Are Direct Lenders More Like Banks or Arm’s-Length Investors?

Wednesday January 24, 2024


I study whether direct lenders, which have been displacing banks in private equity (PE) buyouts, lend more like banks or arm’s-length investors. Using a novel database for direct lender-held loans to PE buyouts, I find that nearly all senior loans originated by direct lenders include financial covenants. Upon covenant violation, direct lenders frequently impose additional restrictions on firms’ activities during renegotiation, resulting in more conservative investment and financial policies. During the COVID-19 pandemic, direct lenders exhibited greater flexibility than banks in resolving distress through out-of-court renegotiation, in part facilitated by more equity injection from the firms’ PE sponsors. Furthermore, direct lenders’ prior relationships with PE sponsors were associated with more favorable continuation lending during the pandemic. Overall, similar to banks, direct lenders appear to actively monitor and engage in relationship lending.


Young Soo Jang, University of Chicago Booth School of Business