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Returns Wanted! Opportunities in Private Middle Market Lending

June 2013
Four years after the turmoil of the 2008 credit crisis, continued political and economic malaise has forced monetary policymakers to prolong and enhance their stimulus of capital markets. Yet, as successive waves of monetary stimulus have caused market participants across the board to pursue risky assets in pursuit of yield, a specific set of structural forces at work in the market for corporate credit has caused a bifurcation in the cost of capital for large versus small and medium sized creditors. Currently, the cost of credit for small and medium sized corporate borrowers in the private market is up to 4-5% higher than for large issuers of comparable credit quality issuing publicly traded bonds. For investors with an ability to accept illiquidity, strategies designed to capitalize on this lending opportunity offer an attractive premium over public bond markets. In this paper, we will lay out the options available for investors seeking to participate in private middle market lending. We then turn to a brief exploration of the forces that have created these conditions and why they are likely to persist for some time.

 

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