Preqin/NXT Survey: Direct Lending Investors Increasing Exposure To Lower Middle Market

May 24 2017 | 11:17pm ET

Interest among direct lending investors is increasingly focused on opportunities in the lower middle market, according to a new survey from Preqin and structured finance specialist NXT Capital, as assets in the alternative credit segment approach $100 billion. 

The survey polled almost100 institutional investors active in the private debt space, Preqin said in a statement. The research reveals that favorable risk/return profiles when compared to fixed income products were the most common reason for increasing allocations to lower-middle-market direct lending. In the current low-yield environment, this appeal has led investors to commit more than $65 billion to North America-focused direct lending as a whole since the start of 2013, pushing the AUM of U.S.- based fund managers to $99 billion as of June 2016. 

Other highlights from the Preqin/NXT report:

  • Private debt is a distinct allocation segment for 91% of respondents, with 82% allocating specifically to US lower-middle-market direct lending. 

  • This trend looks set to continue: 58% of respondents expect to increase their allocation to U.S. lower-middle- market direct lending in the next 12-24 months. 

  • The majority of respondents (52%) expect senior debt products to offer the best opportunity within private debt. 

  • Most investors in U.S. lower-middle-market direct lending funds have high performance expectations. Sixty percent of survey respondents are targeting returns of 8-12% from their investments. 

  • Direct lending funds have largely met those expectations, returning almost 10% in the five years to June 2016. 

  • Key factors driving respondents’ investment decisions are the manager’s track record (77%) and the rigor of the manager’s investment process (52%).

“This report demonstrates the strength of the lower-middle-market direct lending industry in the U.S., and the important role it plays in many investors’ portfolios,” said Ryan Flanders, head of private debt products for Preqin. “In a long period of depressed interest rates and low yields from traditional fixed income products, U.S. lower-middle-market direct lending appeals to investors due to its risk/return profile, regular income, and low correlation to other asset classes. On this basis, it seems likely that interest and activity in the sector will continue to grow.” 

Founded in 2003, Preqin is a leading source of information for the alternative assets industry, providing data and analysis via online databases, publications and bespoke data requests. More than 47,000 professionals in more than 90 nations use the company’s products.

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