Investors Flock to US Lower-Middle-Market Private Debt

A Preqin/NXT Capital survey* of private debt investors has found that 45% believe that the private debt market is at a peak, and that the coming months will see a correction. In response, investors are looking increasingly to US lower-middle-market direct lending** and counter-cyclical strategies. In fact, the survey reveals that many investors believe that US lower-middle-market direct lending will be less affected by a cycle change and other macroeconomic trends than private debt as a whole.

As a result, appetite for lower-middle-market direct lending in the US has been growing, and a majority of investors plan to increase their allocations to the sector in 2018. Returns expectations for the sector are also relatively high: the majority of investors expect returns of 8% or more from unlevered funds, and more than 10% from levered vehicles, which is higher than for the private debt asset class as a whole.

For more information and analysis, see the full Preqin Special Report: Shifting Gears: Investors Head Toward the Lower Middle Market here:

Key US Lower-Middle-Market Direct Lending Facts:

Forty-five percent of private debt investors believe that assets are overvalued and that a correction is due.


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Investors believe US lower-middle-market direct lending will be more insulated from the economic cycle and other macroeconomic trends than private debt in general. Eighty-six percent believe this is a risk for private debt generally, but just 43% cite it as a risk for the US lower middle market.

Eighty-six percent of investors have a dedicated allocation to US lower-middle-market direct lending, and a majority (56%) are set to increase their exposure over the next 12-24 months.

Counter-cyclical strategies are also sought-after, with 46% and 37% of investors now viewing special situations and distressed debt funds respectively as presenting the best opportunities in the next 12-24 months. Thirty-four percent of respondents identified straight senior debt as presenting the best opportunities over the same timeframe.

Beyond seeing US lower-middle-market direct lending as a potentially less volatile sector, the largest proportions of investors cited high relative returns (57%) and diversification (55%) as its key appeals.

Returns expectations are high: 59% expect unlevered lower-middle-market direct lending funds in the US to return 8% or more, compared to 39% that expect the same for broader unlevered private debt funds.

Similarly, 79% expect levered vehicles focusing on the sector to return at least 10%, compared to 60% that expect that standard for generic private debt vehicles.

Tom Carr, Head of Private Debt Products – Preqin:

“Given the widespread speculation about exactly where we are in the market cycle, it is not surprising to see that many investors are positioning themselves in anticipation of a correction. However, what is striking is the clear bifurcation of investor response – institutions are looking to the US lower middle market for safety while simultaneously moving up the risk/return curve in search of opportunity. In these circumstances, it is a mark of confidence in the sector that return expectations have remained so high, outstripping private debt as a whole. With such clear and widespread appetite, we can expect lower-middle-market direct lending in the US to be an increasingly active sector in the coming months.”