Private Debt

CHAPTER 2The Historical Performance of US Middle Market Direct Loans

THE CLIFFWATER DIRECT LENDING INDEX (CDLI)

Most asset classes become institutionalized only after a long maturation period that permits discovery of both return and risk. That discovery process also involves the establishment of a database of unbiased information on the asset. For example, the Center for Research in Security Prices (CRSP) database served that early role in the study of stock performance, as did the Capital International database for international stocks, and the Salomon Brothers database for corporate bonds.

A major challenge for investors considering US middle market direct lending has been the lack of data upon which to understand long‐term return and risk. Commercial bank C&I loans or direct loans held by insurance companies might be valuable sources of information, but these records are proprietary and not kept in a form that is conducive to the rigorous performance analysis available for other asset classes. As a result, investors who have engaged in direct lending have relied primarily upon the attractive yields available on current private corporate loans and the performance records of a few asset managers who have engaged in middle market direct lending over an extended period of time. Currently investors might collect and compare the performance records of direct lending managers, but these records suffer from being self‐reported, with inconsistencies in loan valuation, asset quality, ...