I work in direct lending at a shop where originations folks get paid based on the amount of $ volume they close.
This leads to originations folks constantly butting heads with underwriting folks on the deals they bring in and wasting a lot of my time as an underwriter pushing shitty deals through.
Curious to hear if others in the industry deal with this same issue or if different originations models exist out there that are more efficient?
This is a common tension in private credit and direct lending shops where origination and underwriting teams have distinct roles and incentives. Based on the most helpful WSO content, here's what you need to know:
Origination vs. Underwriting Dynamics:
Conflict Sources:
Alternative Models to Reduce Conflict:
Industry Norms:
If your firm is open to it, advocating for shared incentives or more collaborative processes could help mitigate these conflicts and improve overall productivity.
Sources: Private Credit Resources and Prep, Credit Analyst Q&A, Q&A: Non-Bank Commercial Lending, Credit Fund to PE: Is it Doable, Why corporate banking instead of investment banking?
I'm actually on the other side of this issue where lead underwriters originate their own deals, and tbh I wish I had it your way. I think it's very hard to originate a deal and then remain impartial during the underwriting process, especially if you find a credit issue midway through that you weren't originally aware of. I've seen people hide information/be misleading during IC because they just want to get the deal done, instead of thinking about long-term exposure to the credit/the sector/etc. To me that's completely the opposite of what an underwriter should be doing.
However, I've heard of other people at places like yours complain about originators pushing bad deals on them, and it definitely sounds like it can get contentious. How much work are you putting into these deals? While it might be annoying to do any work on a deal you know is bad, I would assume you'd do a 1-pager or initial screen and then it would be shot down at IC?
Deal with this issue every day
I'll add my .02
I do credit research for an insurance company where our underwriters bring in accounts they believe we should write and we do the financial review process while still allowing them to make the judgement call on the pricing/risk but limiting it to an extent. Basically, they do originations and underwriting.
I would say it is normal for there to be bias when you make your commission based on volume (in our case premiums) and still have to underwrite the risk. I would assume you have some sort of rating framework in place already. If you are in a position to suggest changes, I would say you set strict underwriting policies that coincide with the rating/risk then when the originators come back you just point to the approved policies and treat them as the "bible." If you can get the group head of the originators to sign off on it then it is even better because it puts the onus on him to be the bad guy.
For the solution to originators pushing through shitty deals, well, the problem is that some company or another will most likely underwrite the risk if the price is right. If your company is constantly in the running for these deals and will write them from time to time, then who is to say that it's a waste of time. My follow up question would be: are they shitty deals because the credit rating is low or are they shitty deals because the credit rating is low AND you're quoting a spread below market? If the rating is low who cares just send a go away bid to the originator. If this is where you get pushback, then you need to put rules in place for how much you can deviate from market rates. If there are times a business decision needs to be made, then have a group head who can make the exception on certain accounts. If the company is constantly quoting shitty accounts below market, then why even have an underwriting function? Quoting and wasting time doing the review only to shut it down is normal and unfortunately the nature of the beast in credit...
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