Where does the direct lending market end and the broadly syndicated market begin? With the growing prevalence of mega direct lending deals, the answer is less straightforward than it was even a few years ago.
Asset Collectors
There are a few key drivers behind direct lending’s disintermediation of the lower end of the broadly syndicated market. For one, deal flow has continued to come down in recent years after peaking in 2021 around $1.2 trillion. At the same time, M&A volume has also decreased. With less supply of deals in the market, and still-strong demand to invest, some managers have had to reconsider their approach to deploying capital.
One trend that has come about as a result is the rise of “asset collection.” Asset collectors can include smaller lenders or new entrants to the market, which tend to be less experienced in originating assets. Often, the most cost-effective way for these managers to build portfolios is by purchasing small pieces of other managers’ deals—and while this can result in diversified portfolios, it affords less influence over deal terms.
Asset collection also extends to the lenders in the market that have continued to raise larger and larger funds, in some cases upward of $10 billion. In the direct lending market, capital needs to be deployed over a set time period before it begins to weigh on returns. For lenders financing traditional middle market deals, this can pose a challenge—deploying tens of billions of dollars into deals in increments of $100-$200 million is both inefficient and difficult to execute in a timely manner. As a result, many managers have chosen to move up-market, ramping large funds by making bigger investments in upper (upper) middle market companies ($100+ million in EBITDA), rather than patiently deploying capital into more traditional middle market opportunities. For managers, executing these large transactions can certainly have advantages from a profit standpoint.
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