July 23, 2019
The current credit cycle may be long in the tooth, but we believe investors in private debt needn’t panic. Spurred on by banking reforms after the GFC, direct lending has emerged as a stalwart asset class, delivering attractive yields across the cycle. Investors who have remained on the sidelines and have a bearish view of the market may find solace in the fact that direct lending has historically delivered its highest returns at the beginning of the economic recovery. Granted, this history is limited. But there are a few GPs who have been investing in this space since at least the turn of the century. In uncertain times, experience matters.
Over time, investors have flocked to the middle market, and with time, these lenders will turn their sights up market. Even in the face of an impending downturn, direct lending may be a beacon of hope.
Like any investor, we believe strongly in the value of having a disciplined and dogged commitment to our due diligence process. We find the value of limiting risk and reducing the variance of outcomes to be well worth the effort. Diversification, remaining invested, credit quality, and insisting upon covenants are just a few of the things we have come to value during our 20 plus years of investing in private debt.
John Bohill and Srdjan Vlaski from StepStone’s private debt team discuss the value that private debt can add late in the credit cycle.