CHAPTER 6How Liquid Are Direct Loans?
For some investors, an attractive feature of US middle market direct loans is an effective life that is shorter than their typical five‐year maturity. Understanding effective life is useful for measuring overall portfolio liquidity, which in turn can help investors in setting annual commitment levels to direct lending portfolios, help managers who must balance cash flows from direct loan assets with potential investor withdrawals, or manage financing when direct loan assets are leveraged at the portfolio level.
US middle market direct corporate loans have historically had an effective life that averages 2.75 years, based upon Cliffwater Direct Lending Index (CDLI) data covering the period from September 2004 through December 2017. However, unlike many of the investment characteristics for direct lending that show stability over time, the measurement of effective life has varied considerably, from a low of 2.09 years to a high of 7.19 years. And unfortunately, but predictably, the effective life in direct lending varies inversely with general conditions of market liquidity. In other words, direct loan liquidity declines when credit conditions deteriorate.
A significant benefit of investing in US middle market direct loans is their comparatively high cash flow from principal and income. The CDLI database shows principal repayments from loan maturity, prepayments, or corporate actions that average approximately one‐third of total assets annually ...
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