LGT Capital Companions is allocating extra of its non-public credit score portfolio away from direct lending, as fierce competitors brings down yields.
Thomas Kyriakoudis, associate and co-head of credit score options at LGT Capital Companions, mentioned that direct lending will stay its largest non-public credit score allocation however the agency is now investing extra in different areas.
“In 2023, it was essentially the most enticing marketplace for direct lending I’ve seen in my profession – huge spreads and good yields,” he informed Various Credit score Investor.
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“However this 12 months, notably within the second quarter, there was plenty of compression on these yields. I’d undoubtedly determine that higher mid market – companies with greater than £75m EBITDA – to be extra aggressive now.”
An inflow of latest entrants to the direct lending house, mixed with the restoration of the broadly syndicated mortgage (BSL) market, has intensified competitors for bigger offers.
Deloitte knowledge for the primary quarter of 2024 confirmed that the BSL market recorded a complete issuance of €29.3bn (£24.8bn) in Europe, the best stage for the reason that second quarter of 2021.
Consequently, non-public credit score companies are trying elsewhere for yield.
Kyriakoudis famous “extra resilience in unfold compression” within the decrease mid-market as non-public credit score companies should not competing for offers with banks.
“We wish to be balanced,” he added. “There’s a minimal measurement for us, we wouldn’t go for the smaller firms however there’s a band of curiosity under these offers that may compete with the BSL market.”
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Different areas that the choice asset supervisor finds enticing embody internet asset worth lending, asset-backed lending, vital threat transfers, structured credit score similar to CLOs, mezzanine finance and CLO equities.
“I feel [asset-backed lending] has the potential to be greater than direct lending by way of absolutely the measurement of the market,” mentioned Kyriakoudis. “It’s doubtlessly a really fascinating space. The market has most of the identical dynamics because it did post-GFC, once you noticed banks be much less aggressive, so there are alternatives for personal lenders to return and deploy capital.”
LGT Capital Companions manages over $5bn (£3.8bn) of personal credit score belongings, on behalf of the LGT endowment and exterior shoppers.