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Nesbitt - Private debt: opportunities in corporate direct lending

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The essential resource for navigating the growing direct loan market Private Debt: Opportunities in Corporate Direct Lending provides investors with a single, comprehensive resource for understanding this asset class amidst an environment of tremendous growth. Traditionally a niche asset class pre-crisis, corporate direct lending has become an increasingly important allocation for institutional investors assets managed by Business Development Company structures, which represent 25% of the asset class, have experienced over 600% growth since 2008 to become a $91 billion market. Middle market direct lending has traditionally been relegated to commercial banks, but onerous Dodd-Frank regulation has opened the opportunity for private asset managers to replace banks as corporate lenders; as direct loans have thus far escaped the low rates that decimate yield, this asset class has become an increasingly attractive option for institutional and retail investors. This book dissects direct loans as a class, providing the critical background information needed in order to work effectively with these assets. Understand direct lending as an asset class, and the different types of loans available Examine the opportunities, potential risks, and historical yield Delve into various loan investment vehicles, including the Business Development Company structure Learn how to structure a direct loan portfolio, and where it fits within your total portfolio The rapid rise of direct lending left a knowledge gap surrounding these nontraditional assets, leaving many investors ill-equipped to take full advantage of ever-increasing growth. This book provides a uniquely comprehensive guide to corporate direct lending, acting as both crash course and desk reference to facilitate smart investment decision making--

-CLIFFWATER: Cliffwater is one of the largest alternative investment advisory firms, currently advising on approximately $57 billion of alternative assets. In the direct lending space, Cliffwater is a recognized thought leader, and its executives are frequent speakers at industry conferences. Cliffwater developed the first, and to date only, index which directly tracks the performance of approximately 6,000 individual direct lending investments (www.CliffwaterDirectLendingIndex.com). Similarly, Cliffwater created and maintains an index which tracks the performance of publicly-traded BDCs (www.BDCs.com), which represent an important segment of the direct lending industry. As a result, they are well-known in this space. -POTENTIAL AUDIENCE: The private debt community is large and growing. Jonathan Bock maintains an active distribution list of several thousand BDC focused investment professionals. As this book will be written for the broader institutional investor looking for a resource on the asset class, the audience will include the general investment community of endowments, foundations, family offices, consultants, and retirement funds, all of which can be tapped into as well. This is also complimentary, in certain ways, to the CAIA suite of materials. -EVENTS: Jonathan Bock/Wells Fargo hold an event with ~1,000 in attendance every November. Cliffwater has its own event every Spring for ~200 attendees and reaches 20-30 new clients per month. Market description Institutional investors, retail investors, and financial advisors-- Read more...
Abstract: The essential resource for navigating the growing direct loan market Private Debt: Opportunities in Corporate Direct Lending provides investors with a single, comprehensive resource for understanding this asset class amidst an environment of tremendous growth. Traditionally a niche asset class pre-crisis, corporate direct lending has become an increasingly important allocation for institutional investors assets managed by Business Development Company structures, which represent 25% of the asset class, have experienced over 600% growth since 2008 to become a $91 billion market. Middle market direct lending has traditionally been relegated to commercial banks, but onerous Dodd-Frank regulation has opened the opportunity for private asset managers to replace banks as corporate lenders; as direct loans have thus far escaped the low rates that decimate yield, this asset class has become an increasingly attractive option for institutional and retail investors. This book dissects direct loans as a class, providing the critical background information needed in order to work effectively with these assets. Understand direct lending as an asset class, and the different types of loans available Examine the opportunities, potential risks, and historical yield Delve into various loan investment vehicles, including the Business Development Company structure Learn how to structure a direct loan portfolio, and where it fits within your total portfolio The rapid rise of direct lending left a knowledge gap surrounding these nontraditional assets, leaving many investors ill-equipped to take full advantage of ever-increasing growth. This book provides a uniquely comprehensive guide to corporate direct lending, acting as both crash course and desk reference to facilitate smart investment decision making--

-CLIFFWATER: Cliffwater is one of the largest alternative investment advisory firms, currently advising on approximately $57 billion of alternative assets. In the direct lending space, Cliffwater is a recognized thought leader, and its executives are frequent speakers at industry conferences. Cliffwater developed the first, and to date only, index which directly tracks the performance of approximately 6,000 individual direct lending investments (www.CliffwaterDirectLendingIndex.com). Similarly, Cliffwater created and maintains an index which tracks the performance of publicly-traded BDCs (www.BDCs.com), which represent an important segment of the direct lending industry. As a result, they are well-known in this space. -POTENTIAL AUDIENCE: The private debt community is large and growing. Jonathan Bock maintains an active distribution list of several thousand BDC focused investment professionals. As this book will be written for the broader institutional investor looking for a resource on the asset class, the audience will include the general investment community of endowments, foundations, family offices, consultants, and retirement funds, all of which can be tapped into as well. This is also complimentary, in certain ways, to the CAIA suite of materials. -EVENTS: Jonathan Bock/Wells Fargo hold an event with ~1,000 in attendance every November. Cliffwater has its own event every Spring for ~200 attendees and reaches 20-30 new clients per month. Market description Institutional investors, retail investors, and financial advisors

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Table of Contents Guide List of Exhibits Chapter 1 Chapter 2 Chapter 3 - photo 1
Table of Contents
Guide
List of Exhibits
  1. Chapter 1
  2. Chapter 2
  3. Chapter 3
  4. Chapter 4
  5. Chapter 6
  6. Chapter 7
  7. Chapter 8
  8. Chapter 9
  9. Chapter 11
  10. Chapter 12
  11. Chapter 13
  12. Chapter 14
  13. Chapter 15
  14. Chapter 16
  15. Chapter 17
  16. Chapter 18
  17. Chapter 22
Pages

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Private Debt
Opportunities in Corporate Direct Lending

STEPHEN L. NESBITT

Private debt opportunities in corporate direct lending - image 2

Copyright 2019 by Cliffwater LLC. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate percopy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 7508400, fax (978) 6468600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 7486011, fax (201) 7486008, or online at www.wiley.com/go/permissions.

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Library of Congress CataloginginPublication Data:

Names: Nesbitt, Stephen L., 1953- author.

Title: Private debt : opportunities in corporate direct lending / Stephen L. Nesbitt.

Description: First Edition. | Hoboken : Wiley, 2019. | Series: Wiley finance | Includes index. |

Identifiers: LCCN 2018049404 (print) | LCCN 2018050703 (ebook) | ISBN 9781119501275 (Adobe PDF) | ISBN 9781119501169 (ePub) | ISBN 9781119501152 (hardback)

Subjects: LCSH: Investments. | Small businessFinance. | Bank loans. | BISAC: BUSINESS & ECONOMICS / Investments & Securities.

Classification: LCC HG4521 (ebook) | LCC HG4521 .N427 2019 (print) | DDC 658.15/2dc23

LC record available at https://lccn.loc.gov/2018049404

Cover Design: Wiley

Cover Image: belov1409 / iStock.com

To the ones who make it all worthwhile: Lisa, John, Blake, Amanda, twins Ford and Ellie, and a dog named Kitty.

Introduction

Corporate lending was traditionally the business of commercial banks, but the global financial crisis and ensuing regulatory backlash created an opportunity for nonbank private asset managers to replace bankers as primary lenders to a large swath of middle market businesses, primarily in the United States. The economic recovery, albeit slow, found many middle market companies looking for debt capital for growth or refinancing. With banks in retrenchment, these companies found asset managers to be willing lenders. Lacking the deposit capital available to banks, the new direct lenders in turn have sought capital from institutional investors hungry for yields closer to 10% than the 13% available from traditional sources. Though estimates vary, the size of the corporate direct loan market in the United States today is perhaps as high as $400 billion and growing.

This book is directed primarily toward investors interested in learning more about corporate direct lending. The author comes from the perspective of an investment consultant to institutional investors providing research and advice on asset classes, manager selection, and asset allocation. The book therefore follows the same path that fiduciaries to institutional capital walk in their own due diligence on a new asset class.

That research covering return and risk is updated along with a new chapter addressing liquidity.

provides a theoretical foundation for the threeasset view by splitting fixed income into separate credit and interest rate components using option pricing models developed almost 50 years ago by Robert Merton, Fischer Black, and Stephen Cox. Their concept that any credit instrument can be modeled as a riskfree rate plus a put option forms the basis for sensitivity analysis and simulation to better understand the behavior of yield, return, and risk for various types direct corporate loans and the value of covenants.

provides an explanation for the high yields in direct loans by dissecting them into six components, each associated with a distinct risk factor potentially found in loans, and each offering an extra yield, or risk premium, as compensation for the specific risk factor. This yield architecture provides investors with a method for understanding and comparing absolute yields.

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Investments that go terribly wrong generally have too much leverage or involve fraud. Many investors in direct corporate loans apply some leverage to enhance return. examines the impact of leverage on portfolio return and risk and provides guidance to investors on what leverage level might be appropriate. Unlike traditional stock or bond portfolios where return and risk characteristics are similar among managers, direct lending offers investors many options that can materially differentiate one portfolio from another.

discuss alternative forms for investing in direct corporate loans and some of the practicalities. Business development companies ( BDC s) are covered first because they are the most visible of direct lending vehicles. Other topics include manager selection, loan valuation, fees, and portfolio construction.

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