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To better understand the market dynamics behind the growth of corporate direct lending, it is important to highlight the advantages for borrowers. These characteristics sustain the continuing uptake of direct lending by middle-market companies:

 Control: Direct lenders will maintain close relationships with sponsors and management teams of borrowers after originating the transaction. Even if the loan experiences difficulties and defaults, a direct lender will continue to work closely with the borrower for a resolution. This stands in stark contrast to how banks operate. When a loan underperforms, banks send it to an internal workout team, which aims to remove the troubled asset from the bank’s loan portfolio, and not to help the borrower restructuring the business.

 Speed of execution: The private equity landscape is increasingly competitive, and many sponsors are pre-empting sales processes to gain an advantage over other bidders. Therefore, sponsors are seeking direct lenders that can move quickly alongside them in submitting binding offers for investment targets. As direct lenders have smaller teams and more flexible investment approval processes than banks, they can offer the speed of execution that sponsors need in competitive sales processes.

 Structural flexibility: Direct lenders have less rigid policies in place compared with banks and can provide more flexibility in structuring customised financing solutions. For example, direct lenders have shown flexibility in capital repayment, typically structuring a “bullet” profile so that 100% of principal is repaid at maturity. This allows the borrower to use its free cash flow to grow the business as opposed to repaying principal. Direct lenders also exhibit more flexibility than banks in the negotiation of key terms in loan agreements. Greater flexibility can also be provided during the life of the loan would the issuer face an adverse situation as demonstrated during the COVID-19 crisis. For instance, direct lenders quickly agreed to suspend or postpone interest payments for companies confronted with liquidity issues.

 Business partners: In the case of non-sponsor transactions (i.e., with no private equity firm involved), direct lenders can provide support to management teams in addition to debt capital. Like private equity firms, direct lenders can give management teams access to their relationship networks to access more customers, sector expertise, more supplier relationships and operational experts supporting the companies’ financial and operational performance.