CDLI: Cliffwater Direct Lending Index, 4th Quarter 2022

Private debt is a rapidly growing asset class among institutional investors, a trend that is expected to continue. This report focuses on fourth quarter 2022 and long-term performance for one of the largest segments of private debt, U.S. middle market corporate lending.
The Cliffwater Direct Lending Index(CDLI) is an asset-weighted index of approximately 12,000 directly originated middle market loans totaling $263 billion as of December 31, 2022.
The index produced a 2.04% total return in the fourth quarter, bringing the 2022 calendar year CDLI total return to 6.29%. Interest income jumped to 2.59% (10.77% annualized) which was somewhat offset by -0.43% in unrealized losses for the quarter. Realized losses equaled -0.12% for the quarter, and realized losses totaled -0.09% for the calendar year, reflecting a benign credit default environment during 2022.
However, unrealized losses continue to accumulate as markdowns on loans totaled -0.43% for the fourth quarter, bringing total calendar year unrealized losses to -2.61%. From its September 31, 2004 inception, the CDLI has produced an annualized 9.31% return, unlevered and gross of fees.
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The CDLI assists investors in better understanding private debt as an asset class and to benchmark manager performance. It is now used globally by institutional investors and asset managers as the index of choice for understanding the return and risk characteristics of U.S. middle market debt.
Launched in 2015, the CDLI was reconstructed back to 2004 using quarterly SEC filings required of business development companies, whose primary asset holdings are U.S. middle market corporate loans.
Importantly, SEC filing and transparency requirements eliminate common biases of survivorship and self-selection found in other industry universe and index benchmarks. And finally, loan assets in the CDLI are managed for total return by independent asset managers, unlike similar loans within insurance companies where statutory and other regulatory requirements can result in non-performance objectives. See www.Cliffwater... for further information on the CDLI.
While the CDLI income return component largely drives long term total return, net gains (losses) can impact returns over shorter time periods and can be very important in differentiating individual manager (lender) performance. Net gains (losses) are defined as the periodic change in loan valuation. It is the equivalent of price change for traded securities. We divide net gains (losses) into two components, realized and unrealized.
Realized gains (losses) represent the component of valuation change for completed transactions. In the case of a portfolio of loans, such as the CDLI, realized gains (losses) mostly come in the form of realized losses generated by write-downs of loan principal that result from borrower default. The amount of the write-down depends upon the value of the post-default collateral or new principal amount
Unrealized gains (losses) represent the component of valuation change that is sourced by a change in market price or, in the case of a portfolio of loans, such as the CDLI, a change in “fair value” not attributable to a transaction.
The CDLI outperformed the two public credit indices in 13 of the 18 calendar years. In the four of the five years CDLI did not outperform, broadly syndicated high yield bonds and loans were rebounding from stressed credit conditions from the prior year. In 2020 high yield bonds outperformed due to a decline in overall interest rates which benefited fixed-rate high yield bonds. In contrast, the CDLI has demonstrated greater consistency in calendar year performance.