Private Performing Credit Index

Houlihan Lokey is an expert in the valuation of Private Credit, including Direct Lending and BDC assets. We produce the Index, as well as Studies on relevant topics, and other research and analysis:

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Study 1: How do IRRs vary by size of borrower?

We have been producing the PPCI for several quarters using a dataset of instruments we have valued since Q3 2017. Clients have asked us for a variety of data insights, and the question of whether different size loans persistently yield more has been common. To answer this, we turned to the same dataset we use to compute the quarterly index, but created quartile subindices for comparison purposes.

The answer to that question is yes: There are trends and conclusions, but it is not a simple response. We stratified the data into quartiles based on adjusted EBITDA-breakpoints of 10 million, 20 million, 50 million. The periods prior to and since COVID-19 display marked differences, but the smallest borrower quartile does persistently pay the highest IRRs. The largest borrowers pay the least, although that is most pronounced since Q2 2019.

The average of the entire dataset is presented as subindex average. For computational reasons, that average is not exactly the same as the PPCI, but the comparison between quartiles is accurate.

By examining the quartiles relative to the subindex average, that same observation is easier to see. However, there is a marked convergence of IRRs by quartile in Q4 2019, prior to COVID-19 lockdowns and market reaction. While the largest borrowers are routinely +/- 20bps from the average, the smallest borrowers have been 180 bps above average in the past several quarters.

The overall divergence between quartiles is also dynamic and has moved wider and tighter over time. This graphic shows the dispersion as the highest quartile IRR minus the lowest quartile IRR. The trailing average of dispersion also shows an increase, as IRRs continuously reflect size premiums or discounts.

Conclusions and Observations

This is the simple answer to the question, "How do IRRs vary by size of borrower?": There is a wide variation in the dispersion of IRRs relative to size, but the smallest borrowers appear to consistently pay the higher IRRs. One conclusion for a direct lender may be to pursue smaller loans on the strategy that the increase in execution costs for a larger number of transactions is compensated by the increase in overall return. However, the opposite conclusion is also supported-that the pursuit of the largest transactions may reduce execution costs sufficient to gain an advantage, despite the lower IRRs.

It seems clear that the competing strategies can both be winners, but they vary over time and by market conditions.

Current Index Report

Houlihan Lokey's Portfolio Valuation and Fund Advisory Services practice is a leading advisor to many of the world's largest asset managers, who rely on our strong reputation with regulators, auditors, and investors; private company, structured product, and derivative valuation experience; and independent voice. As a function of this unique position within one of the world's largest capital markets, Houlihan Lokey routinely provides valuations of instruments in many of the least visible asset classes, particularly private credit. The Houlihan Lokey Private Performing Credit Index (PPCI) is an aggregate view drawn from our extensive dataset of private credit valuations.

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