Non-bank lending to small-and medium-sized firms-i.e., private credit-has exploded over the past two decades. To explore the rise in its popularity, we focus on Business Development Companies (BDCs), which comprise a large fraction of the total private debt market and for which we can observe detailed information on portfolio investments. Many have explained the growth in BDCs in terms of its role as a substitute for bank financing in the wake of post-crisis credit tightening. Our work instead focuses on the fact that private lending is an outgrowth of the burgeoning private equity market. BDCs both provide debt for PE-sponsored deals and make PE-like investments themselves. Unlike banks, BDCs offer a complex combination of securities to companies, spanning the debt/equity spectrum. This allows private lenders to tailor contracts to the risk profiles of individual firms. The growth of the asset class is tied directly to both PE affiliations and PE-like contractual complexity, which is associated with higher interest rates and values at the loan level, yet lower market risk than traditional private equity. By blending lending with traditional private equity investments, the supply of capital is tailored to a growing retail investor segment.
David Robinson, Duke University, Fuqua School of Business
Melanie Wallskog, Duke University, Fuqua School of Business