Direct lending is a form of corporate debt provision in which lenders other than banks make loans to companies without intermediaries such as an investment bank, a broker or a private equity firm. In direct lending, the borrowers are usually smaller or mid-sized companies, also called small and medium enterprises, rather than large, listed companies, and the lenders may be wealthy individuals or asset management firms.
Peer-to-peer lending networks such as crowdfunding are sometimes considered part of the direct lending market and lend to very small companies. However, most asset managers involved in direct lending will consider loans only above a certain size, typically €5 million or more. Aside from peer-to-peer networks, direct lending is therefore mainly focused on middle market borrowers.
The market has grown in importance since around 2009 in response to banks reducing their lending activities to companies in the wake of the Financial crisis of 2007-08. There is little comprehensive data on the size of the market and the scale of the opportunity is disputed. The need for direct lending has been put at €100 billion in Europe alone between 2013 and 2015. However, other sources report that in 2014 asset managers are struggling to find enough direct lending opportunities to invest in.
Asset managers cite the higher returns available from direct lending strategies as a main reason that people should invest in direct lending. US pension funds are among the investors who are reported to have made allocations to direct lending strategies, especially in Europe. Several European governments have taken initiatives to boost direct lending to smaller companies since the financial crisis. For example, in 2012, the UK government introduced a scheme to lend £700 million of public money to smaller companies in partnership with asset managers. A large number of asset management firms have started funds to invest in direct lending, and several US firms have targeted European direct lending since around the start of 2013.
- Venture capital
- Angel investor
- Revenue-based financing
- History of private equity and venture capital
- Eavis, Peter (16 July 2014). “Funding Circle, a Peer-to-Peer Lender, Raises $65 Million”. The New York Times.
- Stothard, Michael (12 March 2013). “Funds lend direct to eurozone groups”. Financial Times.
- Dolan, Charles (2013). “Beyond Banks: The Emerging Opportunity in European Direct Lending” (PDF). The Bank of New York Mellon.
- “Alcentra website”. Retrieved 14 July 2014.
- “Insurer Legal & General to start lending direct to businesses”. Reuters. 17 July 2014.
- Bisserbe, Noémie (6 April 2014). “Direct Lending Takes Off in Europe”. The Wall Street Journal.
Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder and CEO of TBIL.co STATX Mutual Fund.