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Investing Ideas
Direct lending: The missing ingredient within a strategic credit allocation
Structural bifurcation offers attractive opportunities in the traditional middle market; secular conditions support credit allocations and exposure across the high-yield spectrum.
Key Takeaways
- Credit is often underutilized in portfolio construction,1 yet may provide attractive income, downside protection, and total return across market cycles.
- By combining complementary sources of public and private credit, investors can potentially enhance return consistency, income durability, and compounding potential.
- The direct lending market has transformed into a bifurcated ecosystem, with attractive opportunities in the traditional middle market due to higher spreads, stronger loan covenant protections, and less leverage.
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Direct lending: The missing ingredient within a strategic credit allocation
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Direct lending: The missing ingredient within a strategic credit allocation
Structural bifurcation offers attractive opportunities in the traditional middle market; secular conditions support credit allocations and exposure across the high-yield spectrum.
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Alternative investment strategies may not be suitable for all investors and are not intended to be a complete investment program. Alternatives may be relatively illiquid; it may be difficult to determine the current market value of the asset; and there may be limited historical risk and return data. Costs of purchase and sale may be relatively high. A high degree of investment analysis may be required before investing.
1. Source: Fidelity Investments, “A study of allocations to alternative investments by institutions and financial advisors.” Proprietary research from Fidelity explores emerging trends by segment, and strategies where investors may be under- or over-allocated to alternatives. Relative to stated return expectations, institutions across the board, including advisors, demonstrated under-allocation to private credit.
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