Survey Indicates Cautious Optimism for the CLO and Direct Lending Markets
The CLO market is showing cautious signs of optimism with expectations for increased M&A activity and evolving demand, despite concerns about risk premiums and market concentration.
The findings come from a recent survey conducted at the Natixis CIB 7th Annual Direct Lending Finance / CLO Forum in New York, which gathered more than 225 professionals for a day of detailed discussions around the direct lending and related financing markets. The group heard from 24 speakers including direct lending originators and financing professionals, private equity sponsors, economists, investors, and Chief Executive Officers.
We had the opportunity to poll attendees throughout the conference. The insights collected offer a comprehensive view of the sentiments and expectations within the CLO market from a diverse range of respondents, from investors and issuers to a variety of service providers to the industry.
Our SPG Americas (Securitized Products Group) breaks down the major findings and what they say about the current state and outlook of the CLO market.
M&A Volume Accelerating at Moderate Pace
A notable finding from the survey is the outlook on M&A activity, with 48.15% of respondents expecting a modest acceleration in the near to mid-term. This positive sentiment indicates that market participants are anticipating increased transaction volumes, likely driven by favorable conditions for strategic acquisitions. Conversely, 35.80% foresee the status quo continuing, suggesting that while there is optimism, there are also prevailing uncertainties that may hinder more aggressive growth.
Risk Premiums Likely to Widen
The survey also highlighted concerns regarding risk premiums in the CLO market, with nearly half of respondents (48.15%) predicting that risk premiums will widen. This cautious outlook suggests that participants are wary of rising credit risks, possibly influenced by macroeconomic factors and market volatility driven by uncertainty in overall economic and market momentum.
Private Credit: Consolidation or Fragmentation?
The expectation of consolidation in private credit, noted by a striking 76.54% of respondents, indicates a trend towards a more concentrated market where larger players may dominate, potentially impacting competition and pricing. Recent high profile acquisitions including BlackRock purchasing HPS Investment Partners, Blue Owl Capital’s multiple acquisitions including Kuvare Asset Management and Atalaya Capital Management, and Wendel Group’s acquisition of Monroe Capital appear to highlight a trend of consolidation in both direct lending and private credit generally.
Equity Support for Direct Lending CLOs
On the demand front, there is a strong belief in the increasing interest for third-party equity in Direct Lending CLOs, with 53.09% of respondents anticipating a modest increase. This trend aligns with the growing appetite for CLO investments, particularly as market dynamics evolve.
New Structures
During the event, there was a focused discussion of alternative sources of capital to direct lenders beyond traditional CLOs, LP/GP structures and BDCs. The anticipated growth in Rated Feeder structures, with 54.32% of respondents expecting a modest increase in acceptance and usage, points to a shift in how direct lenders may structure and market investment options in the future. This trend could enhance the attractiveness of rated, optimized investments in private credit strategies to a wider range of investors, further driving market growth.
The Takeaway
Overall, the survey results paint a cautiously optimistic picture of the direct lending market and the related Private Credit/Middle Market CLO market, marked by expectations of increased M&A activity, evolving demand for equity, and potential shifts in market structures. While there are concerns about risk premiums and market concentration, the prevailing sentiment suggests that participants are preparing for a dynamic and evolving landscape in the Direct Lending and CLO sectors.
