Conclusion
With investors looking for diversification and incremental return, some will search for other private asset classes that may be more esoteric than middle market direct lending. However, investors that stick with or begin an allocation to middle market direct lending should be rewarded and likely benefit from greater capital deployment in the coming year. The recent and current vintage of direct lending should also be attractive with good relative value and credit structures, along with an expected transition to a more constructive economic outlook. In addition, the secular support of this asset class is still in its early stage. Very few investors are at their target allocation, while many are planning to increase the allocation in coming years, and others are just beginning investment in the asset class. It is and will remain important for investors to evaluate and understand how different segments of middle market lending represent different diversification and alpha opportunities. With rates likely remaining elevated through 2025 compared to interest rate standards of the past decade, and the substantial spread relative to public high yield loans, the income from middle market direct lending should be quite attractive. This should result in yields remaining at or near double digits and a foundation for investor returns.
For more of our thoughts on the Principal Alternative Credit outlook for 2025, read our full perspective here.