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Opportunities today in middle market lending
- Private credit may help institutional investors address timely challenges, including generating yield and providing low-volatility, low-correlated returns. But making allocation decisions can be challenging.
- We favor allocations to higher-quality U.S. senior and junior level debt, particularly from health care, business-to-business services and software companies.
- Mezzanine debt may offer opportunities for value and high yield premiums at what may be a market bottom, so we suggest reserving resources for these opportunities.
- Private investing offers a number of levers to help create value, but investment scale, experience and access to relationships are essential.
Private credit has historically been an attractive investment. Historically stable performance and broader knowledge of the asset class have driven an increasing amount of capital into the space.1
With regulation and consolidation preventing banks from holding leveraged loans, the void has been filled by private credit managers, finance companies and asset management firms. Growing demand from issuers of private credit, and the appetite from investors, has accelerated fundraising by managers. The more experienced successful managers are effectively crowding out smaller firms.
We see opportunities for private credit investment in today’s environment. We consider a number of investment factors as we determine how to incorporate these investments into an existing asset allocation strategy.
1 Data source: Cliffwater Direct Lending Index (CDLI), 01 Jan 2005 to 31 Dec 2019.
2 Data source: Prequin, 31 Aug 2019.
3 Data source: The National Center for the Middle Market
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.
Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Correlation is a statistical measure of how two securities move in relation to each other. Perfect positive correlation (a correlation co-efficient of +1) implies that as one security moves the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation (a correlation co-efficient of -1) means that securities will move by an equal amount in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; their movements in relation to one another are completely random. Covenant is a promise in an indenture, or any other formal debt agreement, that certain activities will or will not be carried out. Covenants in finance most often relate to terms in a financial contract, such as a loan document or bond issue stating the limits at which the borrower can further lend. Earnings before interest, taxes, and amortization (EBITA) refers to a company’s earnings before the deduction of interest, taxes, and amortization expenses. It is a financial indicator used widely as a measure of efficiency and profitability. S&P/LSTA Leveraged Loan Index is designed to reflect the performance of the largest facilities in the leveraged loan market. S&P Middle Market Index provides investors with a benchmark for mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment.
A word on risk
Investing involves risk; principal loss is possible. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, derivatives risk, dollar roll transaction risk and income risk. As interest rates rise, bond prices fall. Below investment grade or high yield debt securities are subject to liquidity risk and heightened credit risk. Foreign investments involve additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. Please note investments in private debt, including leveraged loans, middle market loans, and mezzanine debt, are subject to various risk factors, including credit risk, liquidity risk and interest rate risk.
This information represents the opinion of Nuveen, LLC and its investment specialists and is not intended to be a forecast of future events and or guarantee of any future result. Information was obtained from third party sources which we believe to be reliable but are not guaranteed as to their accuracy or completeness. There is no assurance that an investment will provide positive performance over any period of time.
Nuveen, LLC provides investment advisory services through its investment specialists.