Cliffwater draws up direct lending index

The US consulting firm has constructed a performance index for US mid-market lending based on private and public BDC performance tracing back to 2004.  

US institutional consulting firm Cliffwater has created the first benchmark designed to evaluate the relative performance of US direct lending managers.

The lack of a proper benchmark for the various sub-sets of the asset class is often cited by investors and advisors as one of the difficulties with assessing private debt opportunities.

The California-based advisor announced last week that it has created the Cliffwater Direct Lending Index (CDLI) based on the performance of public and private business development companies (BDCs) between September 2004 and September 2015.

Steve Nesbitt, Cliffwater’s chief executive, told PDI he recommends his institutional clients invest about 5-10 percent of their portfolios in direct lending strategies.

The index is currently comprised of over 5000 direct loans valued at about $75 billion. The yields for the CDLI index have been historically stable over this time period, ranging between 10 percent and 12 percent, the index revealed.

The Cliffwater research also showed that the CDLI is well diversified across industry groups, mirroring the composition of the US mid-market. It could also be less risky than investing in high-yield bonds. “For example, energy debt, a higher risk exposure currently, equals a modest 3 percent of total assets compared to over 10 percent in the Barclays High-Yield Bond Index.”

The research concluded that mid-market direct loans deliver a stable yield over time and have fewer losses than high-yield bonds and leveraged loans.

When comparing CDLI returns to other alternative and traditional asset classes, Cliffwater posited that the CDLI index returns, at 9.92 percent, outpaced other traditional and alternative asset classes, except for private equity, which came in at 14.72 percent over the same time period as measured by the Cambridge buyout index.

The Cliffwater index doesn’t take into account management fees and leverage normally associated with private closed-end funds as it is based on BDC assets. In a calculation that adds moderate leverage, 1.25 percent in management fees and incentive fees of 15 percent, Cliffwater estimates that private funds would still deliver about 10.22 percent.