What's Direct Lending? Bank Loans Without a Bank

What’s direct lending? Old-fashioned bank lending, just without the bank. As tougher regulations have reshaped the post-financial crisis landscape, traditional banks have cut back on business lending. That’s created an opportunity for a growing group of asset managers who are making loans to mid-market companies. For investors, it’s an increasingly popular answer to low-yield woes. Some companies big enough to tap the syndicated debt market are choosing direct lending instead. The question for regulators is whether the market can sustain such growth without making a mess.

It starts with asset managers -- initially, mostly hedge funds and private-equity funds, but now other types of investors as well, including insurance firms -- raising pools of money from investors interested in debt. The managers field pitches from debt advisers with investment opportunities, or private-equity funds looking to finance acquisitions. The direct-lending fund does its own research before deploying its money. Direct lenders tend to hold onto the loans long-term, sometimes offering growth support to the company and entering into multiple funding rounds, although some funds do sell a small proportion of their debt.