Working Paper: NBER ID: w30868
Authors: Joern Block; Young Soo Jang; Steven N. Kaplan; Anna Schulze
Abstract: Despite its large and increasing size in the U.S. and Europe, there is relatively little research on the private debt (PD) market, particularly compared to the bank and syndicated loan markets. Accordingly, in this paper, we survey U.S. and European investors with private debt assets under management (AuM) of over $300 billion. These investors are primarily direct lending funds. We ask the general partners (GPs) how they source, select, and evaluate deals, how they think of private debt relative to bank and syndicated loan financing, how they monitor their investments, how they interact with private equity (PE) sponsors and how they view the future of the market. The respondents provide primarily cash flow-based loans and believe that they finance companies and leverage levels that banks would not fund. The direct lending funds target unlevered returns that appear high relative to their risk. They use leverage in their funds, but appreciably less than banks and collateralized loan obligation funds (CLOs). They use and negotiate for both financial and incurrence covenants to monitor their investments. The presence of PE sponsors helps them lend more and craft more effective covenants. U.S. and European funds are similar on many dimensions, but the European funds rely less on PE sponsors and compete more with banks. Overall, the private debt market is both different from, but shares characteristics with the bank loan and syndicated loan markets.
Keywords: private debt; corporate lending; non-bank intermediaries
JEL Codes: G24; G32; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| private debt funds (F34) | financing to companies that banks would not fund (G21) |
| private debt funds monitoring through covenants and regular updates (F34) | borrower behavior and reduced risks associated with lending to smaller firms (G21) |
| presence of private equity sponsors (G34) | lending capacity and effectiveness of private debt funds (F34) |
| private debt funds (F34) | gaps left by banks (G21) |
| private debt funds (F34) | target unlevered returns that are high relative to their risk (G17) |