The Lending Technology of Direct Lenders in Private Credit

Young Soo Jang, Dasol Kim, Amir Sufi and Xiangyu Chen

No 34500, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We compare the lending technology of direct lenders, banks, and finance companies using a unique data set on secured borrowing by the universe of U.S.-based private middle market firms. The dramatic rise of direct lenders over the past 20 years is due to their comparative strength in providing enterprise-value based loans to private equity-backed firms in intangible capital industries. The rise in direct lending is also partially explained by a pull-back in bank lending due to stronger post-Global Financial Crisis banking regulation, but the strength of this channel is quantitatively weaker. Direct lenders write collateral claims more focused on the continuation value of firms after default, especially when the firms operate in intangible capital industries. Direct lenders are more highly specialized by industry than banks. The evidence supports the view that direct lenders have a relative advantage in lending to higher risk borrowers where there is a large gap between continuation value and liquidation value in the event of default.

JEL-codes: G00 G20 G30 (search for similar items in EconPapers)
Date: 2025-11
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