With established managers concentrating on increasing large deals, an opportunity has emerged in the relationship-based core mid-market, according to Corinthia’s Mark Wilton.
2024 was another strong year for direct lending fundraising. However, a key trend has been the growing concentration of fundraising by a small group of managers raising mega funds. This dynamic raises two important questions. Is it harder for new entrants to raise capital and establish themselves? And, does it make sense for an LP to support a new institution?
How do you see the opportunity set within the private debt market evolving?
The private debt market continues to grow and mature, and it is increasingly becoming a core allocation in investors’ portfolios. As at year end 2024, the private credit asset class is estimated to stand at US$2tn. Although dominated by direct lending, private credit includes a range of strategies from opportunistic credit to NAV finance and asset-backed financing. Across the full opportunity set, the addressable market was recently estimated to be as large as $30trillion.
The asset class delivers attractive risk premia to investors (illiquidity, credit and low duration) as well as valuable financing solutions for borrowers, making it a critical component of the financial ecosystem. For this reason, we believe that the asset class is here to stay and set to grow; but as it evolves, we will see segmentation within private credit and within its ‘sub-strategies’ including direct lending.
Direct lending is one component of the private debt world and, to date, remains the largest segment. Within direct lending we are seeing more segmentation, between sponsor-backed or non-sponsor backed strategies, many industry specialist strategies and, most significantly, across borrower size and lender scale. This is particularly stark between the core middle market, where bilateral relationships and direct origination are the norm, and the upper middle market, where deals become far more transactional and shared by multiple lenders in a club. As the larger managers have raised increasingly large funds and shifted their focus towards large-cap transactions, we see more choice for investors and borrowers. We see a gap – and an opportunity – in the core mid-market.
How can new entrants compete?
To be successful as a new entrant in the direct lending market, managers must have a clearly differentiated offering. As the direct lending market has evolved, lenders have achieved varied degrees of success, and some have failed. Investors understand that not all direct lending managers are the same and will expect any new player in the market to have a clear and differentiated offering. Corinthia’s strategy is focused on the relationship-driven core mid-market, and we prioritise a conservative and disciplined investment approach rather than chasing yield. Furthermore, we set ourselves apart from most new entrants by starting out with a 20+ strong investment team that has been working together for the last 10-20 years.
Mid-market sponsors choose lenders that can support them through the investment lifecycle.
Mark Wilton, Corinthia
Does differentiation matter to LPs?
Yes, differentiation offers the benefits of diversification. In a world where we have seen larger managers move up market to participate in very large transactions, usually as part of a club, LPs with allocations to numerous large-cap managers risk overlapping exposure. The evolution of private credit (and direct lending) into multiple sub-strategies offers investors the opportunity to run diversified exposure to private credit, and to balance large-cap credit risk with mid-market direct lending to mitigate concentration risk.
Many UK LPs care about financing and supporting UK companies, does your strategy tie into this?
Historically about 40% of our activity in Europe has focused on the UK, the largest market in Europe for direct lending, as a result of the deep penetration of private equity. I have been doing this for close to 30 years and strongly believe financing mid-market companies in the UK has been a fantastic way to impact the real economy. The UK mid-market makes up less than 1% of all UK companies but accounts for over 25% of UK employment. These companies are real engines of growth and innovation, contributing approximately 30% of UK economic gross value add. So yes, our strategy is all about supporting growing businesses and, I believe, has as very meaningful, albeit indirect, impact on the UK economy.
What are the key barriers to entry to the direct lending mid-market?
While the mid-market is a natural entry point for new firms, it is also a challenging one. If a large cap sponsor is looking to raise a $2bn facility, it is likely to speak to a significant number of parties and seek to build a club deal with multiple lenders. The transaction is more like a capital markets transaction, in the sense that it focuses on whether the lenders have the capacity for the transaction and if they are willing to accept the terms that are on offer.
The mid-market is different; access is via relationships, which come with experience and years of working with private equity sponsors and deal introducers. A new entrant would need to demonstrate that they have access and experience. Mid-market sponsors choose lenders that can support them through the investment lifecycle – from funding acquisitions to navigating challenges. Success hinges on reputation, reliability and collaborative partnership – not just the ability to provide capital.
We see a gap – and an opportunity – in the core mid-market.
Mark Wilton, Corinthia
From an LP’s perspective, is it worth the risk to back a new group?
We believe it is, because with change comes opportunity. New managers will be motivated to be competitive. For large institutions, this is an opportunity to form deep relationships early on and create partnerships that offer mutual benefit. For smaller LPs, this can mean more attractive terms than they would be able to source from a more established name. As not all new entrants are the same, there is a need to scratch beneath the surface to understand origination capabilities, investment philosophy and critically the operational set-up. However, if the new manager passes these tests, we believe compelling opportunities lie ahead.
Is there still room for new entrants?
I believe there is still room for new market entrants. The market continues to grow, and the asset class remains attractive to investors looking to build yield and diversification into their portfolios. While large-cap credit is an essential component of LP portfolios, non-correlated strategies such as mid-market lending play a vital role in balancing risk. For new entrants, the key to success is to have a clear and differentiated strategy, and if in the mid-market, an evidencable network of relationships with introducers to demonstrate access.
Corinthia is a new name in direct lending and benefits from a clearly differentiated strategy. It also benefits from its investment team’s experience and relationships. Our focus is on the core relationship-driven mid-market, in which our experienced team has worked together for decades. Furthermore, we prioritise a conservative and disciplined investment approach. With these qualities, we believe the answer to the question is a loud and clear ‘yes’. Watch this space.