Fynsa
The boom in funds and financial institutions that provide direct loans to companies is taking place in a post-pandemic context, in which restrictive policies of central banks worldwide tightened spreads sharply. spread and financing costs, affecting all businesses. This forced banks to clean up their portfolios, being much more restrictive in new credits and refinancing.
As one door closes, another opens, so the market reacted quickly, with non-bank financial institutions offering direct loans to medium- to large-sized companies and projects. offering direct loans to medium to large companies and projects.
The growth of direct loans has been remarkable in recent years. This type of financing offers a number of benefits for both investors and non-bank financial institutions. However, it also presents challenges that need to be carefully addressed.
Benefits for Investors:
Direct loans have attractive returns compared to traditional fixed-income investments, with superior risk-return ratios.
By offering direct financing to companies, investors can earn higher returns than those offered by more liquid lending strategies such as syndicated loans, such as syndicated loans.
Unlike investing in public debt instruments, direct credit structuring has better access to management and loan structures can be tailored to align risk appetite. better access to management and loan structures can be tailored to align risk appetite. This customization allows the inclusion of creditor-friendly terms and strong covenants, improving risk control and protecting investor interests.
Direct credits offer diversification benefits, as returns are less correlated to public markets. Investing in a diversified portfolio of credits across industries and geographies can help mitigate sector-specific or regional risks, contributing to a more resilient investment strategy. help mitigate sector-specific or regional risks, contributing to a more resilient investment strategy.
Challenges to consider:
One of the main challenges for direct lending investors is the credit risk associated with debtors. Careful assessment of the financial and operational soundness of companies is crucial to mitigate this risk and protect the invested capital. Performing thorough due diligence and regular monitoring, as well as participating at some level of company decision making, helps to keep this aspect in check. Although this generates extra costs for the administration of these loans, it helps to reduce the information gap between creditors and debtors.
With the growing popularity of direct lending, competition for quality deals has intensified. Established firms with extensive origination platforms may have a competitive advantage in obtaining attractive investment opportunities, potentially marginalizing new market entrants. competitive advantage in obtaining attractive investment opportunities, potentially marginalizing new market entrants.
Direct lending expose investors to sector and economic volatility, especially in industries sensitive to macroeconomic factors or disruptive events. Investing in sectors experiencing stress or structural change requires specialized expertise and proactive risk management.
Despite the challenges, direct lending remains an attractive investment alternative for those seeking yield in today's high interest rate environment. By leveraging customized structures and rigorous risk management practices, investors can navigate the complexities of direct lending while capitalizing on its potential to return returns.nvestors can navigate the complexities of direct credits while capitalizing on their potential for attractive returns and portfolio diversification. However, it is essential that investors remain vigilant, adapt to changing market conditions and prioritize risk control to effectively capitalize on the benefits of direct credits.
Andrew de Carcer
Senior Portfolio Manager Private Debt Fynsa AGF
