Direct Lending – A new asset class for fixed income investors
Traditionally the role of fixed income within a portfolio was to protect investors from the volatility of equities and provide income to protect against inflationary pressures. Traditional portfolio theory rests on the maxim of ‘normal’ interest rates.
Fixed income allocations should therefore adapt to this new strategic environment and investors should question whether they are paying too much for liquidity.
Since the Global Financial Crisis there have been major forces in play that have opened up a new direct lending asset class for institutional and experienced investors.
Firstly globally regulators have imposed capital requirements on traditional banks to ensure that the reckless lending habits undertaken pre-2008 will not reoccur. As such banks’ balance sheets have shrunk as they have retreated from lending to a multitude of different borrowers.
Secondly, as technology has developed, non-banking institutions, via the use of big data, have the ability to source potential borrowers where before that was the privy of large banks with significant distribution networks.
At MASECO we believe that this asset class should be considered as a component of clients’ overall wealth solution. To what degree and how much depends on individual circumstances.
We believe that as an investor it is important to fully understand the sub-asset classes that make up the Direct Lending/Alternative Credit landscape. We have launched a series of Primas that are designed to explain these sub-asset classes and highlight some of the major risks inherent in the Direct Lending Alternative credit space.
Over the coming years we envisage that investing in alternative credit and direct lending will become a new asset class for investors. As a result of the low rate environment and the sanguine risk/return trade off available within traditional fixed income, investors are looking to capture the 'illiquidity' risk premium and 'inefficient' premium available in this space.
To help clients understand the risks and opportunities that present themselves we have developed a Prima Series that covers the major sub asset classes in this space. In addition you can subscribe to receive similar bulletins on a regular basis.