Common Investors Across the Capital Structure: Private Debt Funds as Dual Holders

62 Pages Posted: 19 Oct 2024 Last revised: 24 Nov 2024

See all articles by Tetiana Davydiuk

Tetiana Davydiuk

Johns Hopkins University - Carey Business School

Isil Erel

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Wei Jiang

Emory University Goizueta Business School; ECGI; NBER

Tatyana Marchuk

Nova School of Business & Economics; Centre for Economic Policy Research (CEPR)

Date Written: September 30, 2024

Abstract

This paper examines the dual role of Business Development Companies (BDCs) as creditors and shareholders in the private direct lending market. Utilizing a comprehensive deal-level database, our analysis shows that dualholder BDCs are more effective monitors than sole lenders, benefiting from enhanced tools for information access and governance. This effectiveness allows them to charge higher loan spreads, while simultaneously reducing credit risk and lowering the borrowing cost of portfolio firms from other lenders. We rule out alternative explanations attributing higher loan spreads to mere compensation for capital injection or to hold-up by a dominant financier. Our findings highlight a critical mechanism through which BDCs serve a market segment — mid-sized firms with low (or even negative) cash flows and a lack of collateral but high growth potentials — that is typically undesired by traditional bank lenders.

Keywords: business development companies, direct lending, private debt, dualholders, dual-holding, nonbanks, delegated monitoring

JEL Classification: G20, G21, G23, G28, G32

Suggested Citation

Davydiuk, Tetiana and Erel, Isil and Jiang, Wei and Marchuk, Tatyana, Common Investors Across the Capital Structure: Private Debt Funds as Dual Holders (September 30, 2024). Fisher College of Business WP No. 2024-21, European Corporate Governance Institute – Finance Working Paper No. 1021/2024, Available at SSRN: https://ssrn.com/abstract=4992219 or http://dx.doi.org/10.2139/ssrn.4992219

Tetiana Davydiuk

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Isil Erel (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Wei Jiang

Emory University Goizueta Business School ( email )

1300 Clifton Rd
Atlanta, GA 30322
United States

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Tatyana Marchuk

Nova School of Business & Economics ( email )

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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