NEW YORK, May 15 (LPC) – Direct lending funds, which provide capital to middle market companies in increasing amounts, are turning to other funds to reduce their credit exposure.

Growing interest in the middle market and intense competition among non-traditional lenders has prompted debt capital providers to advocate for larger equity investments, sometimes ultimately to win prime mandates. plan only to offload some of the risk after the fact.

“It’s part of how comfortable funds feel about writing big checks,” a market source said.

“There is a ghost aftermarket,” the source added. “Some of these private credit funds intend to spread positions with other lenders.”

This dynamic stems from a development of the middle market moving away from unitranche lending, referring to a single tranche of debt that combines senior and junior capital at a blended cost, often referred to as an arrangement between lenders (Lenders), towards what is called a “single dollar united”.

Yesterday’s unitranche loans were preferred in times of market volatility, when sponsors and borrowers needed certainty of execution.

Now that the product is more widely used and the loans are larger, the preference is for one lender to provide the entire loan and then bring in other investors to reduce the risk.

“While companies have raised larger funds, they prefer to take the whole coin and the market has gone from AAL,” said Michael Ewald, managing director of Bain Capital Credit.

Unlike banks, which arrange loans to be distributed among institutional investors, direct lenders are generally investors who buy and hold loans until maturity.

Private equity borrowers using the unitranche route can save on loan rating expenses and avoid the risk of upward price inflection during broader syndication. With growing funds, sponsors have more options.

“Regulated banks have been losing shares to direct lenders for some time, thanks to higher lender holdbacks. This dynamic has also enabled sponsors to avoid the syndication process as much as possible, which involves market risk, ”said Randy Schwimmer, assembly manager at Churchill.

The private credit market continues to grow in size. The funds raised US $ 96.9 billion in 2018, up from US $ 70.9 billion and US $ 62.6 billion in 2017 and 2016, respectively, according to LPC data.

“Between $ 50 million and $ 75 million is where the line between funds and banks starts to blur,” Ewald added.

Additionally, dealing with a direct lender means the terms of the deal are not publicly available and the funds place the loan positions with a handful of names.

The underwriter continues to act as an agent and is open with the borrower as to their intention to reduce their position. In some cases, the Sponsor will invite a Sponsor to participate in the Debt Financing.

“It’s always a people business and it’s important that the owners know who’s in the group,” said a second market participant.


To keep up with the rapid growth of the middle market, banks are also tapping into their own strengths to provide complementary services alongside private debt funds to gain exposure to the middle market.

The expansion of funds means they offer a “cafeteria plan” of options, including a range of instruments beyond term lending to benefit private equity borrowers, which most banks are up to. ‘now unable to provide.

But, banks are able to tap where direct lenders are weakest – by financing other debt instruments, including revolving credit facilities – due to the fact that they have a higher cost of capital. low and can leverage their much larger origination networks to provide fund flows. . Some seek formal partnerships through joint ventures.

“Banks are now naturally looking for an advantage in areas where they have always been competitive. One is to provide revolving credit capacity. Another is the asset backed loan. Finally, some regional banks have more experience in sectors such as automotive, natural resources and energy, ”said Schwimmer. (Reporting by David Brooke and Leela Parker Deo. Editing by Michelle Sierra and Lynn Adler.)