Every investor seeks consistent, high-yield returns. That’s no surprise.
But often consistency and high-yield prove elusive. Sure, a portfolio of stocks could generate exceptional returns during good times. But when a recession comes, that portfolio could lose 33% (the average loss during downturns).
As an investor looking to maintain and grow wealth, you must strive to minimize risk and maximize return. The right investments can help you achieve that.
Enter direct lending funds.
Direct lending gives investors the opportunity for strong, predictable returns. It removes intermediaries, such as banks, enabling investors and asset managers to provide capital to businesses and entrepreneurs, such as real estate investments. For those seeking an answer to low-yield woes, direct lending offers a solution—as long as they properly perform underwriting, funding, and loan management.
In this article, we’ll discuss how direct lending funds work, how safe these funds are compared to other investments, and the pros and cons compared to other real estate investments.
How do direct lending funds work?
Direct lending funds provide capital to businesses, entrepreneurs, and other investors. To make leveraged loans to borrowers, direct lenders raise capital from investors to fund a loan—without the need for a traditional lender. Therefore, direct lending forms a part of the private debt market.
In recent years, the size of the private debt market has grown tremendously. As Bank of America research notes, the US private debt market has more than doubled in the last decade. It now exceeds $700 billion.
There are three primary reasons for the growth of direct lending funds:
- Investor desire for fixed income with higher, more consistent yields
- A need for capital among middle-market companies, entrepreneurs, and investors, especially those who can’t secure loans from traditional banks
- Following the financial crisis in the late 2000s, commercial banks retreated from lending to middle- and small-market companies.
Since banks don’t lend to certain borrowers or for certain projects, direct lending funds fill a gap in the market. This brings opportunities to businesses and investors alike.
Direct lending funds can allocate capital to any industry where analysis shows the potential for solid, steady returns, from mid-market companies to local businesses. Industries can range from telecom to healthcare to retail. It varies across direct lending funds.
For example, at DLP Capital Partners, we lend short-term, high-yield capital to real estate investors. Our direct lending fund doesn’t own any real estate directly. Instead, we provide debt capital to investors and entrepreneurs in the space.
Are direct lending funds safe and do they perform well?
All financial investments carry risk. Since direct private money lending isn’t regulated in the same way it is for traditional bank lending, many warn of risks. A Google search of direct lending investments will show you that.
For instance, Bloomberg recently reported on the record-breaking amount of cash direct lending funds have raised in 2019. The report also warned of concerns about direct lending investments, stating the market has gotten too hot and there are too many risky loans.
While the report does highlight a concern investors should have—the fact that some direct lending investments carry too much risk—it ignores the opportunity that exists in the market. You can achieve consistent, high yields with the right direct lending investments.
“For direct lending funds, success relies on good strategy and great execution. With the DLP Lending Fund, our real-estate loans are backed by real estate, a tangible asset. We also employ a thorough underwriting process to ensure loans are only made to borrowers with a high probability of success,” states Don Wenner.
The point is this: Investors can earn solid, consistent income through direct lending funds. But they have to choose the right fund. That requires partnering with the funds that do their due diligence and create a real opportunity for both the lender and borrower.
While it’s helpful to read cautionary tales, investors should also look beyond the headlines and at the numbers. The data shows direct lending investments do quite well.
From 2013-2018, direct lending funds returned an average of 13% annually, according to Preqin, an alternative assets data provider.
Now, compare that to other debt investments, such as the US 10-year treasury, which yields only 1.71% as of November, 2019. High-yield corporate bonds, which have averaged just under 7% returns, fail to match direct lending investments as well.
Even compared to income investments, like dividend stocks, direct lending investments have performed better. As a list of high-dividend stocks show, it’s hard to get more than 8% in annual payouts.
Investors still may ask: What about stocks?
Well, the S&P has achieved average annual returns of 9.8% over the past 90 years. That’s solid, but comes with volatility and risk of significant loss during recessions. Still, the average return of direct lending investments continues to outpace the S&P 500. Moreover, direct lending investments center around debt investments. This ensures consistent cash flow to the fund, regardless of market conditions.
Direct lending investments versus real estate investments
When it comes to producing steady cash flow and consistent returns, real estate has long been king, especially multi-family investments. CBRE research proves this:
So, if you want consistent, solid income, why not invest directly in real estate?
If you look at the data, direct lending has still produced better returns, precisely because this type of debt financing offers higher yields. Since direct lending funds aren’t as constrained by capital requirement guidelines, they can lend to companies and business-people with higher leverage. If the deal goes smoothly, that equates to higher returns.
Still, for some, the advantages of direct lending investments may not outweigh the risks. Poor management of direct lending funds or lending to riskier borrowers can damage returns (especially in a downturn). So investors may seek the stable returns of real estate investment funds instead of direct lending funds.
That’s wise—but some direct lending funds offer a solution that gives you the best of both worlds.
Enter the DLP Lending Fund: Direct Lending in Real Estate
To get the most of direct lending investments, investors should not only look for well-managed funds that invest in assets and people that consistently deliver, but also funds that put investors first and guarantee liquidity (something other funds may not).
The DLP Lending Fund aims to do all that as a lender of short-term, high-yield capital to real estate investors. To mitigate risks, we only lend to borrowers capable of success and refinancing if needed.
“The DLP Lending Fund is DLP’s largest fund. We have a return target of 11% net to investors. We’ve succeeded that by generating over 12% every single month and a historical return of 14% return net to investors. The fund has a 10% preferred return, meaning investors earn 10% before we earn anything. And we’ve never missed a targeted return,” describes Wenner.
The chart below details the Lending Fund’s annualized returns by month since 2014. As you can see, the fund has exceeded targeted returns each month.
“How do we achieve this? We do a phenomenal job of writing great loans to successful full-time real estate investors. We’ve originated more than 1,000 loans to successful real estate investors at an average loan-to-value of 54%. Our loans are only 6-12 month loans, which means they’re paid off quickly. This gives us the ability to liquidate your investment with a 90-day notice.”
In short, the DLP Lending Fund taps into the potential of the direct private money lending market and real estate investments. That’s why the fund offers attractive returns.
Would you like to hear more about the DLP Direct Lending Fund? Click the link below and invest now!