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.

By: Michael Scarsciotti, David Selbovitz

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 comprises 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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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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