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What is Direct Lending?

December 12, 2022
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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 recapitalizing 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 amortization structures
6. Floating rate interest
7. Wide variety of use of proceeds

What is Prudential 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 Prudential 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.

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