Is Now the Time to Invest in Direct Lending?

Investors are increasingly turning to private credit in the quest for higher and more stable returns.

According to P&I,¹ asset owners are embracing a range of private credit strategies, including “sale-and-leaseback, revolving credit facility, structured credit, European tactical credit, and direct lending in response to market conditions.” Given recent market uncertainty, investors may be wondering how these assets would perform under stressed scenarios, such as increased market volatility or a default cycle.

Aon focuses on direct lending as one of the larger private credit strategies available to investors. By analyzing available data and using our experience with direct lending managers, we find that direct lending protects capital as well as or better than public credit markets through various stressed scenarios while continuing to provide excess returns over a long horizon.

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^{1 P&I article dated December 9, 2019: “More asset owners clamoring for multi-strategy private credit”}

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^{Appendix:

Index Definitions

The Cliffwater Direct Lending Index (CDLI): This index seeks to measure the unlevered, gross of fee performance of U.S. middle market corporate loans, as represented by the asset-weighted performance of the underlying assets of Business Development Companies (BDCs), including both exchange-traded and unlisted BDCs, subject to certain eligibility requirements. The CDLI Total Return Index includes three components: Income Return, Realized Gain/ Loss, and Unrealized Gain/Loss.}

^{S&P/LSTA Leveraged Loan Index: An index designed to track the marketweighted performance of the largest institutional leveraged loans based on market weightings, spreads and interest payments.}