Why Direct Lending Is a Booming Part of Private Debt

What’s direct lending? Old-fashioned bank lending -- without the bank. As tougher regulations reshaped the post-financial crisis landscape, traditional banks have cut back on business lending. That’s created a raft of opportunities: For a growing group of asset managers who are making the loans, for borrowers and for investors looking for an answer to low-yield woes. Increasingly, that last group includes hedge funds and buyout firms who are dishing out billions of dollars at a time to lure borrowers away from the $1.3 trillion leveraged loan market. For regulators, the question 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 higher-yielding debt. The managers field pitches from debt advisers with investment opportunities, or other 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 do sell a small proportion of their debt.