This paper outlines a refreshed investment case for Senior/Unitranche direct lending to predominantly European middle market companies.
Direct lending in its current form emerged as a result of the increased regulation on the banking industry following the 2008 global financial crisis. As such the majority of Direct Lending Funds only have track records through the recent, relatively benign default environment for credit.
We believe that the market environment (and therefore the tactical case for investing in Direct Lending) has been shifting over the last few years as we move later in the credit cycle. Direct Lending assets have increased sixfold since 2012 and this increased level of competition between Direct Lending Funds has put pressure on the coupons and fees that Funds are able to charge borrowing companies and on the risk protections Funds can incorporate in loan agreements.
In this paper we take a fresh look at the strategic and tactical cases for investing in this asset class and review why selecting a quality Direct Lending fund is more important than ever.
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