Middle Market Direct Lending

Benefits of Pursuing Both Sponsored and Non-Sponsored Transactions

Middle market direct lending, embraced by institutional investors, has developed into a mature asset class over the last two decades. The strategy has many attractive attributes: the potential for strong risk-adjusted returns, current income payout, lower volatility compared to other fixed income alternatives, and less correlation to traditional asset classes. With the proliferation of investors allocating capital to the space, it is imperative to recognize that not all direct lending managers are the same.

Direct lending transactions can generally be defined as falling into one of two categories: sponsored and nonsponsored. This is a crucial distinction. Both origination methods can positively benefit portfolio diversification and economic returns. Each has distinct characteristics, and we intend to highlight the dynamics and considerations of each in this article.

Key Takeaways

  • We believe it is important for investors to understand the differences between sponsored and non-sponsored direct lending approaches.
  • There are advantages and disadvantages to both. As a lender, we think it’s wise to pursue both approaches. Both can positively benefit portfolio diversification and economic returns.
  • To successfully pursue both sponsored and non-sponsored direct lending strategies, a manager should have robust underwriting capabilities, flexibility, appropriate scale and bespoke sourcing capabilities.