Cliffwater Direct Lending Index - 3rd Quarter, 2023

The Cliffwater Direct Lending Index(CDLI) is an asset-weighted index of ~14,000 directly originated middle market loans totaling $295 billion. The CDLI assists investors to better understand asset class characteristics and to benchmark manager performance. The CDLI seeks to measure the unlevered, gross of fee performance of U.S. middle market corporate loans, as represented by the asset-weighted performance of the underlying assets of Business Development Companies (BDCs), including both exchange-traded and unlisted BDCs, subject to certain eligibility requirements. The CDLI Total Return Index includes three components: Income Return, Realized Gain/Loss, and Unrealized Gain/Loss.
Key takeaways from Q3 2023 are:
1. CDLI produced a strong 3.17% Q3 2023 total return, following up on a strong 2.81% Q2 total return, and driven by continued increases in interest income,
2. An equally strong 11.15% CDLI return over the trailing year and a 9.42% annualized return from CDLI’s 2004 inception has contributed to making private debt today’s fastest growing institutional asset class.
3. Private debt yields continued to climb in Q3, with the CDLI yield-to-maturity and current yield hitting 12.29% and 11.76%, respectively.
4. Realized credit losses continued in 2023, approaching their long-term historical 1% annual average, following two years (2021 and 2022) of near zero credit losses.
5. CDLI returns in 2023 got a boost from unrealized gains, in part reversing unrealized losses in 2022 from recession concerns.
6. As in past cycles, private loan valuation, as reflected in CDLI prices, tends to overstate loan markdowns, contradicting the “volatility laundering” narrative championed by some commentators.
7. CDLI-S, our senior-only debt index, and CDLI-V, our venture-only debt index, returned 3.28%% and 2.22%, respectively, for Q3 2023. Lower venture debt returns came from both an increase in realized and unrealized losses.
8. Aside from the pick-up in realized losses, most other measures of loan stress showed only modest changes.
9. A worsening liquidity environment from reduced M&A activity continues to be noteworthy, as the average effective loan life has continued to increase, reaching 5.81 years on September 30, well above its 3.17-year historical average.