Middle-Market Direct Lending

A Lucrative Alternative Asset Class

The US is home to some 200,000 companies dubbed “middle-market” — typically with EBITDA up to $150m.

On a stand-alone basis, America’s middle-market represents a $6.3tn economy, third-largest in the world. Non-bank lending to these middle-market companies is referred to as direct lending or private credit and represents a 75 percent market share.

Middle-market companies seek loans from non-bank financiers, because they provide distinct advantages that align with growth strategies and operational requirements. They include:

  • Growth. Opportunities to expand operations, invest in new technologies, enter new markets, support strategic acquisitions, and more.
  • Financing structures. Customisable loan structures tailored to meet the specific needs of individual companies.
  • Committed capital. Bank lenders typically need to syndicate or sell a portion of their middle-market loans, while non-banks do not.
  • Experience. Specialised knowledge with a deep understanding of challenges faced by middle-market companies, as well as niches by industry and geography.
  • Speed. Focused approach enables faster and more efficient access to capital.
  • Relationship-orientated. Facilitates ongoing communication and collaboration, which results in support beyond the initial financing.

Middle-market direct lending exhibits strong defensive traits, enabling the strategy to adeptly navigate the current uncertain environment:

  • Attractive income. Higher annualised yields relative to fixed income instruments such as high yield and treasuries.

Middle-market direct lending - attractive income

  • Risk-adjusted returns. Attractive historical performance relative to fixed-income instruments (again, such as high yield and treasuries).

Middle-market direct lending: return vs volatility

  • Hedge against rising rates. Floating rate structure neutralises duration risk from interest-rate movement.
  • Senior and secured. Priority in the borrower’s capital structure with robust lender protection through covenants to reduce risk.

Covenants to reduce risk

Because of Prospect Capital Management’s achievements in middle-market direct lending, investors have placed their trust in the firm’s long-term expertise and track record to protect their capital and generate returns. The firm has over 100 employees and $11.5bn in assets under management as of March 31, 2023.

Prospect is currently offering an institutional-calibre middle-market direct lending solution for income-focused retail investors. Prospect Floating Rate and Alternative Income Fund (PFLOAT) is a non-traded business development company. PFLOAT invests primarily in the debt of privately-owned US middle-market companies and seeks to provide income largely from investing in senior and secured floating rate credits.

PFLOAT’s common stock pays a monthly dividend.

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