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Private Debt: Opportunities in Corporate Direct Lending

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Private Debt: Opportunities in Corporate Direct Lending

Stephen L. Nesbitt

ISBN: 978-1-119-50116-9 December 2018 256 Pages

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Description

The essential resource for navigating the growing direct loan market

Private Debt: Opportunities in Corporate Direct Lending provides investors with a single, comprehensive resource for understanding this asset class amidst an environment of tremendous growth. Traditionally a niche asset class pre-crisis, corporate direct lending has become an increasingly important allocation for institutional investors—assets managed by Business Development Company structures, which represent 25% of the asset class, have experienced over 600% growth since 2008 to become a $91 billion market. Middle market direct lending has traditionally been relegated to commercial banks, but onerous Dodd-Frank regulation has opened the opportunity for private asset managers to replace banks as corporate lenders; as direct loans have thus far escaped the low rates that decimate yield, this asset class has become an increasingly attractive option for institutional and retail investors.

This book dissects direct loans as a class, providing the critical background information needed in order to work effectively with these assets.

  • Understand direct lending as an asset class, and the different types of loans available
  • Examine the opportunities, potential risks, and historical yield
  • Delve into various loan investment vehicles, including the Business Development Company structure
  • Learn how to structure a direct loan portfolio, and where it fits within your total portfolio

The rapid rise of direct lending left a knowledge gap surrounding these nontraditional assets, leaving many investors ill-equipped to take full advantage of ever-increasing growth. This book provides a uniquely comprehensive guide to corporate direct lending, acting as both crash course and desk reference to facilitate smart investment decision making.

Introduction ix

Acknowledgments xii

CHAPTER 1 Overview of US Middle Market Corporate Direct Lending 1

CHAPTER 2 The Historical Performance of US Middle Market Direct Loans 9

CHAPTER 3 Performance Comparisons to Other Asset Classes 21

CHAPTER 4 Current Yield or Yield to Maturity? 29

CHAPTER 5 Comparative Credit Loss Rates 35

CHAPTER 6 How Liquid Are Direct Loans? 37

CHAPTER 7 Credit as a Separate Asset Class 41

CHAPTER 8 Loans and the Theory of Credit 53

CHAPTER 9 Risk Premiums in US Middle Market Lending 71

CHAPTER 10 Covenants and the Loan Agreement 79

CHAPTER 11 Should Direct Loan Portfolios Be Leveraged? 83

CHAPTER 12 Business Development Companies 91

CHAPTER 13 Selecting Direct Lending Managers 105

CHAPTER 14 Loan Valuation 125

CHAPTER 15 Investment Fees 131

CHAPTER 16 Direct Lending and J-curve Mitigation 139

CHAPTER 17 Portfolio Construction 143

CHAPTER 18 Expected Returns and Risks from Direct Lending 153

CHAPTER 19 Asset Allocation 163

CHAPTER 20 European Middle Market Direct Lending 167

CHAPTER 21 The Borrower’s Perspective 175

CHAPTER 22 Other Private Debt Opportunities 181

Conclusion 219

Glossary 221

List of Exhibits 231

Index 235