Private credit, specifically direct lending, is gaining popularity in investor portfolios. With all of this talk about private credit strategies, how about a little refresher?
Private credit refers to debt privately originated by an asset manager without the intermediation of a bank or traded on any public market. This direct approach can achieve greater efficiency, confidentiality, and certainty of closing for the borrower than borrowing from a bank. The lender typically benefits by securing tight financial protections and higher yields. Unlike public debt, rating agencies do not rate private credit loans.
There are various types of private credit strategies across various segments of the market. Across market segments, private credit can span the capital stack of small businesses, up to very large corporations.
For illustrative purposes only.
At PennantPark, within our Senior Debt Strategy, we focus on Direct Lending. These debt instruments are directly originated first-lien loans in the core middle market. Our Senior Debt Strategy targets profitable, growing, cash-flowing companies with $10-$50M in earnings across five primary sectors: healthcare, government services, software & technology, consumer, and business services. Our direct lending deals are structured with floating-rate yields, over a specified reference rate (usually LIBOR or SOFR), at the top of the capital structure, with a minimum of two financial covenants.
If structured properly, direct lending strategies have the potential to generate returns similar to, or higher than, other credit investments, with less risk and less volatility. Below, we outline the three primary reasons that investors are increasing their allocations to direct lending.
Investors are increasingly allocating to private credit, and direct lending is gaining particular attention. According to a survey by Mercer Investments and CAIS, 98% of the 260 participating financial advisors were already investing in private credit, and 68% planned to increase their allocations over the next 12 months1. What are the expected benefits?
1 Why Private Credit Is the Alternative Asset Class Everyone Covets | February 2024
Note: Past performance is not necessarily indicative of future results. Invested capital is at risk. Volatility is measured using standard deviation.
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