2024 Outlook: Direct Lending
Our direct lending experts bring into focus the biggest challenges and opportunities shaping private credit markets in the U.S., Europe and Asia Pacific.
Natasha Sahi (Moderator): Given the widespread risks across markets today, many investors have concerns about the challenges posed by high interest rates, inflation, and growing geopolitical risk. How is the direct lending asset class positioned against this backdrop?
Tyler Gately: The direct lending market certainly faces a number of headwinds, but there are also reasons to be optimistic. For one, this is an asset class made of directly originated and negotiated loans. This means that managers have access to, and often ongoing engagement with, management teams, which gives them access to information. Another factor contributing to the resilience of the asset class is that it is less exposed to heavily cyclical industries, like commodities, that tend to underperform in down cycles. This helps insulate the market from some of the volatility you see elsewhere.
It's also important to note that if or when things do go wrong, most direct lending transactions have strong covenants, which are a critical part of managing losses given that investors don't have the ability to sell out of deals. In addition to enabling managers to track the performance of a company, covenants give lenders a seat at the negotiating table if a company runs into trouble, allowing lenders to exercise their rights and remedies, which helps protect principal before it’s too late.
Adam Wheeler: I would also point out that direct lending, as an asset class, has performed very well over the last decade. While partly a result of the benign economic backdrop, this also stemmed from, and will continue to be impacted by, asset selection. As Tyler said, this is an asset class where managers are sourcing and originating their own assets and, as a result, they tend to be very selective about the assets and industries to which they want exposure.
