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Until recently, banks were the primary provider of debt capital to corporations. Using an “originate to distribute” model, a single bank underwrites an entire loan facility and finds other lenders (a syndicate) to share the risk. Since the Global Financial Crisis (GFC), the number of commercial banks in the United States has fallen by more than a third, from 7,200 to less than 4,450.[1] Congress passed major reforms that limited the amount of risky assets banks could have on their balance sheets. The combined effect of fewer commercial lenders and more stringent capital requirements left a significant void in global capital markets. The middle market, consisting of companies with EBITDA below USD 75 million, was particularly affected, as banks turned their attention upmarket. Institutional lenders, in search of attractive yields, filled the gap left by banks. Lower capital supply as well as higher demand from investors and more flexible terms for issuers explain the growth of private middle market direct lending since the GFC.

Over the last decade, corporate private debt in the middle market – also referred to as direct lending – has matured into an institutional-quality asset class. In 2018, 182 private debt funds raised USD 119 billion. Not only have more funds been raised but deal sizes and volumes have also grown markedly. Private debt managers put more than USD 145 billion of capital to work across 1,345 transactions in 2019.[2] However, these numbers are probably understated; we estimate the overall middle market in the United States to be USD 1.25 trillion. With an average loan life between three and four years, this results in annual issuance of more than USD 350 billion. The European market is approximately a third of the US market, totaling around USD 410 billion.[3]

Private debt covers a large and diverse universe of strategies in the three main asset classes: corporate, real estate, and infrastructure. This universe has broadened to encompass the burgeoning field of specialty finance. Exhibit 1 serves as an extract of some of the main private debt strategies, comparing gross asset yield levels with public credit on a risk-adjusted basis. On that basis, the attractiveness of direct lending becomes obvious.