Key takeaways
- Direct lending continues to be the preferred private credit allocation for institutions and individuals alike.
- As the market matures, investors are turning to asset-based finance as a diversifier to direct lending.
- Flexible special situations strategies continue to gain market share at the expense of distressed funds.
Direct lending continues to dominate the world of private credit, comprising 88% of all private credit capital raised in Q2. There is good reason for this: The direct lending market is relatively mature, has a strong performance track record, is scalable for lenders and is easy for investors to understand. As private credit allocations grow, however, investors are beginning to think strategically about building a well-balanced, diversified private credit portfolio.
Two strategies that fit the bill as both rich in opportunity and diversifying to direct lending are special situations and asset-based finance (ABF). Special situations, once an afterthought to distressed and mezzanine strategies, has risen to take a 15% share of private credit fundraising in 2023 compared to just 6% in 2016. The strategy—which allows the manager to offer capital solutions to companies in a wide variety of circumstances—has grown in prominence as the complexity of firms’ capital needs has increased. Given its opportunistic nature, special situations may act as a natural diversifier to regular-way direct lending.
A less understood market that is rapidly growing is asset-based finance, a broad umbrella of credit strategies that focus on financing assets rather than companies. These may be financial assets, such as consumer loans, or hard assets such as airplanes. While data on fundraising remains scant, the global opportunity set for private ABF is massive—around $5.2 trillion. Our market observations agree with a recent survey (shown in the second chart to the right) that suggests investors prefer ABF above all other emerging private credit strategies. The complex nature of these transactions lends itself to significant alpha potential, while its sensitivity to the performance of specified assets (rather than to performance of companies and industries) provides economic diversification.
Direct lending remains the core of most private credit allocations, but as the market matures, we look for accelerating growth in other private debt strategies .Key takeaways• Direct lending continues to be the preferred private credit allocation for institutions and individuals alike. • As the market matures, investors are turning to asset-based finance as a diversifier to direct lending.
