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We are joined by the Hermes Direct Lending team for our quarterly Q&A series.

Not all senior loans are created equal, and the cov-lite form – those with weaker investor protections – are dominating the large-cap segment of the European market. We completely avoid these instruments, focusing instead on covenanted mid-market deals, which offer more attractive returns with stricter risk controls than cov-lite large-cap deals.

In developing the Hermes Direct Lending Strategy, we knew that the ability to consistently source high-quality loans is essential to generating the resilient returns with low volatility and correlations that can be derived from the asset class. Our unique origination strategy is designed to provide us with access to attractive deals. Our proposition In the Hermes Direct Lending Strategy, we offer a diversified portfolio of attractive first-lien UK and European senior loans. We aim to generate stable cash income and long-term returns of LIBOR plus 6% on a gross annualised basis. For investors seeking higher returns, a co-investment vehicle holding the same assets can be run in parallel to the Strategy to enable greater exposures to loans with more aggressive risk/return profiles. Our investment team has a comprehensive range of credit skills, from loan origination to restructuring, which have been exercised through market cycles. In a competitive market, our ability to consistently source high-quality loans is a key strength. It is based on our unique origination strategy, which features a co-lending partnership with RBS for senior-secured loans to UK mid-market businesses, and our own ability to source deals, thereby generating a healthy pipeline of attractive senior-secured and unitranche loans.