The Lending Technology of Direct Lenders in Private Credit

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 borrowers of direct lenders are distinct relative to those of traditional lenders; they are younger, more likely to be in intangible capital industries, and more likely to be located in the biggest cities in the United States. These differences reflect the focus of direct lenders on private equity-owned firms; direct lenders have negligible impact in industries and cities with low private equity presence. The lending technology of direct lenders is distinct from banks: they have almost no branch network, they are geographically distant from borrowers, they write collateral claims more focused on the continuation value of firms after a default, and they have a higher degree of specialization in certain industries. Direct lenders and private equity sponsors match on industry specialization more strongly than geographic proximity. The findings suggest that direct lenders are not a general substitute for traditional lenders in middle market business lending, but they are instead specialized lenders focused on a particular segment of the U.S. economy with a distinct lending technology.