Page 119 - OBW Winter Ed 2018

PORTFOLIO

Technically, direct loans are typically floating-rate, meaning they earn favorable risk-adjusted return profiles and diversification possibilities.
more in a rising-rate environment. Borrowers accustomed to low rates According to a recent report by Ares Management LP, 57 per cent of
may be unprepared for a jump in interest costs on what is often a big investors the research firm surveyed are looking to raise their exposure
pile of debt. That risk, combined with increasingly lenient terms and the to private debt opportunities.
relative inexperience of some direct lenders, could become a bigger issue
in a downturn. In the meantime, the index created by private-markets adviser Cliffwater
LLC to gauge the performance of middle-market loans before fees, has
For now, opportunistic, lightly-regulated private-equity firms have taken shown a 9.3 per cent return over the past five years. It does not take
their place in parts of middle-market lending, shifting the risk and the much to attract investors when the risk and return ingredients offer
reward of those loans out of the banking system. better outcome than listed securities.

The US-based Ares Management LP believes that these private-equity The past few years have certainly been good for such investments. Today
firms held loans to midsize companies at the end of 2017 valuing more we observe private clients attracted by the strategy and investing in
than half a trillion dollars. It was only $300 billion U.S. in 2012. One funds, special purpose and other investment vehicles, but how long will
specialist of leverage finance recently referred to this phenomenon as this favorable run last?
a “...seismic change in the marketplace,” suggesting that the market is
poised for further growth as firms, ranging from private equity giants to There seem to be challenges ahead this year and fewer opportunities
smaller outfits, angle for more action. for institutional investors. The rising investor interest also translates
into more competition for deals. For now, ‘the new kids on the buck’ are
Institutional investors have been raising their allocations to direct riding high on the wave of this trend.
lending and private debt opportunities in the past few years as they eye

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