Common Investors Across the Capital Structure: Private Debt Funds as Dual Holders
Fisher College of Business WP No. 2024-21
European Corporate Governance Institute – Finance Working Paper No. 1021/2024
62 Pages Posted: 19 Oct 2024 Last revised: 24 Nov 2024
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: Suggested Citation