Commentary

Reuters’ Lawrence Delevingne has a long, thoughtful piece about the new extremes of the direct lending market.  The business of lending to middle market companies which are too small to issue syndicated loans or high yield bonds has exploded since 2010, with numerous new entrants.  Some of them are too leveraged, and others are offering liquidity terms that are too lenient.

We had a big direct lending business at Plainfield Asset Management, and those assets made it impossible to meet the wave of redemption requests in December 2009, after Lehman and Madoff.  Even though Plainfield had fully delivered, and we had elaborate lockups and gates, the depth and duration of the Financial Crisis made it impossible to deliver timely liquidity at favorable prices.

In the next recession, the same problems will reoccur.  Business Development Companies with permanent capital are the most resilient structures.  Opportunity Funds, where investors have to wait for the underlying assets to pay off, is the next best structure.  Hedge funds actively participating in direct lending are unlikely to weather a recession, unless it is both short and mild.  Lessons learned.