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Diversified opportunistic lending investment case

Diversified Opportunistic Lending Investment Case

In a low yield market environment, could diversified opportunistic lending be suitable for your pension scheme as a higher returning contractual asset class?

Patrick Race

Partner, Investment Advisory

KPMG in the UK


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Diversified opportunistic lending investment case

Diversified Opportunistic Lending (“DOL”) involves making private credit investments (typically loans or other debt obligations), similar to traditional private debt such as direct lending, but targeting a higher risk and return with greater flexibility and increased diversification. 

Following the global financial crisis, a significant amount of new regulation (e.g. Basel III) has made certain forms of lending less attractive for banks and insurers. With demand for this lending remaining strong, this has created a funding gap in the market and we believe that diversified opportunistic lending provides institutional investors the ability to take advantage of this. 

Over the last few years, we have seen a large inflow of capital into more traditional private credit asset classes, which has seen competition increase, putting pressure on the returns available in this space. While traditional private credit still offers an attractive illiquidity premium over public market equivalents, Diversified Opportunistic Lending'’s unconstrained approach provides the fund manager with the flexibility to invest in less competitive areas of private credit and generate attractive risk adjusted returns as a result.

The strategy targets a broad opportunity set and flexible guidelines allow managers target specific areas, particularly:

  • Corporate lending (similar to direct lending, but comparatively higher risk and return)
  • Asset-backed lending (loans secured by collateral)
  • Stressed/distressed (borrowers in operational/financial difficulty)
  • Niche/opportunistic (special expertise/market dislocations)

In practice, we consider Diversified Opportunistic Lending' mandates as targeting returns of 6-10% (net of fees), with a large portion of this return comprised of income. Diversified opportunistic lending funds are closed-ended, meaning investors cannot redeem their investment until the end of the funds’ 5-8 year lives. Diversified Opportunistic Lending' funds invest with a global mandate.

We consider diversified opportunistic lending to be an attractive option for clients with the capacity to take on illiquid assets, wishing to diversify their growth holdings away from more traditional asset classes. Clients should note the risks involved with the asset class before making an allocation, noting that these risks mean selecting the appropriate fund manager with the sourcing capabilities to identify the best opportunities of great importance. 

Download our report 'Diversified Opportunistic Lending' for more insights.

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