Direct Lenders in the U.S. Middle Market

Abstract

The reduction in credit supply from traditional lenders following the 2007--2008 Financial Crisis contributed to a surge in direct lending and, in particular, investments by business development companies (BDCs). Using a novel hand-collected dataset, we provide the first systematic analysis of the BDC sector. We exploit three exogenous shocks to credit supply, including new banking regulations and a major finance company collapse, to establish that BDC capital acts as a substitute for traditional financing. Relying on the synthetic control method, we further document that firms' access to BDC funding has stimulated economic growth and innovation.

Keywords: BDCs, direct lending, middle market, economic growth

JEL Classification: G20, G23, G32