Are Direct Lenders More Like Banks or Arm’s-Length Investors?

87 Pages Posted: 4 Aug 2023 Last revised: 24 Jan 2024

See all articles by Young Soo Jang

Young Soo Jang

Pennsylvania State University - Smeal College of Business; University of Chicago Booth School of Business

Date Written: January 24, 2024

Abstract

I study whether direct lenders, which have been displacing banks in private equity (PE) buyouts, lend more like banks or arm’s-length investors. Using a novel database for direct lender-held loans to PE buyouts, I find that nearly all senior loans originated by direct lenders include financial covenants. Upon covenant violation, direct lenders frequently impose additional restrictions on firms’ activities during renegotiation, resulting in more conservative investment and financial policies. During the COVID-19 pandemic, direct lenders exhibited greater flexibility than banks in resolving distress through out-of-court renegotiation, in part facilitated by more equity injection from the firms’ PE sponsors. Furthermore, direct lenders’ prior relationships with PE sponsors were associated with more favorable continuation lending during the pandemic. Overall, similar to banks, direct lenders appear to actively monitor and engage in relationship lending.

Keywords: Direct lending, private credit, private equity, shadow banking

JEL Classification: G21, G23, G30, G32

Suggested Citation

Jang, Young Soo, Are Direct Lenders More Like Banks or Arm’s-Length Investors? (January 24, 2024). Available at SSRN: https://ssrn.com/abstract=4529656 or http://dx.doi.org/10.2139/ssrn.4529656

Young Soo Jang (Contact Author)

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802
United States

University of Chicago Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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