I've seen the two talked about separately on this site.. Can somebody explain to me the difference? In my group, while we do structure asset-based facilities (revolvers, term loans) to MM companies on a club (us and one other/a few banks involved) and syndicated basis, we also have loans where we are the sole lender to the company (is this not considered 'direct' lending?).
From what I've read so far, it seems that the 'senior secured' / top of the capital structure aspect is shared between direct lending & comm. banking as well, in the sense that direct lenders structure/offer senior secured debt, 1st/2nd lien debt, unitranches, etc. If I'm off-base, someone please inform me.
Basically, looking to learn similarities/differences.
Bump!
Similar premise, direct lending firms are simply non-bank creditors, direct competitors to bank debt, it’s all semantics. The direct lending term just means there’s no intermediary aka a bank in financing.
The primary difference is regulatory, driven by the different sources of capital. Banks hold deposits, so risk-taking is restricted in a number of ways in order to protect depositors. Direct lenders are raising funds from investors who want the lender to put that capital at risk in exchange for returns. Regulators take a much more hands off approach; they're not nearly as concerned with a fund blowing up as they are with a bank going under.
Banks still dominate the investment grade large corporate syndicated loan space because i) they're low-risk borrowers, so capital requirements aren't as onerous, ii) banks have balance sheets large enough to support the biggest borrowers, and iii) there's a lot of cross-sell opportunities with large corporations, so it's a worthwhile use of capital for big banks. As the borrower size goes down into the middle market and lower-middle market, banks have less cross sell to pursue and higher capital requirements for riskier borrowers. Direct lenders have taken share in this space because they can be as risky as they like, so long as they provide investor returns.
Thanks for the detailed response, HC!
HighlyClevered's response is bang on, but 3 points I think they didn't cover are:
The above is based on my experience in London, BDCs in the US may operate differently.
Thanks for your response, Mid. Couple questions:
"Capex facility" - is this basically referring to a term loan that is to be used specifically for capex?
What is usually the ballpark minimum ticket size that would be required by a syndication of banks before its just not worth their time/effort? (Is it the $150MM mark you referred to above?)
"Banks are running multiple trees" - what are multiple trees?
Are "stretch-senior" loans simply senior unsecured/secured loans that are more levered than what a bank would typically lever for senior unsecured/secured loans?
How come direct lending (especially at some small credit funds) is such a lucrative career
How come some hired armies of former bankers when you can start such fund by hiring some relationship managers covering SME and credit officers at a bank
I'd be interested to hear an answer to this too. Also, what is typical junior analyst all-in comp (and structure; i.e salary vs. bonus) for someone working at a direct lending fund / private credit fund? (assuming those are the same thing)
It's easy to start a fund, it's not easy to successfully raise capital for that fund though. Why would you invest in a fund which is staffed by SME focused credit corporate bankers or the equivalent, when you can invest in a fund which is staffed by former BB / balance sheet bank Lev Fin bankers and who have a network across top PE funds to help deploy that capital.
Compared to other investment strategies, DL funds are not that lucrative. Fees are less, and often only earned on deployed capital rather than raised capital.
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