Learn about direct lending as a flexible and creative financing solution for middle market companies.
Throughout the 2008 financial crisis, increased bank regulation and market shifts created a demand for an alternative source of capital for middle market companies. In response to this demand, private investment funds and non-bank lenders stepped in and began lending to the middle market, which is what we know as direct lending. Direct lending takes the place of senior secured debt and floating rate capital traditionally provided by banks, eliminating the need for an intermediary, such as an investment bank. Our direct lending capital is very consistent with a bank loan, so its floating rate in terms of the coupon and medium term dated capital, typically 5- to 6-years in maturity.
Where does direct lending capital fit within the private debt landscape?
Within the private debt market, there are a wide range of companies in terms of size and credit quality. Larger companies generally obtain a credit rating from a ratings agency such as S&P or Moody's. Therefore, these companies generally have interest from many lenders. On the other hand, middle market companies are generally not able to access that level of capital for several reasons. First off, the transactions are generally kept private. Secondly, they're not rated. Third, their issue size does not create liquidity in the marketplace. This is where direct lending fits in.
What are the typical uses for direct lending?
What are characteristics of issuers for direct lending capital?
Direct Lending tends to be an event-driven type of financing, for middle-market companies with attractive growth prospects and positive cashflow. If a company is pursuing an acquisition, looking to complete a management buyout, or recapitalising its capital structure, direct lenders can execute quickly and efficiently to provide senior debt to achieve those objectives.
Companies that apply for direct lending capital are generally $10 to $50 million of EBITDA in size. Given direct lending capital generally finances more than just a plain vanilla refinancing, the need, the depth, and the sophistication of capital increases compared to the average bank refinancing.
What are the benefits of direct lending capital?
1. Large hold size
2. Speed of execution
3. Flexibility beyond the bank market
4. Structure transactions with multiple tenors
5. Unique amortisation structures
6. Floating rate interest
7. Wide variety of use of proceeds
What is Pricoa Private Capital’s experience with direct lending?
Many direct lenders only focus on the private equity sponsored market, meaning the company is owned or controlled by a private equity firm. While Pricoa Private Capital supports private equity sponsored borrowers, we also work with family-owned and management-owned companies that don’t change hands in terms of ownership for many generations. Our platform provides everything from revolving credit facilities through to direct loans, including mezzanine and structured equity as well. As a buy and hold partner with deep pockets of capital, we work with companies that are looking for a lender with a longer-term orientation and more flexibility than a bank.
This article represents the views, opinions and recommendations of the author(s) regarding the economic conditions, asset classes, securities, issuers or financial instruments referenced herein. Distribution of this information to any person other than the person to whom it was originally delivered is unauthorised, and any reproduction of these materials, in whole or in part, or the divulgence of any of the contents hereof, without prior consent of Pricoa Private Capital is prohibited. Certain information contained herein has been obtained from sources that Pricoa Private Capital believes to be reliable as of the date presented; however, Pricoa Private Capital cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. Pricoa Private Capital has no obligation to update any or all of such information; nor do we make any express or implied warranties or representations as to the completeness or accuracy or accept responsibility for errors. These materials are not intended as an offer or solicitation with respect to the purchase or sale of any security or other financial instrument or any investment management services and should not be used as the basis for any investment decision. Past performance is no guarantee or reliable indicator of future results. No liability whatsoever is accepted for any loss (whether direct, indirect, or consequential) that may arise from any use of the information contained in or derived from this report. Pricoa Private Capital and its affiliates may make investment decisions that are inconsistent with the recommendations or views expressed herein, including for proprietary accounts of Pricoa Private Capital or its affiliates.
The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients or prospects. No determination has been made regarding the suitability of any securities, financial instruments or strategies for particular clients or prospects. For any securities or financial instruments mentioned herein, the recipient(s) of this report must make its own independent decisions.
Pricoa Private Capital (‘PPC’) is a trading name of PGIM, Inc. (‘PGIM’), PGIM Private Capital Limited and PGIM Private Capital (Ireland) Limited. In the United Kingdom, information is issued by PGIM Private Capital Limited with registered office: Grand Buildings, 1-3 Strand, Trafalgar Square, London, WC2N 5HR. PGIM Private Capital Limited is authorised and regulated by the Financial Conduct Authority (“FCA”). In the European Economic Area (“EEA”), information is issued by PGIM Private Capital (Ireland) Limited with registered office: Pramerica Drive, Letterkenny Business and Technology Park, Letterkenny, Co Donegal, F92 W8CY, Ireland. PGIM Private Capital (Ireland) Limited is authorised and regulated by the Central Bank of Ireland and operating on the basis of a European passport.
©2022 Prudential Financial, Inc. and its related entities. PPC, Pricoa, PGIM, the PGIM logo and the rock symbol are service marks of PFI and its related entities, registered in many jurisdictions worldwide. PFI of the United States is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom.