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For direct lending into complex situations, transactions are sourced directly from middle-market companies both in the US and in Europe. We anticipate that a certain percentage of middle-market firms will experience a complex situation requiring an opportunistic credit solution. Under normal circumstances, an estimated 5% of middle-market borrowers will require customized opportunistic financing, leading to a market size of more than USD 80 billion, potentially increasing during an economic downturn.

For secondary situations, market opportunities arise in the syndicated loan market. Based on a market size of USD 1.61 trillion,[6] and assuming that on average 22% of loans trade below 80% of par during a recession, as demonstrated in the GFC, we estimate the market for opportunistic lending to be approximately USD 350 billion. To profit from secondary opportunities, managers must have sufficient capital at hand and be able to act swiftly.

There are several drivers supporting the growth of the opportunistic lending market:

 Borrower experience of private debt: Given the increasing prevalence of direct lending in the middle market, borrowers (in certain complex situations) are gaining a more detailed understanding of non-bank financing and becoming more open to opportunistic lending, especially given the lack of other options.

 Post-COVID-19 environment: The borrower-friendly environment prevailing before the COVID-19 outbreak pushed leverage to pre-GFC levels; most leveraged loans were covenant lite. The increased uncertainty about future economic conditions as well as liquidity concerns could trigger further downgrades and exacerbate outflows of capital, particularly from CLO investors, in the leveraged loan market. This would lead to some value dislocation from credit fundamentals and present investment opportunities on the secondary market for selective managers.

 Bank deleveraging balance sheets: Within Europe, regulatory reforms through Basel III have increased capital requirements for banks. As sub-investment-grade corporate risk attracts the highest capital charges, banks are motivated sellers for these assets to meet the capital requirements. In 2016, European banks held an estimated EUR 700 billion in non-core corporate loans.[7] This represents a significant source of potential deals for opportunistic lenders.