Research from the alternative assets database Preqin has found that direct lending funds with vintages from 2002 to 2012 have produced median net returns of 11.4% annually. According to Preqin, direct lending funds have close to the lowest risk profiles for any major private equity or private debt strategy.
Preqin found that over the same period only distressed debt funds produced a higher return, with 12.6% annualised returns. In terms of risk, direct lending funds had a standard deviation of 5.8%, with only mezzanine funds producing a lower standard deviation of 5.3%. Preqin head of private debt products, Ryan Flanders, commented: “The emergence of the private debt asset class has presented many attractive risk/return profiles for investors. The consistency of returns in direct lending is most obvious, with steady low double-digit returns and minimal standard deviation. As this is a small market relative to some other more defined alternative assets, the question is whether this can be maintained as the asset class becomes more crowded.”
Looking at the returns from different types of private debt, Flanders said that direct lending has provided consistency, while returns from mezzanine funds have increased recently. On the other hand, returns from distressed debt have fallen as the economic recovery has taken hold. In addition, a number of notable investors have made sizeable allocations to private debt including the New York State Teachers’ Retirement System and the California Public Employees’ Retirement System.