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Investment outlook

Investing in middle market senior secured loans

Metal Rotar

Executive summary

One of the characteristics of the loan market since the credit crisis in 2008 has been a dearth of senior loan capital available to middle market companies. Historically, these companies have not had the access to the broader debt capital markets afforded to larger, more liquid borrowers, and are generally too small to be financed by public loan mutual funds or institutional loan investors. At a moment when interest rates remain low and public equity and credit securities seem fully valued, the investment opportunities in middle market loans look very compelling.

Middle market companies are seeking more loans to finance growth as the economy expands

This means that it is possible for an established, experienced lender to construct a high-quality loan portfolio, producing a potentially attractive risk-adjusted return. One of the components of this return is the so-called “illiquidity premium” associated with middle market loans, reflecting the recognition by institutional investors that smaller loans are less liquid than their more broadly syndicated counterparts. Middle market loan originations are designed as buy-and-hold investments and require a high level of due diligence on the part of the investor. However, the senior secured position of these loans in the capital structure provides downside protection when compared to other loans or equity. The floating-rate nature of middle market loans mitigates interest-rate risk and provides increased returns in a rising interest rate environment.

Benefit from our experience

At Nuveen, we have developed a robust investment process, and a team that is experienced at structuring these loans and constructing middle market loan portfolios. This puts us in a good position to take advantage of the demand for capital, particularly from private equity sponsored companies, a market segment where we have years of investing experience. In this primer, we will outline the case for this strategy, and its potential risks and rewards.

The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. YOUR CAPITAL IS AT RISK.

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Risks and other important considerations

The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Financial professionals should independently evaluate the risks associated with products or services and exercise independent judgment with respect to their clients. Certain products and services may not be available to all entities or persons. Investments in middle market loans are subject to certain risks. Please consider all risks carefully prior to investing in any particular strategy. These investments are subject to credit risk and potentially limited liquidity, as well as interest rate risk, currency risk, prepayment and extension risk, and inflation risk.

Churchill Asset Management is a registered investment advisor and an affiliate of Nuveen, LLC.

Churchill Asset Management is a registered investment advisor and an affiliate of Nuveen, LLC.

This document is solely for the use of wholesale clients and is not for general public distribution.

This document is issued by Nuveen Real Estate (Australia) Limited ABN 98 168 690 444, AFSL 460770.

This document is intended solely for the use of wholesale clients, as defined in section 761G of the Corporations Act 2001 (Cth) and is not for general public distribution.

This document is being provided to you solely for your information. By accepting this document you represent that you are a wholesale client.

Past performance is not indicative of future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. This document does not purport to be a comprehensive statement or description of any markets or securities referred to within. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. Prospective investors should not rely on the information in this document and should make their own enquiries and evaluations they consider to be appropriate to determine the suitability of any investment (including regarding their investment objectives, financial situation and particular needs) and should seek all necessary financial, legal, tax and investment advice. If you invest through a third-party provider, you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to be or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. Any investment application for a fund will be made solely on the basis of the information contained in the relevant fund’s offer document (including all relevant covering documents), which may contain investment restrictions. This document is intended as a summary only and (if investing in a fund) potential investors must read the relevant fund’s offer document before investing.

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 factors such as market conditions or legal and regulatory developments. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. 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 made in preparing this material could have a material impact on the information presented herein. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible. This information does not constitute investment research as defined under MiFID.

The information in this document has been prepared using information from a variety of sources. The information is believed by Nuveen Real Estate to be correct but no warranty is made with respect to its completeness or accuracy. All opinions and estimates in this document are subject to change without notice. Nuveen Real Estate is not under any obligation to update the information contained in this document to the extent that it is or becomes out of date or incorrect. This information is confidential and must not be made available, published or distributed to any third party without the prior written consent of Nuveen Real Estate.