Strategy Insights: Direct Lending
The case for direct lending in the core middle market -- from opportunity to tools for success.
Middle market direct lending can offer investors a compelling opportunity to generate significant income potential with historically lower volatility relative to traditional fixed income. The overall scale of the market and tailwind of private equity sponsor transaction activity has created an ever-present need for direct lending financing. But the market is vast, comprising companies that range from as small as $100 million to as large as $1 billion in enterprise value. By pursuing direct lending opportunities in the core middle market -- companies with enterprise value between $100 million and $750 million -- investors may benefit from a fragmented opportunity set, a more favorable competitive environment, attractive yields and other potential advantages.
This paper defines the core middle market. describes the development of the market landscape and identifies key ingredients for success when pursuing a lending strategy.
- The core middle market offers a large, fragmented opportunity set with attractive competitive dynamics versus the upper middle market
- Potential total return advantages include high current income relative to liquid markets with lower volatility
- Sourcing and due diligence expertise is essential for success in this space due to the idiosyncratic nature of investment opportunities, while ESG experience can also differentiate lenders
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