Direct Lending – A new asset class for fixed income investors


Traditionally the role of fixed income within a portfolio was to protect investors from the volatility of equities and provide income to protect against inflationary pressures. Traditional portfolio theory rests on the maxim of ‘normal’ interest rates.

With bonds delivering historically low yields and the expectation that global rates will increase slowly over the next decade this does not provide the most attractive backdrop for fixed income investors.

Fixed income allocations should therefore adapt to this new strategic environment and investors should question whether they are paying too much for liquidity.

Since the Global Financial Crisis there have been major forces in play that have opened up a new direct lending asset class for institutional and experienced investors.

Firstly globally regulators have imposed capital requirements on traditional banks to ensure that the reckless lending habits undertaken pre-2008 will not reoccur. As such banks’ balance sheets have shrunk as they have retreated from lending to a multitude of different borrowers.

Secondly, as technology has developed, non-banking institutions, via the use of big data, have the ability to source potential borrowers where before that was the privy of large banks with significant distribution networks.

Fixed Income investors now have the ability to invest capital in a manner that has been traditionally reserved for banks’ balance sheets. They have the ability to earn an illiquidity risk premium on their income stream and can do so in a diversified manner whilst minimising the idiosyncratic risk of single borrower or credit sub asset class exposure.

At MASECO Asia, we believe that this asset class should be considered as a component of clients’ overall wealth solution. To what degree and how much depends on individual circumstances.

We believe that as an investor it is important to fully understand the sub-asset classes that make up the Direct Lending/Alternative Credit landscape. We have launched a series of Primas that are designed to explain these sub-asset classes and highlight some of the major risks inherent in the Direct Lending Alternative credit space.