Private debt markets are attracting increasing interest from investors, who are actively seeking alternative ways of yield-producing strategies in a low-yielding traditional market environment. Following Preqin’s classification of private debt strategies, there are six strategies in which investors can allocate: mezzanine, distressed debt, special situations, venture debt, fund of funds and direct lending. The downside protection and the diversification offered to investor portfolios make the asset class enticing, which already accumulated assets under management of more than $500bn. The 2008 crisis constitutes the milestone for the surge of private debt markets and the allocations are expected to rise significantly over the coming years.
By referring to direct lending, we exclude the online marketplace lending, which is a different story to what discussed in this perspective. Direct lending appears to rank highly among other strategies in the credit spectrum, offering investors with liquidity/illiquidity premium compared to public markets. The position of direct lending is not only a product of reduced bank lending activity, but other factors contribute to their appealing profile, such as the reduced liquidity in bond markets provoked by the Volcker rule and the upside potential provided in a potential increase in interest rates.
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