We are delighted to announce the publication of our latest research paper. This note: Direct Lending v Liquid Markets compares the returns characteristics of the European Direct Lending market in comparison with the liquid Leveraged Loan and High-Yield markets, particularly in the context of the rising yield environment we have seen over recent months.
Between Dec-21 and Apr-22, yields in the European Leveraged Loan market have risen from 3.4% to 4.4%, and from 3.1% to 5.4% in the European High-Yield market. Despite these increased yields in the liquid markets, we believe that the European Direct Lending market remains a significantly more attractive opportunity for credit investors.
To summarise our conclusions:
- Periods of excess yield in the liquid markets are driven overwhelmingly by secondary trading prices of securities (average weighted bid), as opposed to the fundamental return characteristics of these securities (margin, base rate).
- Capturing excess yield in the liquid markets requires the investor to time entry and exit from the market precisely, making it a short-term, opportunistic strategy rather than one with a long-term focus.
- Over a longer time-frame, Direct Lending returns remain at a premium to liquid market returns, even through periods of market volatility.
We believe Direct Lending can deliver these higher returns on lower risk than the liquid markets, due to the ability to carry out more thorough due diligence, a focus on less cyclical industries, better investor protections and longer terms funding structures.