The last word: The truth about direct lending
Direct lenders have become a dominant force in buyout financing over the past decade, displacing traditional bank funding. This has led some people to suggest that relationship lending, backed by robust credit protections, is becoming a thing of the past. But how do direct lenders really behave? A new study looks into the issue.
Young Soo Jang is an assistant professor of finance at The Pennsylvania State University, Smeal College of Business, having earned his PhD from The University of Chicago Booth School of Business and bachelor’s degree from Massachusetts Institute of Technology. He has worked as a research assistant at the Federal Reserve Board of Governors and has a particular interest in corporate debt and entrepreneurial finance.
Young Soo Jang
How accurate is the popular perception that direct lenders apply less stringent loan documentation than their traditional banking peers and are more likely to be fair-weather friends who do not maintain relationships during difficult periods?
As direct lenders take an increasing market share in buyout financing from traditional banks, a recent academic paper (see sidebar for more details) attempts to answer this question. In contrast to the prevailing view, the research finds that direct lenders engage in active monitoring and relationship lending, much like banks. Financial covenants are a near-ubiquitous feature of direct lending agreements, according to the findings, and direct lenders and sponsors appear to work collaboratively to resolve company distress, with payment deferral agreements and equity injections far more likely in deals involving direct lenders than those where banks provide finance. We caught up with the research author, Young Soo Jang, to find out more.
In Are Direct Lenders More Like Banks or Arm’s-Length Lenders?, Young Soo Jang (The Pennsylvania State University) uses a novel database of loans...