Some big investors are skeptical on direct lending craze

investmentnews.com:

Private credit is going through a golden era, according to its fans, but a handful of asset managers are refusing to be dazzled by the biggest part of the booming $1.5 trillion market: direct lending.

Swiss Life’s investment arm and Scotland’s Baillie Gifford are avoiding the direct-lending craze in part because of transparency fears, a lack of liquidity and the good returns on offer elsewhere. Abrdn Plc says it lends to investment-grade borrowers, but not to the riskier companies that make up much of this market. The three firms manage about $1 trillion combined.

Their caution runs counter to other large funds, which are scrambling for a piece of the private-debt action in the hope that high fees will juice their profits and stop investor outflows. Swiss Life Asset Managers and Baillie Gifford say the returns on company loans aren’t hefty enough to make up for the difficulty of trading them compared to other asset classes.

“We don’t think there’s much of an illiquidity premium any more on private assets in general,” says Daniel Holtz, Swiss Life AM’s head of credit, in an interview with Bloomberg. “Especially when you consider what the private equity shops have paid for and the leverage they employ, it’s difficult to see those deals working with a higher cost of capital.”

Torcail Stewart, an investment manager at Baillie Gifford’s Strategic Bond Fund, says there are now “ample opportunities” to buy easily tradeable junk and investment-grade bonds “at low cash prices on very appealing yields.”

“The ‘search for yield’ days are over,” he adds. “So why chase more illiquid instruments like loans?”

Direct-loan funds — which typically lend cash straight to midsized companies that are private equity owned or have riskier