Private lending's inherent advantages have kept the growing asset class well insulated against stock- and bond market volatility in recent months, according to new commentary from John Howe, CEO of direct lending specialist Old Hill Partners, Inc.

The manager's main strategy, which invests in a portfolio of carefully constructed asset-backed transactions, produced its 66th consecutive month of positive net returns in June.

Custom facilities structured between the lender and the issuer are generally well insulated against the types of things that kept stock and bond market investors up at night last month, noted the company. "There are certainly plenty of things that can influence the successful outcome of a direct lending transaction," said John Howe. "But Greece's future in the euro and the Chinese stock market rollercoaster are not among them."

Instead, Howe describes issuer default risk as the paramount concern. Accordingly, structuring experience, due diligence, analysis and monitoring are of prime importance when crafting direct lending transactions. Macro risks, such as rising interest rates, are mitigated through the use of floating-rate structures.

Moreover, size matters. The larger the issuer, the more likely they are to have access to capital from large financial institutions, and thus the lower potential returns will be. Conversely, smaller issuers have significantly less access to capital and are thus more willing to accept structures with significantly higher yields.

The sweet spot, according to Old Hill, is therefore where the opportunity is small enough to generate excess returns, yet the lender is large enough to bring sophisticated, experienced mid- and back-office support to bear. "When these transactions are properly constructed and managed," continued Howe, "the result is stable, transparent income typically several hundred basis points higher than comparable public debt."

For investors such as family offices and pension funds, for whom preservation of capital and the regular distribution of income are dual mandates, the private lending sector provides a valid alternative to an anemic post-crisis return environment.

However, as institutional capital floods into the space, investors should remember that there are wide qualitative differences between direct lending managers, and the process of identifying, structuring and underwriting a private debt transaction is complicated, variable and by no means a one-size-fits-all process.

Darien, CT-based Old Hill Partners Inc. is an SEC-registered investment adviser with significant experience in asset-backed lending and alternative investment management. The firm offers customized lending products and services to middle market clients seeking creative funding structures for growth initiatives. Founded by John C. Howe in 1996, Old Hill has funded approximately $650 million in asset-backed lending transactions.