Direct lending’s popularity puts pressure on larger players (2024)

FAQs

Direct lending’s popularity puts pressure on larger players? ›

Direct lending's popularity might be its downfall. The strategy came of age following the financial crisis in 2008, but with an estimated $200bn (£159bn) in dry powder waiting to be invested, margins are set to come under pressure and the quality of covenants could decline, according to managers.

Direct lending strategies may be appealing as they invest in the senior-most part of a company's capital structure, which may provide steady current income with relatively lower risk.

Direct lending is a form of corporate debt provision in which lenders other than banks make loans to companies without intermediaries such as an investment bank, a broker or a private equity firm.

5. Closely Held: Direct loans are often closely held by a small group of lenders. Broadly syndicated loans are often held by tens or hundreds of different lenders. Smaller lending groups allow direct lenders to be more nimble in closing deals and responding to the needs of the borrowers or sponsors.

Collectively, expect an 11.0% long-term average yield on direct lending, sourced as follows: Treasury bill yields, a surrogate for SOFR, average 0.5% above inflation over time.

Failure to Manage Fund-Level Leverage: Direct lend- ing funds may use leverage offered by commercial banks to amplify the returns on their investments. However, the term of the fund-level leverage is often shorter than that of the underlying assets, which creates leverage refinancing risk.

Direct Financing

Disadvantages: This method is much more time-consuming, and it also requires more research on your end so you know exactly what type of loan you need.

What Are the Pros of Working With a Direct Lender? Direct lenders can make funding decisions quickly since they control their own lending criteria. This allows them greater control over which customers get the funds that they're seeking.

Subordinated direct lending often comes with higher interest rates than senior debt because of the risk profile. Mezzanine lending, on another hand, is associated with higher risk – not only because it's subordinated to senior debts, but also because it's not secured by the borrower's assets.

Just like private equity funds, direct lending (DL) funds raise capital from outside investors (Limited Partners) and then charge a management fee and incentive fee (carry), with a hurdle rate requirement to earn the incentive fee.

How much of private credit is direct lending? ›

Direct lending represents the largest category in private credit, at 44% of AUM, and refers to financing that is directly negotiated between a lender (often an alternative asset manager) and a borrower (usually a small-to-mid-sized company).

And like the rest of the shadow banking sector, direct lending operates without regulatory oversight.

Private lenders, including asset managers and private equity groups, play a significant role in the direct lending market. These lenders are often more flexible than banks and can offer bespoke deals to corporate clients who would typically be too small to tap the bond markets.

Who are the top players in direct lending? The top players in direct lending encompass industry giants such as Apollo Global Management, Blackstone Group, and Ares Management, known for their robust strategies and vast assets under management.

In the United States the Direct Lending market has also experienced growth in transaction sizes. In 2023 the average transaction size for deals reached $4.2 billion, compared to $3.8 billion in 2022 and $2.5 billion in 2021.

Direct lending fees on the rise

The total cost of 4.12 percent comprises 1.86 percent in management fees, 1.78 percent in carried interest and 0.48 percent in administrative fees.

Direct Financing

Advantages — The biggest advantages of direct finance are flexibility, and the freedom to customize your finance deal. There's no cap on the number of loans you can apply for, and working directly with your lender gives you full control over the process.

He direct lending is constituted as a alternative financing tool for the companies. Through direct lending, companies obtain financing, but this does not come from financial institutions, as can be the case with the granting of credits by this type of entity.

Why direct lending rather than private equity or mezzanine? You want to work on and close deals rather than looking at dozens or hundreds of deals and rejecting most of them right away, as in PE, and you like assessing companies' credit risk.