{"id":23946,"date":"2024-05-20T05:00:00","date_gmt":"2024-05-20T12:00:00","guid":{"rendered":"https:\/\/www.stepstonegroup.com\/?p=23946"},"modified":"2024-05-17T11:12:16","modified_gmt":"2024-05-17T18:12:16","slug":"direct-lending-market-update","status":"publish","type":"post","link":"https:\/\/www.stepstonegroup.com\/news-insights\/direct-lending-market-update\/","title":{"rendered":"Direct lending market update"},"content":{"rendered":"<h1>Executive summary<\/h1>\n<ul>\n<li><strong>Priced for perfection<\/strong>\u2014Public markets rallied in 2H23, driven by the expectation of early monetary easing. This momentum extended into early 2024, particularly in equity markets, reflecting investor optimism for continued economic resilience and growth. However, this optimism may be prematurely pricing a near-perfect macroeconomic scenario for 2024, potentially vulnerable to geopolitical tensions, persistently high inflation and sustained high interest rates.<\/li>\n<li><strong>Spreads & lending terms<\/strong>\u2014Direct lending showcased strong returns and stable yields through 2023, supported by higher base rates and favorable lending terms. While spreads slightly compressed at the end of the year, total leverage and interest coverage ratios seem to have stabilized. Middle-market companies exhibited strong earnings, especially toward year end, suggesting resilience despite macroeconomic uncertainties.<\/li>\n<li><strong>Transaction activity<\/strong>\u2014Despite a slowdown in private equity activity due to macroeconomic challenges, late 2023 saw an uptick in transactions for direct lending loans towards LBOs, likely driven by the need for private equity firms to deploy capital. This resurgence aligns with increased M&A activity observed early in 2024, offering promising deployment opportunities for direct lenders going forward.<\/li>\n<li><strong>US exceptionalism<\/strong>\u2014The US economy\u2019s resilience contrasts with Europe\u2019s minimal growth, underpinning regional disparities. Inflation has decreased faster than anticipated for most regions, leading to revised interest rate expectations. Central banks are now expected to cut rates in 2024, reflecting a more dovish monetary policy outlook. At the same time, however, the number of rate cuts from Fed have been continuously lowered since the start of 2024, likely correlating with the unexpected strength of the US economy.<\/li>\n<li><strong>Relative value<\/strong>\u2014While the rally in public markets signals investor optimism for 2024, it carries the potential for significant risks around overly optimistic valuations. By comparison, direct lending presents a compelling investment opportunity, underscored by attractive risk-adjusted returns. Direct lending usually performs better than many asset classes in times of financial stress while still offering attractive returns in normal times.<\/li>\n<\/ul>\n<h2>Public markets<\/h2>\n<h3>Strong rally driven by potentially overly optimistic sentiment<\/h3>\n<p>The second half of 2023 began rather muted for public markets, but the dynamic reversed significantly with a strong rally in the last two months across all asset classes, likely spurred by the anticipation of earlier-than-expected monetary easing. This shift in market dynamics suggested a growing optimism among investors about the potential for cheaper borrowing costs to stimulate growth. This enthusiasm has continued through the start of 2024 as most asset classes built further on their gains, especially in the equity markets. Buoyed by expectations of continued positive economic and financial conditions, investors appear ready to embrace higher risks in pursuit of greater returns (<strong>Figure 1<\/strong>).<\/p>\n\n\n<div class=\"infogram-embed\" data-id=\"a8bb6cff-ab1d-409c-8125-63bd7ca7be74\" data-type=\"interactive\" data-title=\"DL market update figure 1\"><\/div><script>!function(e,n,i,s){var d=\"InfogramEmbeds\";var o=e.getElementsByTagName(n)[0];if(window[d]&&window[d].initialized)window[d].process&&window[d].process();else if(!e.getElementById(i)){var r=e.createElement(n);r.async=1,r.id=i,r.src=s,o.parentNode.insertBefore(r,o)}}(document,\"script\",\"infogram-async\",\"https:\/\/e.infogram.com\/js\/dist\/embed-loader-min.js\");<\/script>\n\n\n<h3>\u00a0<\/h3>\n<h3>A “priced for perfection” situation in public markets in early 2024<\/h3>\n<p>However, the recent rally in public markets may carry significant risks for investors as markets are expecting a near-perfect macroeconomic landscape in 2024. This sentiment is directly related to the assumption that developed economies will achieve a \u201csoft landing,\u201d where growth stays resilient and inflation decreases towards central banks\u2019 targets. While there is certainly potential for a cycle of monetary easing, the recent rally in public markets may be vulnerable to geopolitical and inflationary risks. For instance, central banks may be forced to maintain high interest rates for a longer period, in turn pressuring company earnings and financial health. Put simply, a \u201csoft landing\u201d leaves little room for error, with adverse shocks potentially leading to material losses as possibly too low risk compensations are priced in.<\/p>\n<p>An early indicator of those potentially too optimistic market expectations is the current level of spreads in the public debt markets. As of March 2024, the spreads are even lower than their long-term average (<strong>Figure 2<\/strong>). However, the uncertainty has not disappeared, and unexpected economic shocks could still upset the macroeconomic environment. With the market potentially underestimating the possibility for downside risks, it may be too soon to drive spreads below their long-term average.<\/p>\n\n\n<div class=\"infogram-embed\" data-id=\"cf424240-93fd-4f71-a7b0-e297568252a0\" data-type=\"interactive\" data-title=\"DL market update figure 2\"><\/div><script>!function(e,n,i,s){var d=\"InfogramEmbeds\";var o=e.getElementsByTagName(n)[0];if(window[d]&&window[d].initialized)window[d].process&&window[d].process();else if(!e.getElementById(i)){var r=e.createElement(n);r.async=1,r.id=i,r.src=s,o.parentNode.insertBefore(r,o)}}(document,\"script\",\"infogram-async\",\"https:\/\/e.infogram.com\/js\/dist\/embed-loader-min.js\");<\/script>\n\n\n<\/p>\n\n\n<section id=\"intro-stripe-block_db52e6054155e0f1cb5f963eb82ee12f\" class=\"w-block w-intro-stripe w-fc overflow-hidden py-[40px] lg:py-[80px]\">\n <style>\n #intro-stripe-block_db52e6054155e0f1cb5f963eb82ee12f {\n --section-bg: #F2EFF1;\n --content-bg: #445460;\n }\n <\/style>\n\n <div class=\"row justify-center\">\n <div class=\"columns small-12 large-8\">\n <div class=\"intro-stripe__content text-center p-[28px]\">\n <h2 class=\"text-[26px] leading-[1.3] lg:text-[36px] lg:leading-[1.22222] font-light text-white\">Read the full paper here<\/h2>\n \n \n <div class=\"intro-stripe-content__cta text-center\">\n <a href=\"https:\/\/www2.stepstonegroup.com\/Direct_lending_market_update\" target=\"_blank\" class=\"button\">\n Download <\/a>\n <\/div>\n <\/div>\n <\/div>\n <\/div>\n<\/section>\n\n\n<section id=\"insights-block_0f40d276242dc299595c7e666152d239\" class=\"w-block w-insights layout-slider w-fc no-pad overflow-hidden mb-[92px] lg:mb-[145px]\">\n <div class=\"row f-grid row-collapse items-center\">\n <div class=\"columns small-12 large-6\">\n <div class=\"insights__content\">\n <h3 class=\"insights__section-title text-[20px] lg:text-[30px] leading-[1.3] font-light text-highlight mb-[22px] lg:mb-[30px]\">\n Explore more on private debt <\/h3>\n \n \n <\/div>\n <\/div>\n\n <div class=\"columns small-12 large-6\">\n <div class=\"lg:ml-[-85px] lg:py-[58px] md-down:pb-[60px] md-down:px-[16px] overflow-x-hidden lg:w-[54vw]\">\n <div class=\"insights-swiper swiper overflow-visible\">\n <div class=\"swiper-wrapper\">\n <div class=\"insights-item flex flex-col swiper-slide max-w-[320px] lg:max-w-[416px] mr-[24px] revealator-slideup revealator-duration10 revealator-delay2\">\n <div class=\"insights-item__image flex-[0_0_auto] bg-slate relative has-img\">\n <div class=\"image-wand\"><\/div>\n\n <a href=\"https:\/\/www.stepstonegroup.com\/news-insights\/deployment-and-sourcing-channels-in-direct-lending\/\" class=\"block\" aria-label=\"Deployment and sourcing channels in direct lending\">\n <img decoding=\"async\" loading=\"lazy\" class=\"mx-auto w-full object-cover\" src=\"https:\/\/www.stepstonegroup.com\/wp-content\/uploads\/2024\/04\/1-416x208.png\" alt=\"PD snapshot 6 market insight cover image\">\n <\/a>\n <\/div>\n\n <div class=\"insights-item__content flex-[1_1_0] bg-clay pb-[20px] px-[30px]\">\n <div class=\"relative pt-[20px]\">\n <div class=\"content-wand\"><\/div>\n\n <div class=\"mb-[10px] text-[14px] leading-[1.3] font-medium uppercase\">\n <a class=\"bg-sea-green text-white py-[6px] px-[12px] inline-block no-underline hover:bg-slate\" href=\"https:\/\/www.stepstonegroup.com\/category\/market-insights\/\">Market insights<\/a>\n <\/div>\n \n <h4 class=\"text-[17px] leading-[1.3] lg:text-[24px] lg:leading-[1.16667] font-medium mb-[4px] lg:mb-[10px] text-slate\">\n <a href=\"https:\/\/www.stepstonegroup.com\/news-insights\/deployment-and-sourcing-channels-in-direct-lending\/\" class=\"inline-block color-inherit no-underline hover:underline\">\n Deployment and sourcing channels in direct lending <\/a>\n <\/h4>\n <\/div>\n\n <\/div>\n <\/div>\n<div class=\"insights-item flex flex-col swiper-slide max-w-[320px] lg:max-w-[416px] mr-[24px] revealator-slideup revealator-duration10 revealator-delay4\">\n <div class=\"insights-item__image flex-[0_0_auto] bg-slate relative has-img\">\n <div class=\"image-wand\"><\/div>\n\n <a href=\"https:\/\/www.stepstonegroup.com\/news-insights\/corporate-private-debt-primer\/\" class=\"block\" aria-label=\"Corporate private debt primer\">\n <img decoding=\"async\" loading=\"lazy\" class=\"mx-auto w-full object-cover\" src=\"https:\/\/www.stepstonegroup.com\/wp-content\/uploads\/2024\/04\/20240105-Corporate-private-debt-explained-whitepaper-416x208.png\" alt=\"Corporate private debt explained whitepaper cover image\">\n <\/a>\n <\/div>\n\n <div class=\"insights-item__content flex-[1_1_0] bg-clay pb-[20px] px-[30px]\">\n <div class=\"relative pt-[20px]\">\n <div class=\"content-wand\"><\/div>\n\n <div class=\"mb-[10px] text-[14px] leading-[1.3] font-medium uppercase\">\n <a class=\"bg-sea-green text-white py-[6px] px-[12px] inline-block no-underline hover:bg-slate\" href=\"https:\/\/www.stepstonegroup.com\/category\/white-papers\/\">Whitepapers<\/a>\n <\/div>\n \n <h4 class=\"text-[17px] leading-[1.3] lg:text-[24px] lg:leading-[1.16667] font-medium mb-[4px] lg:mb-[10px] text-slate\">\n <a href=\"https:\/\/www.stepstonegroup.com\/news-insights\/corporate-private-debt-primer\/\" class=\"inline-block color-inherit no-underline hover:underline\">\n Corporate private debt primer <\/a>\n <\/h4>\n <\/div>\n\n <\/div>\n <\/div>\n<div class=\"insights-item flex flex-col swiper-slide max-w-[320px] lg:max-w-[416px] mr-[24px] revealator-slideup revealator-duration10 revealator-delay6\">\n <div class=\"insights-item__image flex-[0_0_auto] bg-slate relative has-img\">\n <div class=\"image-wand\"><\/div>\n\n <a href=\"https:\/\/www.stepstonegroup.com\/news-insights\/what-does-all-weather-mean-for-private-debt\/\" class=\"block\" aria-label=\"What does \"all weather\" mean for private debt?\">\n <img decoding=\"async\" loading=\"lazy\" class=\"mx-auto w-full object-cover\" src=\"https:\/\/www.stepstonegroup.com\/wp-content\/uploads\/2023\/12\/231019-125641-STEPSTONE2023FallAnnual-NNT-01190-416x208.jpg?theia_smart_thumbnails_file_version=2\" alt=\"2023 360 Conference – Ariel and Jovan\">\n <\/a>\n <\/div>\n\n <div class=\"insights-item__content flex-[1_1_0] bg-clay pb-[20px] px-[30px]\">\n <div class=\"relative pt-[20px]\">\n <div class=\"content-wand\"><\/div>\n\n <div class=\"mb-[10px] text-[14px] leading-[1.3] font-medium uppercase\">\n <a class=\"bg-sea-green text-white py-[6px] px-[12px] inline-block no-underline hover:bg-slate\" href=\"https:\/\/www.stepstonegroup.com\/category\/videos\/\">Videos<\/a>\n <\/div>\n \n <h4 class=\"text-[17px] leading-[1.3] lg:text-[24px] lg:leading-[1.16667] font-medium mb-[4px] lg:mb-[10px] text-slate\">\n <a href=\"https:\/\/www.stepstonegroup.com\/news-insights\/what-does-all-weather-mean-for-private-debt\/\" class=\"inline-block color-inherit no-underline hover:underline\">\n What does “all weather” mean for private debt? <\/a>\n <\/h4>\n <\/div>\n\n <\/div>\n <\/div>\n<div class=\"insights-item flex flex-col swiper-slide max-w-[320px] lg:max-w-[416px] mr-[24px] revealator-slideup revealator-duration10 revealator-delay8\">\n <div class=\"insights-item__image flex-[0_0_auto] bg-slate relative has-img\">\n <div class=\"image-wand\"><\/div>\n\n <a href=\"https:\/\/www.stepstonegroup.com\/news-insights\/credit-opportunities-liquidity-dislocation-and-relative-value\/\" class=\"block\" aria-label=\"Credit opportunities: Liquidity, dislocation and relative value\">\n <img decoding=\"async\" loading=\"lazy\" class=\"mx-auto w-full object-cover\" src=\"https:\/\/www.stepstonegroup.com\/wp-content\/uploads\/2023\/12\/231019-150944-STEPSTONE2023FallAnnual-NNT-01605-416x208.jpg?theia_smart_thumbnails_file_version=2\" alt=\"2023 360 Conference John Bohill and Mark Tsang\">\n <\/a>\n <\/div>\n\n <div class=\"insights-item__content flex-[1_1_0] bg-clay pb-[20px] px-[30px]\">\n <div class=\"relative pt-[20px]\">\n <div class=\"content-wand\"><\/div>\n\n <div class=\"mb-[10px] text-[14px] leading-[1.3] font-medium uppercase\">\n <a class=\"bg-sea-green text-white py-[6px] px-[12px] inline-block no-underline hover:bg-slate\" href=\"https:\/\/www.stepstonegroup.com\/category\/videos\/\">Videos<\/a>\n <\/div>\n \n <h4 class=\"text-[17px] leading-[1.3] lg:text-[24px] lg:leading-[1.16667] font-medium mb-[4px] lg:mb-[10px] text-slate\">\n <a href=\"https:\/\/www.stepstonegroup.com\/news-insights\/credit-opportunities-liquidity-dislocation-and-relative-value\/\" class=\"inline-block color-inherit no-underline hover:underline\">\n Credit opportunities: Liquidity, dislocation and relative value <\/a>\n <\/h4>\n <\/div>\n\n <\/div>\n <\/div>\n<div class=\"insights-item flex flex-col swiper-slide max-w-[320px] lg:max-w-[416px] mr-[24px] revealator-slideup revealator-duration10 revealator-delay10\">\n <div class=\"insights-item__image flex-[0_0_auto] bg-slate relative has-img\">\n <div class=\"image-wand\"><\/div>\n\n <a href=\"https:\/\/www.stepstonegroup.com\/news-insights\/diversification-in-direct-lending\/\" class=\"block\" aria-label=\"Diversification in direct lending\">\n <img decoding=\"async\" loading=\"lazy\" class=\"mx-auto w-full object-cover\" src=\"https:\/\/www.stepstonegroup.com\/wp-content\/uploads\/2023\/11\/2-416x208.png\" alt=\"2\">\n <\/a>\n <\/div>\n\n <div class=\"insights-item__content flex-[1_1_0] bg-clay pb-[20px] px-[30px]\">\n <div class=\"relative pt-[20px]\">\n <div class=\"content-wand\"><\/div>\n\n <div class=\"mb-[10px] text-[14px] leading-[1.3] font-medium uppercase\">\n <a class=\"bg-sea-green text-white py-[6px] px-[12px] inline-block no-underline hover:bg-slate\" href=\"https:\/\/www.stepstonegroup.com\/category\/white-papers\/\">Whitepapers<\/a>\n <\/div>\n \n <h4 class=\"text-[17px] leading-[1.3] lg:text-[24px] lg:leading-[1.16667] font-medium mb-[4px] lg:mb-[10px] text-slate\">\n <a 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listening to podcast\">\n <\/a>\n <\/div>\n\n <div class=\"insights-item__content flex-[1_1_0] bg-clay pb-[20px] px-[30px]\">\n <div class=\"relative pt-[20px]\">\n <div class=\"content-wand\"><\/div>\n\n <div class=\"mb-[10px] text-[14px] leading-[1.3] font-medium uppercase\">\n <a class=\"bg-sea-green text-white py-[6px] px-[12px] inline-block no-underline hover:bg-slate\" href=\"https:\/\/www.stepstonegroup.com\/category\/podcasts\/\">Podcasts<\/a>\n <\/div>\n \n <h4 class=\"text-[17px] leading-[1.3] lg:text-[24px] lg:leading-[1.16667] font-medium mb-[4px] lg:mb-[10px] text-slate\">\n <a href=\"https:\/\/www.stepstonegroup.com\/news-insights\/rpm-ep-36-building-a-private-debt-portfolio-with-christian-frei\/\" class=\"inline-block color-inherit no-underline hover:underline\">\n RPM\u2014Ep.36 | Building a private debt portfolio with Christian Frei <\/a>\n <\/h4>\n <\/div>\n\n <\/div>\n <\/div>\n <\/div> \n <div class=\"swiper-button-next\"><\/div>\n <div class=\"swiper-button-prev\"><\/div>\n\n <\/div>\n <\/div>\n <\/div>\n <\/div>\n<\/section>\n","protected":false},"excerpt":{"rendered":"<p>Executive summary Priced for perfection\u2014Public markets rallied in 2H23, driven by the expectation of early monetary easing. This momentum extended into early 2024, particularly in equity markets, reflecting investor optimism for continued economic resilience and growth. However, this optimism may be prematurely pricing a near-perfect macroeconomic scenario for 2024, potentially vulnerable to geopolitical tensions, persistently […]<\/p>\n","protected":false},"author":15,"featured_media":23945,"comment_status":"closed","ping_status":"closed","sticky":true,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[377],"tags":[153],"coauthors":[386],"class_list":["post-23946","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-white-papers","tag-private-debt"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v24.4 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Direct lending market update - StepStone Group<\/title>\n<meta name=\"description\" content=\"Executive summary Priced for perfection\u2014Public markets rallied in 2H23, driven by the expectation of early monetary easing. 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