US investors increase exposure for high yielding direct lending

By Daniel Lanyon on Tuesday 30 May 2017

Alternative Lending

The appetite for direct lending in the US has grown steadily in recent years, and assets in the sector have now reached almost $100bn.

The appetite for direct lending in the US has grown steadily in recent years, and assets in the sector have now reached almost $100bn.  

US investor interest in direct lending has been growing rapidly for several years but now yield hungry institutional portfolios are looking more and more to the lower middle market space as an attractive alternative to fixed income, according to new research, particularly in direct lending,.

The report, from NXT Capital and data provider Preqin, found investors are viewing lower-middle-market direct lending as increasingly attractive owing to the ongoing low-yields in the public markets, with the sector now reaching almost $100bn of assets.

Its survey, which featured the views of almost 100 institutional investors active in the Alternative Credit space revealed that interest is now focusing on the lower middle market in particular.

The most cited reason by investors for upping portfolio allocations to the lower-middle-market direct lendingsapce  was the favourable risk/return profile of the sector compared to fixed income products. Sixty per cent of survey respondents are targeting returns of 8-12 per cent from their investments.

In the current low-yield environment, this appeal has led investors to commit more than $65bn to North America-focused direct lending as a whole since the start of 2013, and consequently the assets held by US-based fund managers have grown to $99bn as of June 2016.

More than eight out of 10 of investors surveyed (82 per cent) said they are allocating specifically to US lower-middle-market direct lending and 58 per cent of respondents expect to increase their allocation to US lower-middle-market direct lending in the next 12-24 months.

Ryan Flanders, head of private debt products at Preqin:  said  the report demonstrates the strength of the lower-middle-market direct lending industry in the US, and the increasingly important role it is playing in many investors’ portfolios.

“In a long period of depressed interest rates and low yields from traditional fixed income products, US lower-middle-market direct lending appeals to investors due to its risk/return profile, regular income, and low correlation to other asset classes. On this basis, it seems likely that interest and activity in the sector will continue to grow,” he said. 

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