 14 July 2016

Alternative Lending

A survey of investors by Elian shows those invested in the broad alternative credit space are most bullish on direct lending over other strategies on a two year view.

Direct lending is the most popular of different strategies among European institutional investors over the next two years, according to new research into alternative credit funds.

Private debt strategies, or alternative credit as AltFi prefers to call the space, refers to non-bank lending to both consumers and businesses that is done outside of formal bond markets as well as away from traditional banks.

The research, conducted by fund administration services provider Elian, found within the alternative credit spectrum direct lending was the subsector that institutional investors most expected to invest in over the next 12-24 months. Over 55 per cent of the vote cited direct lending as fund houses increasingly enter a space traditionally occupied by banks.

Ranked second was mezzanine finance with 48 per cent of respondents backing it, followed by distressed debt with 42 per cent.

Direct lending is the process of funds directly lending to firms and individuals without a third party intermediary. An example is the Rnager Direct Lending Investment Trust.

The response from investors comes at a time of several substantial challenges facing markets such as the UK's Brexit vote which many argue could negatviely impact the European direct lending market.

According to investors who took part in the survey the biggest obstacles to growth in the industry are regulation and the ability to fund raise with 60 per cent and 37 per cent citing these challenges. 

This was followed by the maintaining a low cost of capital over the long-term versus traditional banks (35 per cent) and a resurgence in bank lending (32 per cent).

Charles Le Cornu, head of private equity at Elian said: “We have seen fervent growth in the alternative funding market over the last two years and private debt funds within it. This has been driven largely by the creation of the Capital Markets Union, charged with mobilising capital in Europe and which has acted as fundamental catalyst for the continued strength in alternative lending platforms.

“A secondary factor has been the long term trend of ongoing bank disintermediation across Europe. Fund managers have been drawn to the direct lending space following regulations introduced after the financial crisis that have made it harder for banks to provide financing to businesses. As European banks shed assets this trend will only continue, increasing the demand for direct lending,” he added.

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