“Broadly syndicated loans are liquid, so have high volatility that exaggerates credit deterioration,” one market observer told us recently. “The middle market,” he continued, “is illiquid, so has low volatility which can mask credit deterioration.”

How do PMs in these strategies manage through market volatility and maintain credit quality?

Large cap loan buyers act like deep-sea trawlers, catching fish, dragging big nets along the bottom of the ocean. Direct lenders use line-and-tackle, going after big game fish, but also trout and salmon in smaller waters.

While an increasing share of large loans are being structured as unitranches held by the biggest direct lenders, the majority are still underwritten by banks, then distributed to CLO shops and retail funds. Those buyers often arrange their portfolio management by sector, using PMs with long experience in specific industries.