In addition to goals-based planning, they can provide genuine diversification to portfolios, with low correlations to conventional equity and bond markets, and a predictable rate of return.
Understanding risk and allocations
The level of risk an investor is willing to accept will be crucial when determining if a direct lending investment is right for them.
Direct lending takes many guises, and the level of risk can vary significantly across different products. Not all direct lenders are created equal and what separates them is not only how successfully they make loans, but who they extend credit to and the collateral that they secure loans against.
Some direct lenders provide loans to consumers - others to SMEs.
The way in which they structure products is widely differentiated too.
Getting under the bonnet of a direct lending offer is as important as understanding the investment process, strategy and composition of any equity, bond or multi-asset fund.
Each individual direct lending investment may be exposed to a diverse spread of sectors, differing in size and loan terms, combining to provide investors with diversification within their investment.
Many direct lending funds use secured assets, such as asset backed finance, loans with debentures or project financing.
Direct lending also brings a number of structural protections which shields investors from the risk of loss. Some providers focus on peer-to-peer investments; others offer bonds that are secured against large portfolios of businesses, meaning that the impact of any individual default does not impact on returns.
The UK appears to be showing a greater interest in direct lending strategies.
Products for institutional investors have existed for some time, but appetite is now starting to increase among consumers and consequently the number of consumer-focused products is growing.
A survey by AKG revealed that over half (53 per cent) of the financial advisers questioned had been asked by their clients about products exposed to SME credit/direct lending.
Intermediaries have a big role to play in the future success of the asset class.
As trusted professionals, IFAs prepared to research and understand the direct lending products out there are well positioned to provide their clients with the confidence and insight they need to make informed decisions and achieve reliable and attractive outcomes.
Belinda Thomas is a partner at Triple Point Investment Management
