Whitepaper - Fidelity Investments - Direct lending: Does borrower size matter? A closer look at risk and returns.

Fidelity’s head of direct lending David Gaito and Fidelity direct lending institutional portfolio manager Audie Apple share their insights on why bigger is not necessarily better for direct lending.

The growth of direct lending, despite a large and diverse investment opportunity set, has led to a narrative that centers around larger borrowers. Strategies across the size spectrum have their merits and in fact may be complementary, serving to further enhance diversification and more fully capture the opportunity across the spectrum in the asset class. The amount of leverage in the capital structure as well as the presence of financial covenants (or lack thereof) are critical factors to consider for a more fulsome perspective on the risk profile of direct lending strategies. Further, the higher organic returns associated with lower middle market loans may also reduce the reliance on portfolio leverage resulting in more attractive risk-adjusted returns to investors.

Authors:

David Gaito, CFA Head of Direct Lending, Fidelity Investments
Audie Apple, Direct Lending Institutional Portfolio Manager, Fidelity Investments

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