CVC’s announced plans to exit its U.S. middle market direct lending arm comes as a bit of a surprise. The deal sees nine CVC investment managers running $1 billion in mostly unitranche and first lien loans move to Sound Point Capital Management. Private equity has bulked up alternative asset management products to diversify outside of buyouts, prompting me to wonder why CVC would want to get leaner?

For its part, CVC says the asset sale isn’t part of a broader retreat from direct loans. The firm is keeping its European direct lending platform, where the European-based and focused private equity fund sees the most synergies with its buyout strategies. CVC also notes that the biggest part of its credit portfolio, performing credit, remains untouched by the transaction.

Still, the deal may prompt an eyebrow given its contents. Private equity has poured into direct loans for middle market companies, creating business development corporations and credit funds to capitalize on a $1 trillion market, according to Preqin. And CVC’s loan portfolio would appear diversified across several industries positioned for a post-pandemic rebound including business services, hospitality, industrials, and healthcare. 

Larger funds have seemed to retreat from direct lending only to return to the market in a different structure. Blackstone, for instance, ended its joint venture with Franklin Square in 2018 and sold its remaining credit business to KKR, only to raise $28 billion to create its own direct lending operation in which it keeps all the profits.

Blackstone’s composite private credit funds returned net 6 percent in 1Q21, and 7 percent from inception through to the end of March. This could be another reason for CVC’s about face on the attractiveness of U.S. direct lending. The net returns are not paltry, but are a far cry from comparable strategies’ performance in the past year.

CVC itself grew its credit investment business by acquiring Resource Capital’s private credit group, Northport Capital TRS in 2016.

Watch the performance of U.S. middle market direct lending returns next earnings season to keep an eye on whether the in-house credit arms of private equity firms could be up for disposal.

Read more of our coverage here: Sound Point acquires CVC Direct Lending Credit Unit.