Direct lending posted 9% gross return for 2017: Cliffwater index

The industry benchmark showed an almost 10% gross return for the strategy since September 2004.

Annual returns for direct lending dropped several percentage points last year, notching 8.62 percent gross, compared with 11.24 percent gross in 2016, according to one industry benchmark.

The Cliffwater Direct Lending Index reported that the cumulative gross return since September 2004, at 9.70 percent, surpassed last year’s gross returns. The index spans over 6,000 direct loans amounting to $91 billion in assets.

The CDLI draws the total return from three different areas: income, net realised gains or losses and unrealised gains or losses. For 2017, income returns were 10.16 percent, while realised losses and unrealised gains stood at -1.75 percent and 0.33 percent, respectively.

Los Angeles-based Cliffwater developed the CDLI in 2015 and using quarterly Securities and Exchange Commission filings calculated the quarterly returns back to September 2004. In the report, the firm explained it had used SEC filings to “eliminate common biases of survivorship and self-selection” present in other industry benchmark and indices.

While the past performance data sheds a positive light on direct lending specifically, projections from data provider Pitchbook paint a rosy picture for the larger private debt universe as well.

An analyst note from the firm puts the 10-year horizon internal rate of return at 8.2 percent for asset class, compared to the project 8 percent for venture capital and 9.6 percent for private equity funds. The recent increase in maximum allowable leverage for business development companies will increase competition among the alternative lenders.