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The Full Guide to Direct Lending: Industry, Companies & Careers

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Hardly anything in the modern finance industry is truly “new,” but direct lending might come closest.

Private debt markets have always existed, but direct lending – a specific subset of private debt – took off in a major way after the 2008 financial crisis.

As the large commercial banks stepped away from lending to middle-market and lower-middle-market companies, due to new regulations and economics, “alternative lenders” stepped in to fill the gap.

And in the process, they created a sub-industry that blends elements of private equity, mezzanine, and traditional bank lending.

Table Of Contents

Direct lending vs. private debt, direct lending vs. leveraged finance and debt capital markets, direct lending vs. mezzanine, direct lending recruiting & ideal candidates, direct lending fund interview questions and answers, direct lending case studies and modeling tests, direct lending jobs: deals, work, and hours, the top direct lending funds, direct lending salary + bonus levels, direct lending exit opportunities, is direct lending right for you, for further learning, what is direct lending.

Direct Lending Definition: Direct lending funds provide loans to middle-market companies that are originated and held by the lender rather than broadly syndicated; they are typically illiquid, senior secured loans with 5-7-year maturities and floating coupon rates, and returns expectations are in the high single digits to low double digits.

Just like private equity funds , direct lending (DL) funds raise capital from outside investors (Limited Partners) and then charge a management fee and incentive fee (carry), with a hurdle rate requirement to earn the incentive fee.

Unlike commercial banks, DL funds are unregulated, which means they can take higher risks and pursue deals that large commercial banks would reject or ignore.

Often, the financing required for middle-market M&A and buyout deals is in the “grey zone” for banks: it’s too large for the bank to fund directly but too small to be worth syndicating (i.e., splitting up the issuance and selling it to other investors).

So, instead of negotiating with several banks for a $150 million term loan, a company might find a direct lender that can fund the entire loan and complete the process quickly.

DL funds can also make deal processes more efficient by reducing the number of parties involved and the risk of leaks about the deal.

They’re often willing to lend up to higher multiples of EBITDA (e.g., 4.5x or 5.0x rather than 4.0x for a Term Loan)… in exchange for higher interest rates, of course.

I’ve used this image before, but this graph from Marquette Associates sums up various credit fields quite well:

These terms are often used interchangeably, but private debt is broader and includes direct loans, mezzanine , and forms of distressed debt .

“Private debt” means that the loan is funded directly by one investment firm rather than being syndicated and sold to many investors, and that that one investment firm plans to hold the loan until maturity.

Also, as the name implies, private debt is not publicly traded, so its market value is more difficult to determine.

But the terms, risk, and returns expectations for private debt vary widely, and distressed debt, at one end of the spectrum, is not comparable to the average direct loan.

The main differences here are:

• LevFin and DCM loans tend to be widely syndicated, i.e., the bank underwrites the loan, divides it, and sells it to a group of lenders called “the syndicate.”
• Direct lending funds are raised from Limited Partners such as pensions, endowments, and sovereign wealth funds , and they charge these LPs management and incentive fees. But if a bank holds a loan directly on its Balance Sheet, it’s funded by the bank’s deposits and debt, and the bank earns a small fee on the amount raised, with no incentive fee.
• Loan sizes tend to be smaller because direct lenders focus on middle-market companies.

Career-wise, direct lending is “better than DCM but not as good as LevFin.”

The work is more interesting than DCM since you get modeling and credit analysis exposure rather than constant market update slides.

But it’s still perceived as less modeling-intensive than LevFin or M&A or strong industry teams, and you’ll have fewer exit opportunities than in one of those.

The business models of direct lending funds and mezzanine funds are quite similar: raise money from outside investors, invest directly in issuances from companies, and charge a management fee and incentive fee.

But the risk and potential returns differ significantly:

• There is rarely equity participation with direct loans, but it’s common with mezzanine.
• Both types of loans may charge commitment fees, prepayment penalties, and other fees, but these fees tend to be higher for mezzanine.
• Capitalized or “Paid-in-Kind” (PIK) Interest is rare for direct loans but common for mezzanine.
• And direct loans are secured and have floating interest rates, while mezzanine issuances are unsecured and have fixed rates.
• Finally, mezzanine tends to fund the “last debt required” in deals, such as taking a company from 4x Debt / EBITDA to 5x Debt / EBITDA, while direct loans are used for funding up to that initial 4x.

Credit-related groups at the large banks work well if you want to break into direct lending. Think: Leveraged Finance , Restructuring , and M&A and industry teams with solid deal flow and debt-related deals.

Capital markets groups, such as ECM and DCM , are not great options because you don’t get much modeling exposure.

Areas like corporate banking , commercial banking, fixed income research , and credit rating agency work are in the “maybe” category: yes, you do credit analysis, but you don’t necessarily work on the types of deals that direct lenders execute.

If you’re working in one of those fields and you want to move into direct lending, you would boost your chances significantly by winning an IB role first.

It is possible to break in straight out of undergrad, especially if you’ve had credit-related internships at banks or other investment firms.

However, it’s not necessarily the best idea for the same reasons that private equity right out of undergrad may not be ideal : you limit your options and may not get meaningful work.

Recruiting tends to follow the off-cycle pattern at the smaller direct lenders and the on-cycle pattern at larger groups attached to the private equity mega-funds .

So, if you want to work at one of the huge funds doing direct lending, you’ll need to be prepared for headhunters and recruiting long in advance of the start date.

But if you’re fine with going to a smaller fund, you can take your time, network around, and join when they’re ready to hire someone.

The interview process is the standard one for any finance role: an HR phone screen or HireVue , a phone or video interview with an investment professional, and then a Superday with 3-4 people at the firm, possibly including a case study or modeling test as well.

Interview questions for DL roles can be summarized as: “Take the mezzanine fund and corporate banking articles and make sure you know the interview questions listed there.”

Since the questions are so similar, we’re not going to repeat everything here – but we will present a few of the most common fit and technical ones:

Walk me through your resume / tell me about yourself.

See our walk-through, guide, and examples for the “ Walk me through your resume ” question.

You can put more of a “lending” spin on it by saying that the capital structure element of deals interests you most, and you want to work on that specific aspect.

What do direct lenders do?

They provide loans to mid-sized and smaller companies that are directly originated with no or minimal syndication. The loans are senior secured with 5-7-year maturities and floating interest rates, and direct lenders typically hold them until maturity.

The direct lending market exists because large banks stepped away after the 2008 financial crisis, partially due to new regulations and partially due to economics and industry consolidation.

Why direct lending rather than private equity or mezzanine?

You want to work on and close deals rather than looking at dozens or hundreds of deals and rejecting most of them right away, as in PE, and you like assessing companies’ credit risk.

You prefer direct lending over mezzanine because mezzanine is more of a split debt/equity focus, and you want to focus on the credit side.

What are some of the key maintenance covenants that you would analyze in a credit deal?

Maintenance covenants relate to financial metrics that the company must maintain after it raises debt.

The most common ones include the Leverage Ratio, or Debt / EBITDA, and the Interest Coverage Ratio, or EBITDA / Interest (and variations like Net Debt rather than Debt, or EBITDA – CapEx rather than EBITDA).

For example, secured loans often require companies to maintain Debt / EBITDA below a certain number, such as 5x, and EBITDA / Interest above a certain number, such as 2x.

How do you calculate the Fixed Charge Coverage Ratio (FCCR) and the Debt Service Coverage Ratio (DSCR), and what do they mean?

Both metrics may be defined in slightly different ways, but the FCCR is usually something like (EBIT + Non-Interest Fixed Charges) / (Non-Interest Fixed Charges + Interest Expense + Mandatory Principal Repayments).

The FCCR tells you how well the company’s business earnings can pay for its “fixed” expenses, such as rent/leases, utilities, and debt interest and principal repayments. Higher coverage is better.

The DSCR can also be defined differently, but we often use (Free Cash Flow + Interest Expense) / (Interest Expense + Mandatory Principal Repayments).

Some people also use EBITDA – CapEx, EBITDA – CapEx – Cash Taxes, or other variations in the numerator.

This one measures a company’s ability to pay for its debt with its business cash flow, and it does not consider other fixed expenses such as rent. Higher numbers are better.

What qualities would you look for in a company that’s seeking funding from us?

This one is covered in the corporate banking article; the criteria are quite similar.

You want companies with predictable, locked-in, recurring revenue, ones that can survive a downturn or industry decline, ones with low existing debt levels, and ones with low CapEx requirements and fixed expenses.

It also helps to be an industry leader in a growing market.

How can you quickly approximate the Yield to Maturity (YTM) on a bond?

We have a tutorial on this one, so please refer to it:

How to Approximate the Yield to Maturity (YTM) on Bonds

(For more, please see our full tutorials on the bond yield , the Current Yield , the Yield to Maturity , the Yield to Call , and the Yield to Worst .)

Suppose that we issue a $200 million loan to a middle-market IT services company to fund a leveraged buyout. It has a 7-year maturity, a floating interest rate of Benchmark Rate + 600 bps, an origination fee of 1%, and a prepayment penalty of 2%. What is the approximate IRR if the company repays this loan at the end of Year 5, and the Benchmark Rate rises from 1% in Year 1 to 3% in Year 5? Assume no principal repayments.

The interest rate here starts at 7% and rises to 9% by the end, so the “average” rate is 8%.

The origination fee is 1%, and the prepayment fee is 2%, so the lender earns 3% extra over 5 years; 3% / 5 = slightly more than 0.5% since 3% / 6 is exactly 0.5%.

You could say, “Between 8% and 9%, but slightly closer to 9%” for the answer.

In Excel, the IRR is 8.51%.

If you get a case study or modeling test, it will likely take this form:

“Please read this CIM or a few pages of information about this company, build a 3-statement or cash flow model, and make an investment recommendation about the potential Term Loan A/B or other loan issuance.”

If this is an on-site case study for 90 minutes up to 3-4 hours, skip the fancy models and create Income Statement projections, a bridge to Free Cash Flow, and a simple Debt Schedule .

You do not need to calculate the equity IRR, you don’t need purchase price allocation , and you don’t need the full financial statements to complete these case studies.

Building the correct operational cases, focusing on the pessimistic scenarios, and make sure you include the right credit metrics, such as the DSCR and Leverage and Coverage Ratios.

Sensitivities help but are not necessarily essential if you have reasonable scenarios.

Credit case studies are all about assessing the downside risk and rejecting deals where there’s even a chance of losing money if the company performs below expectations.

For a good example of what to expect, see our Debt vs. Equity case study on YouTube:

Debt vs. Equity Analysis: How to Advise Companies on Financing

Your write-up can follow the standard structure: yes or no decision in the beginning, the credit stats and potential losses in different cases, and the qualitative factors that support your decision (e.g., resistance to recessions, recurring revenue percentage, customer and revenue diversification, margin strength, fixed costs, and industry position).

If this is more of a take-home case study where you have several days or a week to finish, you still should not create a super-complex model.

Use cash flow projections and build the full financial statements only if they’re required.

Instead, use the extra time to do additional research so you can back up your numbers more effectively when you present your recommendation.

The direct lending job itself, at least as an Associate, is similar to what you do in other credit and buy-side roles: origination, due diligence, process work, and financial modeling.

However, the “due diligence” part is often compressed because you look at so many deals and need to decide quickly.

It’s not like private equity, where your team could potentially take months to dig through a single company’s financial data and do on-site diligence.

The steps in a typical deal process might look like this:

1) Receive Non-Disclosure Agreement (NDA) from a Banker or Financial Sponsor – You then mark it up and agree on the changes, and both sides execute it so that you can receive information about the company and deal.

2) Receive and Analyze the Confidential Information Memorandum (CIM) – The bank or financial sponsor sends you the CIM, you build a simple cash flow model to assess the credit risk, and your team makes an initial decision on whether to go forward.

3) Submit an Indication of Interest (IOI) or Letter of Intent (LOI) – You outline your proposed investment terms, including the maturity of the loan, the fees, the interest rate, and so on.

4) Advance to the Next Round – If you’re selected, you complete more due diligence over the next few weeks, including a more detailed model, a review of the data room, and more detailed analysis of customers, revenue sources, and profitability by product/region/customer (the breakeven formula is useful here).

5) Write and Present Your Findings – You’ll then write a more detailed credit memo and present your findings to the investment committee.

6) If Approved, Close the Deal and Monitor the Company – If the committee likes it, they’ll approve the deal and transfer the funds, and you’ll start monitoring the company and reviewing its performance each quarter.

If you’re at an independent direct lending or private debt fund, the average weekly hours might be in the 50-60 range, with occasional spikes when deals close.

The hours are shorter than those in traditional private equity because direct lenders tend to do less due diligence, they have less concentrated portfolios, and they rely on sponsor relationships rather than cold outreach to win deals.

However, note that if you’re in direct lending at a PE mega-fund, your hours and stress levels might be nearly the same as they are in traditional PE.

There are two main groups: managers linked to much larger private equity firms/hedge funds/investment banks, and “independent” managers with a credit focus.

In the first category are firms like Ares, Goldman Sachs Merchant Banking , Apollo, Bain Capital, KKR, Blackstone (GSO), Cerberus, Fortress, and Centerbridge.

In the second category are firms like Oaktree, Golub, Intermediate Capital Group, HPS Partners, PennantPark, Crescent Capital, Owl Rock, CarVal Investors, Hayfin, First Eagle, Maranon, and dozens of others.

Many of these firms also make mezzanine and other private debt investments, and some even make growth equity and equity co-investments as well.

While direct lending funds and private equity funds have similar business models, there are a few important differences:

• Fees Are Often Lower – For example, the management fee might be closer to 1% rather than 2%, and the incentive fee might be 10% or 15% rather than 20%.
• Fees Might Be Charged Based on Deployed Capital Rather Than Raised Capital – So, if your fund raised $1 billion but has only invested $200 million, the 1-2% management fee might be charged on the $200 million rather than the $1 billion.

As a result of these differences, average compensation tends to be lower.

The rule of thumb is “Take IB/PE base salaries and assume lower bonuses.”

So, the approximate total compensation ranges are:

• Analyst: $90K to $140K
• Associate: $125K to $250K
• Senior Associate / Assistant Vice President: $200K to $350K
• Vice President: $300K to $500K
• Principal / Senior Vice President: $450K to $700K
• Managing Director: $400K to just over $1 million

The bonus starts at a relatively low percentage of base salary (10 – 50%), but rises to 100% by the mid-levels and potentially over 100% for MDs.

These are wide compensation ranges because of the differences between different fund types.

For example, an Associate who just finished an IB Analyst program and joined a larger, well-known direct lender might earn total compensation of $200K to $250K.

But at a smaller firm that’s unattached to a large bank or PE firm, total compensation might be closer to $150K.

The bottom line: you still earn a lot in direct lending, but it is a discount to private equity salaries and bonuses , and the “ceiling” tends to be lower because of the lower fees.

Note that we’re not including carried interest in these figures – if we did, there would be an even bigger difference between DL and PE pay at the top levels.

After the “What is direct lending?” question, the second-most-common one is “What do people do after direct lending? What are the exit opportunities? Show me the exit opps!!”

Unfortunately, the answer is quite boring: “Stay in the space and work their way up at the same fund or move to a different fund.”

One of the major disadvantages of direct lending is that it tends to be difficult to move into other industries, even ones related to credit, such as distressed private equity , standard private equity , or credit hedge funds.

The issue is that you work mostly with secured debt, not the high-yield or distressed issuances that these other firms buy and sell.

Also, while PE and DL share some aspects, the “investing philosophy” is quite different since one is a pure equity role, and the other is a pure debt role.

I’m sure that some people have moved from DL to PE, but it’s more difficult than you would think; the reverse move is easier.

Mezzanine funds might be one potential exit opportunity, especially if you worked at a fund that did more than secured loans.

And if you go to a mezzanine fund, you open up exit opportunities at some of the other firm types mentioned above.

These limited exit opportunities also explain why it may not be a great idea to start in direct lending out of undergrad: Leveraged Finance would pay you more and give you more options.

You would be a good fit for direct lending if you want to work on many different deals but not go into each one in extreme depth, and you want to do only credit analysis without considering the equity side.

You would also be a good fit if you want a slightly better lifestyle, still-high-but-lower-than-PE compensation, and you want to stay in credit for the long term.

You would not be a good fit if you want to analyze the equity side of deals, work directly with portfolio companies’ operations, or make the most amount of money possible.

Also, if you’re not sure you want to be in credit for the long term, stay away – because most people in direct lending do end up staying for the long term.

Personal Opinion: While direct lending roles are fine, you could get many of the same benefits (shorter hours in exchange for slightly lower pay, more deals, etc.) by joining a mezzanine fund.

You would also gain access to more exit opportunities, so you could move around more easily if you decide it’s not for you.

So, I’m not sure why you’d choose direct lending over mezzanine if you interview around and win offers in both fields.

Here are some links if you want to learn more about the field:

• Direct Lending Overview by Hewitt ennisknupp
• Supercharged Fixed Income – Direct Lending by Marquette Associates
• The Rise of Private Markets and Non-Bank Lending by Ares

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street . In his spare time, he enjoys lifting weights, running, traveling, obsessively watching TV shows, and defeating Sauron.

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12 thoughts on “ The Full Guide to Direct Lending: Industry, Companies & Careers ”

I work in sponsor finance in commercial banking; we make first lien loans for private equity transactions. Do you think this is helpful experience for direct lending roles?

Potentially, yes.

Useful article! Do you know what the responsibilities, comp, and exit opps look like for a portfolio management analyst or associate at a direct lender?

Different lending shops define PM differently and some have a separate team for it whereas others have associates handling PM tasks in addition to sourcing / underwriting / DDing new investments. Thanks.

Sorry, we don’t have information on that one. Most compensation surveys do not have much specific information on direct lending or differences in the different DL groups.

Hi Brian, thanks for the article. I am headed into a corporate banking role this summer in a bank with CIB umbrella structure. I sometimes get confused when you refer to lack of deal experience when it comes to corporate versus investment banking roles: if I am doing credit analysis/due diligence, modeling, and helping to execute on project financing, term loans, etc. where my firm has “skin in the game”, why are those less of a transaction than syndicating loans on the LevFin or DCM side?

CB deals are somewhat different because you don’t necessarily do as much modeling work, and the hours and intensity are lower because the debt issuances in CB are usually not related to deals. But it does vary by bank, and at some firms, there’s barely any difference between CB and IB, or they’re even grouped together.

I’m currently a student looking at a prospective summer internship.

I was wondering what are your thoughts regarding Credit Portfolio Advisory (specifically at Alantra, Dublin). They have a team that apparently advises on credit transactions.

My eventual goal was to join a credit fund like GSO or Guggenheim but this idea of ‘advising’ on credit transactions somewhat confuses me (as I thought all decisions were analysed and made by the deal parties without ‘middlemen advisors’).

Job description looks pretty similar to a credit fund analyst (but considering those are written by HR… I’d rather not trust them lol).

Any opinions on this credit advisory service, Alantra, exit ops etc. is much appreciated if you have any insight^

Thank you!!!

Sorry, I don’t know enough about that specific group to say much. From the description, it seems like the exit opportunities would be similar to the ones discussed here. Not sure if the top credit funds would be realistic, but other credit funds, direct lenders, maybe mezzanine, etc. would be possible.

Hey Brian. Have you seen individuals move from commercial banking (C&I Lending) straight to Direct Lending? What do you think are the main areas or skills a commercial banking lender should focus on in order to transition his or her career to direct lending?

Not offhand, no, because the skill sets are somewhat different. You need to show more evidence of financial modeling and investing skills to move into direct lending. I’m sure some people have moved in from commercial banking, but it’s not as easy as you might think.

Great article. Do you know of any shops that hire recent grads with little to know experience?

Thanks. Some of the mega-funds that also have credit arms do hire undergrads (Apollo, Bain Capital Credit, KKR Credit, Ares, Oaktree, etc.). But you usually need some type of experience, such as previous internships, to have a good shot at those.

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Private Credit Recruiting (What to Expect and How to Prep)

If you're interested in breaking into finance, check out our Private Equity Course  and Investment Banking Course , which help thousands of candidates land top jobs every year.

The financial crisis of 2007 - 2008 permanently changed how the leveraged finance arms of investment banks operate. Regulatory guidelines enacted in response to the financial crisis and decisively limited the banks’ ability to lend to companies in risky sectors or finance risky leveraged buyouts to support their private equity clients.

As banks became more selective about the transactions they supported, Private Credit (i.e. Private Debt or Direct Lending) emerged to fill the significant lending gap that the investment banks left behind. Private Credit has grown to become one of the most important segments of the entire debt financing universe.

Despite the surge of popularity in private credit among young professionals, there are very few resources explaining how those interested in a career for private credit can navigate its mystifying recruiting process.

In this post, we will provide an overview of how recruiting for private credit works, discuss the similarities and intricacies compared to private equity recruiting, and provide a guide on how professionals from different career backgrounds can navigate the process.

Overview of Private Credit

Similar to private equity, recruiting for private credit is composed of 4 to 5 rounds of interviews, which include a round dedicated to a case study and/or model test. Interviews consist of technical, behavioral and fit questions, with technical questions being geared towards debt- or credit-related topics.

The recruiting season typically begins one year later than private equity, starting in late Fall of an analyst’s 2nd year, although many funds, especially smaller ones, will just recruit on a need basis. As such, we would estimate that Private Credit has more off-cycle recruiting opportunities than Private Equity.

Paths to Private Credit

The most common path to getting an interview at a private credit fund is through headhunters who usually reach out directly to analysts through your professional email.

The largest credit funds such as Carlyle, KKR (both Henkel), Oaktree (Amity) and GSO (SG Partners) rely on the headhunters they use for private equity recruiting. Many private equity mega funds have large credit arms. Regional or smaller funds (<$5B AUM) often post directly to job sites or use lesser known recruiters. When speaking with headhunters, make sure to have your story nailed down as to why you are pursuing private credit over private equity.

Opportunities are available to anyone working in investment banking, but the most common paths to Private Credit are candidates from:

Leveraged Finance or “LevFin” (origination, underwriting, execution)

Capital markets

Corporate / commercial banking

For those not currently in any of these fields, it is highly recommended that you lateral to one first in order to get related work experience and better access to recruiting pipelines.

For commercial and corporate banking analysts finding it difficult to get interviews, a common path is to transition into a LevFin group (whether internally or lateral) before recruiting.

Contrary to private equity, it is not uncommon to see analysts that were promoted to associates in investment banking also move to private credit.

Typical Credit Interview Questions

When preparing for Private Credit interviews, you should take special attention to understand your deals very well. You should be able to:

Explain in 30 seconds what the company does and how their business model makes money.

Know key stats of the transaction (size and interest rate on each debt tranche, leverage metrics) and business (EBITDA, cash flow/margin profile, etc.).

Discuss the investment highlights (what makes this company a good business to invest in?) and risk and mitigating factors (what risks could impact the business’ performance and how is an investor and the company’s cash flows protected?).

If it was a LevFin deal, know details of the syndication process and what investors were concerned with (if possible, check if the credit fund potentially looked at any of the deals you worked on).

If you have directly related experience, you will likely be asked about credit-related technicals, such as:

How do you calculate financial covenants (e.g. Fixed Charge Coverage Ratio)

How do you calculate all-in yield for term loan or bond?

Walk me from EBITDA to levered free cash flow

Walk me through a credit agreement

What is your view on the leveraged loan market?

If you have a corporate or commercial banking background, expect to be grilled more on technicals and what exactly your responsibilities were on deals. Some interviewers assume corporate bankers just manage client relationships and do not handle technical analysis like LevFin juniors, so the technical standard is often higher.

The Case Study / Model Test

The majority of Private Credit groups will administer a case study as the next portion of the interview process.

The case study will either be a take-home assignment or an in-person test. Take-home assignments are much more common during the off-cycle, while in-person tends to be more common during on-cycle due to the time constraints.

1. Take-Home

You will be given a CIM or presentation on a company and supplemental information including an industry report or excel files with large data sets that you will need to comb through.

You will have 2-3 days to prepare a presentation either in Word or PowerPoint format. It should outline the transaction situation, company and its business model, investment merits, key risks and mitigating factors, historical financial analysis, a projection model with multiple cases and most importantly, your recommendation on if you would do the deal or not (Hint: It’s okay to recommend not doing the deal as long as you can defend why).

You will present your memo in front of a group of people who work at the fund. Expect to be grilled on your thesis (Hint: even if it’s a stellar deal, people in the room will try to scrutinize your analysis to see how you handle pressure). You should also be prepared to talk through a downside case .

The idea is to simulate a real investment committee where decision-makers will ask very tough questions to make sure your thesis is air-tight before they approve your deal.

2. In-Person

This will be similar in structure, except that you will only have 3-4 hours to prepare and present your presentation at the fund’s office. Your write-up will be a slimmed-down summary of the take-home version, so 2-4 pages of analysis plus a short form cash flow projection model (i.e. no full balance sheet).

A case study is similar to the work you do during a credit underwriting process (i.e. putting together an 80-page memo and presenting it to the bank’s risk committee).

Every bank runs its credit processes differently, so if your group is not involved with credit underwriting, we suggest taking a CIM from a deal you’ve worked on and preparing your own investment memo.

Example of a Summary Cash Flow Model Output

Some funds may administer a separate model test depending on their investing mandate. Some firms only invest in first-lien term loans, while others invest all throughout the capital structure. Capital structure-focused funds often have higher technical standards and may have a more complex model assignment.

This involves building a full three-statement model from scratch within 2-3 hours using provided financial and capital structure assumptions. Expect to calculate credit ratios and run an IRR analysis if the fund invests in mezzanine or equity co-investments.

While the talent pool for Private Credit and Private Equity recruiting may be similar, the technical standards needed for Private Credit tend to be different. Not only do you have to build three-statement cash flow models, but you also need to be able to compute credit financial ratios, understand debt documents, and analyze individual tranches of debt. The interview fundamentals may be the same, but you may need to spend more time understanding the technical nuances.

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Private Equity On-Cycle Recruiting Timeline

Private Equity Salary (Top Funds)

Best Private Equity Placement (Top Schools and Firms)

What is Direct Lending?

Throughout the 2008 financial crisis, increased bank regulation and market shifts created a demand for an alternative source of capital for middle market companies. In response to this demand, private investment funds and non-bank lenders stepped in and began lending to the middle market, which is what we know as direct lending . Direct lending takes the place of senior secured debt and floating rate capital traditionally provided by banks, eliminating the need for an intermediary, such as an investment bank. Our direct lending capital is very consistent with a bank loan, so its floating rate in terms of the coupon and medium term dated capital, typically 5- to 6-years in maturity.

Where does direct lending capital fit within the private debt landscape?

Within the private debt market, there are a wide range of companies in terms of size and credit quality. Larger companies generally obtain a credit rating from a ratings agency such as S&P or Moody's. Therefore, these companies generally have interest from many lenders. On the other hand, middle market companies are generally not able to access that level of capital for several reasons. First off, the transactions are generally kept private. Secondly, they're not rated. Third, their issue size does not create liquidity in the marketplace. This is where direct lending fits in.

What are the typical uses for direct lending?

What are characteristics of issuers for direct lending capital.

Direct Lending tends to be an event-driven type of financing, for middle-market companies with attractive growth prospects and positive cashflow. If a company is pursuing an acquisition, looking to complete a management buyout, or recapitalizing its capital structure, direct lenders can execute quickly and efficiently to provide senior debt to achieve those objectives.

Companies that apply for direct lending capital are generally $10 to $50 million of EBITDA in size. Given direct lending capital generally finances more than just a plain vanilla refinancing, the need, the depth, and the sophistication of capital increases compared to the average bank refinancing.

What are the benefits of direct lending capital?

1. Large hold size 2. Speed of execution 3. Flexibility beyond the bank market 4. Structure transactions with multiple tenors 5. Unique amortization structures 6. Floating rate interest 7. Wide variety of use of proceeds

What is Prudential Private Capital’s experience with direct lending?

Many direct lenders only focus on the private equity sponsored market, meaning the company is owned or controlled by a private equity firm. While Prudential Private Capital supports private equity sponsored borrowers, we also work with family-owned and management-owned companies that don’t change hands in terms of ownership for many generations. Our platform provides everything from revolving credit facilities through to direct loans, including mezzanine and structured equity as well. As a buy and hold partner with deep pockets of capital, we work with companies that are looking for a lender with a longer-term orientation and more flexibility than a bank.

Publish Date: December 12, 2022

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US leveraged finance: The road ahead

What will drive issuance in a post-COVID-19 world?

Halfway through 2021, we take stock of leveraged finance in the United States and consider the road ahead for both borrowers and lenders. After more than a year of COVID-19, are things returning to normal? Or are we just starting a whole new journey?

In many ways, COVID-19 had far less of an impact on leveraged finance markets than expected. Activity dropped in the second quarter of 2020, primarily in leveraged loan issuance, but a year later numbers returned to pre-pandemic levels. In fact, leveraged loan and high yield bond values reached record highs by the end of Q1 2021—the highest quarter since Q2 2018 and the second-highest quarter, respectively, on Debtwire Par record going back to 2015.

What drove this relatively high-speed recovery? First, the Coronavirus Aid, Relief and Economic Security (CARES) Act, signed into law in March 2020, protected many businesses from the full brunt of the pandemic. At the same time, many businesses shored up their finances, taking on debt to ensure liquidity as lockdown measures continued to have an impact through the second half of 2020. Issuances rose and that upward trajectory carried on into 2021.

By the end of Q1 2021, the picture had changed once again. Vaccines were being distributed quickly and efficiently, raising hopes for a post-COVID-19 future. The economy was also improving, as various states began to open up and a year of pent-up consumer demand was released. By May, core retail sales in the US had reached levels typically only seen over the Christmas period, according to the National Retail Federation. An air of optimism crept into the market, with lenders increasingly willing to take more risks on borrowers in their pursuit of yield. Financing earmarked for M&A and buyout activity also began to climb, hinting at growth plans for the months ahead. Perhaps most significantly, the low interest rate environment gave businesses an opportunity to reprice and refinance their maturing debt in droves.

What's next for 2021?

While these are all very positive signs for lenders in the leveraged finance space, there are still a few red flags on the horizon. First is inflation—in July, the Bureau of Labor Statistics reported that the US consumer price index had climbed 5.4 percent in the 12 months to June, a level not seen in 13 years. These growing inflationary pressures are part of the rush to reprice and refinance existing debt, as businesses try to avoid any unpleasant surprises if interest rates begin to climb as well.

Second, companies in robust sectors that enjoyed a degree of preferential treatment from lenders during the pandemic may find that sentiment shifting in the months ahead as other sectors begin to recover. The "flight to quality" witnessed in the early days of the pandemic will likely return to a more evenly balanced state of affairs. Documentation may also go through some changes in the coming months, as adjustments brought in during COVID-19 are phased out.

Finally, as the dust settles in debt markets, issues that were gaining ground before the pandemic will return in force, especially environmental, social and governance factors, which continue to take on increasing importance among borrowers and lenders alike.

All of which means the road ahead is not quite as clear as many would like, but there will be fewer obstacles blocking the path.

The US leveraged finance story so far

• Leveraged loan issuance reached US$763.5 billion in the first half of 2021, up 60 percent from US$478.1 billion in the same period in 2020
• High yield bond market issuance also rose 22 percent year-on-year, from US$219.6 billion to US$267.1 billion
• Refinancings and repricing deals accounted for 62 percent of overall loan issuance in H1 2021

From closing loopholes to rising inflation: Five trends that will drive leveraged finance

• Leveraged loan and high yield bond markets shrugged off COVID-19 uncertainty to post year-on-year increases in issuance in 2021
• Features of documents through the COVID-19 period—such as liquidity covenants and EBITDAC metrics—are fading from the market
• Lenders are increasingly sensitive to the risk of subordination in either right of payment or lien priority

Fund finance: New ways to harness NAV finance

• Anecdotal evidence points to a surge in uptake of net asset value finance over the past 12 to 18 months
• NAV finance is useful for the prevailing longer PE holding periods, which climbed from 3.8 years in 2010 to 5.4 years in 2020
• Deloitte estimates that the average loan-to-value ratios for NAV facilities sit in the 25% to 30% range

Downgrades, defaults, distressed debt and refinancing

• Refinancing and repricing in US leveraged loan markets surged to US$471.7 billion over the first six months of 2021
• US high yield bond refinancing accounted for 70 percent of total high yield issuance
• Amend-and-extend deals give borrowers further breathing room
• The extension of maturities has reduced near-term risk of default and limited the number of borrowers running out of cash and facing bankruptcy

A more sustainable approach to debt financing

• Global green bond issuance reached US$305.3 billion in 2020, according to Bloomberg data
• Ratings agency Standard & Poor's forecasts that global issuance of sustainability-linked debt instruments will exceed US$200 billion in 2021
• President Biden has pledged to cut US carbon emissions to at least 50 percent below 2005 levels by 2030, advancing the ESG agenda

Ongoing SPAC surge reshapes capital structures

• 248 SPACs listed in 2020, raising US$82.6 billion—a more than six-fold rise on 2019 issuance
• 362 SPAC vehicles raised US$110.2 billion in H1 2021
• 176 M&A deals worth more than US$386.1 billion have been completed via SPACs in H1 2021

How distressed companies are avoiding full-blown bankruptcies

• Announced US corporate bankruptcies climbed to 630 cases in 2020, according to Standard & Poor's—up from 2019 levels, but still lower than expected
• Bankruptcies ticked higher early in 2021—from 14 cases in January to 23 cases in March, before dropping to 11 in June—but are still well below 2020 levels according to Debtwire Par
• Covenant relief and uptiering, as well as drop down deals and other liability management structures have offered companies a variety of levers to pull to avoid entering bankruptcy situations

Energy transition: Financing the race to net zero

• Green bond issuance climbed 13% in 2020, to US$305.3 billion
• Global energy investment will have to increase more than three fold to US$5 trillion by 2030 if net-zero carbon emissions are to be achieved by 2050
• At the start of 2021, renewables accounted for more than 20 percent of total energy generation capacity in the US, surpassing the use of coal

Direct lending in the US post-COVID-19

• North American private debt fundraising increased by 15.8 percent in 2020 despite falling fundraising in other jurisdictions
• The private debt default rate never rose above 2 percent in 2020 and was lower than high yield bond and leveraged loan default rates
• Current private debt yields of 7 percent are outpacing high yield bonds and leveraged loans

Refinancing, repricing, M&A and buyout activity all surged in the early months of 2021, but then lenders shifted gears in pursuit of yield and borrowers realized they could tap the market for more than just liquidity. Where will this fork in the road lead for the rest of 2021?

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Direct lending in the US is in good shape post-COVID-19

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After a volatile and challenging year, US direct lenders moved into 2021 with reputations enhanced and teams strongly positioned to fund new deals. But we cannot discuss current direct lending in the US without casting a slightly wider net for comparison.

According to data collected by Preqin and analyzed by McKinsey, global private debt fundraising (where direct lending represents the largest amount of capital) fell by 6.7 percent to US$124.4 billion in 2020, as COVID-19 saw investors put commitments to new funds on hold. The North American market, however, bucked the global trend, with private debt fundraising up 15.8 percent year-on-year at US$79.8 billion.

This growth in private debt fundraising is conclusive evidence that the North American direct lending space has matured into a credible, established industry, able to operate through credit cycles.

Despite pandemic disruption, private debt markets have continued to benefit from the long-term regulatory trend following the 2008 global financial crisis, according to McKinsey. Regulatory developments established post-crisis constrained traditional bank lending channels and gave non-bank direct lenders an opportunity to win market share and expand their franchises. A prolonged period of low interest rates and dovish monetary policy have also supported the direct lending industry's growth.

Private debt portfolios also appear to have been less impacted by pandemic volatility. As private credit assets are not traded publicly and held in closed-ended fund structures, they are less exposed to market volatility.

This idea is reinforced by a Q1 2021 research note from private markets investment platform Adams Street, finding that private debt default rates never rose above 2 percent in 2020, while leveraged loan and high yield bond default rates came in at around 4 percent and 10 percent respectively.

US investment manager Nuveen notes further that, as the market for private credit investments is illiquid, managers in the space have also taken a more conservative approach to credit risk. Unlike high yield bond and leveraged loan investors, who have the flexibility to trade out of underperforming assets as required, private credit managers follow "buy-and-hold" strategies, which has seen them show a proclivity for funding deals in defensive, asset-light sectors.

In addition, private credit managers often align with borrowers backed by private equity (PE) firms with specific industry/operational expertise, which adds a layer of downside protection.

Private debt funds, however, have not only proven effective at mitigating downside risk. Managers have also continued to deliver returns for investors. According to Adams Street, private debt funds have produced current average yields of approximately 7 percent, versus average yields of 4.73 percent for high yield bonds and 4.61 percent for leveraged loans.

7% According to Adams Street, private debt funds have produced current average yields of around 7%, versus average yields of 4.73% for high yield bonds and 4.61% for leveraged loans

Perfect positioning

As the US economy has reopened, direct lenders have shifted attention and resources back to new deals and are well-placed to continue securing new deal flow and deliver superior returns to other fixed income classes.

According to Nuveen, the potential pipeline of transaction opportunities for private debt managers looks promising. The ratio of dry powder held by PE firms (the primary users of private debt capital) versus private debt funds sits at 5:1. As private market M&A deals are typically structured with debt of between 50 percent and 75 percent of total pro forma capitalization, the ratio of debt dry powder versus PE dry powder would have to shift to between 1:1 and 1:4 before there was any risk of private debt market saturation. All of which means post-pandemic supply-demand dynamics still favor private debt managers.

Furthermore, Nuveen's analysis notes that, while the COVID-19 downswing is very different from other economic downturns, private debt vintages launched in downturns have historically outperformed other years, with 2001 and 2009 being the two best-performing private debt years on their record to date.

The growth in private debt assets under management has also meant that direct lenders have been able to compete for credits that would otherwise have defaulted to either the syndicated loan or high yield bond markets.

Some direct lenders have the capacity to digest credits of up to US$1 billion or form lending clubs with each other that can cover check sizes of up to US$3 billion.

Direct lending has served as an attractive option for borrowers, especially PE sponsors, due, in part, to the speed of execution of direct lending transactions and the fact that pricing and other terms applicable to these transactions are not subject to modification due to market flex provisions.

In addition, PE sponsors appreciate the simplicity of working with a single or small group of lending counterparties rather than a large mix of lenders in a leveraged loan syndicate.

Competing with the syndicated loan and high yield bond markets means direct lenders have had to tighten the pricing of their loans and, in some cases, lend on covenant-lite terms, which until now has not been a feature of direct lending documentation in the core mid-market.

The active selection of credits and PE-backed borrowers by direct lenders, the large sums of liquidity at their disposal and the resilience of their portfolios following the pandemic period, however, suggest that direct lenders are well positioned to continue expanding their platforms and take on increasingly large tickets in the year ahead.

White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.

This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.

© 2021 White & Case LLP

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Direct Lending: A Closer Look

• The US direct lending market has grown in popularity in recent years, thanks to a shifting regulatory landscape which has prompted borrowers to seek alternatives to traditional bank financing.
• Direct lending offers a number of advantages over banks for both borrowers and investors in the asset class, but there are also risks to consider.
• We also take a look at some of the key players in the US direct lending industry, and underscore some important trends to consider.

What is Direct Lending?

Direct lending is a type of financing provided by non-bank capital providers which typically targets middle-market corporations. These companies might use the funds for a range of purposes, including buyouts, working capital, M&A and recapitalizations.

US direct lending is unregulated, meaning direct lenders can pursue higher risk deals that banks eschew due to regulatory constraints (we’ll cover the regulatory impact on the US direct lending sector in greater detail below). As a result, US direct lenders tend to finance middle-market borrowers more often than banks. Banks also look to syndicate loans (slice them up and sell off shares to outside investors), and since most middle-market loans are not large enough to syndicate, banks typically focus on large-cap borrowers. That provides an opening for direct lenders, as the middle-market sector remains  underserved by traditional banks. 

For these reasons, there has been a spike in interest in US direct lending over the last decade amongst borrowers. But these direct lenders are often borrowers themselves, courting investment from a range of institutional capital providers. LPs have also grown more attracted to direct lending, their interest fueled by a growing appetite for the idiosyncratic features of the asset class, including floating rate income streams, a senior secured creditor position, and the creditor’s ability to design bespoke structures that reduce risk.  

Below, we’ll discuss the various features of direct lending in greater detail, including the benefits, risks, and key players in the market.

Benefits of Direct Lending

Direct lending has numerous benefits to both the borrower, and the investors in the asset class (the direct lender’s limited partners).

First, we’ll start with the benefits to the borrower:

• Access to Capital: Direct lending can provide companies with access to capital that they may otherwise not be able to obtain. The reasons for this vary, but typically involve a risk profile that traditional banks are unwilling to loan against. Borrowers with higher risk profiles benefit from a direct lender’s willingness to accept additional risk. 
• Efficiency: Direct lenders can typically provide financing more quickly than banks, which have to receive approval on deals amongst various departments before signing off on the loan. Direct lenders are relatively small, entrepreneurial and nimble organizations, with very few layers, thus accelerating their deal sourcing and diligence processes.
• Increased Flexibility: Direct lenders are often willing to tailor financing packages to meet the specific needs of borrowers. Some middle-market companies have unique structural needs, and thus aren’t the right fit for banks or other large institutions. Direct lenders fill this gap in the market, as they are capable of delivering bespoke debt structures.

  Now, let’s take a look at the benefits to investors in the direct lending asset class:

• Interest Rate Protection: One of the primary concerns when issuing a loan is rising interest rates. If a loan is made at a fixed rate and then interest rates rise, the value of the loan decreases. For example, if a bank loan yields 5% when interest rates are 2%, then the bank earns the 3% difference. If interest rates rise to 4%, suddenly the bank is earning 1% on the same loan. And if interest rates rise further to 6%, the bank is losing 1% on the loan. Direct lenders protect against this risk by issuing floating-rate loans, meaning the interest rates of direct loans rise as the broader interest rate increases. Additionally, direct loans have shorter duration periods (typically 5-7 years), which means they have less sensitivity to interest rate changes overall.
• Seniority and Covenants: Another chief concern for lenders is how they will recoup their money should a borrower default. Direct loans are senior-secured, meaning they are first in line to be paid out in the event of a default. Additionally, direct loans are covenant-heavy, and include restrictions to borrower activities like adding additional debt, as well as maintenance restrictions such as requiring borrowers to maintain a certain debt-to-equity or interest coverage metrics. This is in contrast to traditional bank loans, which don’t typically include maintenance requirements.
• Greater Upside Potential: The spread on first-lien middle-market loans is often larger than the spread on first-lien large-corporation loans (‘spread’ being the difference between the coupon rate of the loan and a benchmark interest rate). So direct loans have greater upside potential than traditional bank loans. They can also feature additional sweeteners such as warrants (the right to purchase stock at a set price, within a set amount of time). This provides direct lenders equity-like upside, should they choose to exercise their warrants. Direct lenders can also limit their downside risk, given the bespoke arrangements of these loans. For example, direct loans might include call protection, which restricts borrowers from ‘calling back’ the loan before the maturity date, thus eliminating prepayment risk.
• Diversification: Direct loans are not highly correlated with broader markets, especially when issued to companies in esoteric industries that remain siloed from broader economic cycles and geopolitical events. So limited partners in direct lenders enjoy diversification during times of macroeconomic distress.

Risks of Direct Lending

Direct lending isn’t a panacea. Along with the many benefits, come a variety of risks to both borrowers and LPs.

Let’s start with borrower risk:

• Less Regulatory Oversight: Direct lenders are not subject to the same regulatory oversight as banks, which implies that they are at a higher risk of distress or default (one could argue that regulatory oversight does little to reduce such risks, but that is an ongoing debate, and beyond the scope of this piece). One thing is certain: direct lenders are not as well-capitalized as banks, hence they are more exposed to borrower risk (meaning if borrowers default, this is more likely to trigger liquidity issues for direct lenders than it is for banks). Borrowers need to be aware of this risk, as a direct lender’s liquidity issues might impact a borrower’s ability to obtain capital from the same lender.
• Strict Covenants: Direct lending contracts usually contain stringent covenants that limit the borrower’s capacity to decrease the loan’s value. These safeguards mandate that borrowers fulfill certain financial requirements, such as maintaining a debt-to-EBITDA ratio, or other maintenance requirements that limit the lender’s downside risk.

Those are the risks to the borrower. Now, let’s take a look at the risks to a direct lender’s investors, or LPs:

• Heavy Reliance on Manual Processes: Direct lenders provide bespoke financing, which means they must source, structure, underwrite and monitor investments with a finer attention to detail, and in certain cases, sector-specific expertise. That implies a heavy time commitment on the part of the lender, which must allocate its resources effectively across the universe of prospective deals. But there’s good news here – this risk is being mitigated by the advent of digital platforms such as CAPX, which reduce the manual processes involved in sourcing and structuring loans. These platforms make the loan sourcing and diligence process more accessible, so lenders can originate, execute and monitor deals more efficiently, and with fewer resources committed.
• Increasing Competition: As an industry evolves, new entrants emerge. In a recent Proskauer Rose survey, competition was ranked the #1 concern amongst Private Credit issuers in 2022. This implies that lending standards won’t be as strict as they otherwise might be, given the growth of direct lending within the middle-market lending sector (more on this below). In other words, competition is forcing direct lenders to loosen their lending standards (examples include lending at higher multiples of EBITDA, and agreeing to more earnings add-backs, which can inflate a company’s EBITDA and make leverage levels appear artificially low).
• Leverage Refinancing Risk: Direct lenders have their own capital sources, and typically use leverage offered by commercial banks to amplify their return profile. Yet this fund-level leverage is often shorter duration than the loans issued to borrowers, creating a leverage refinancing risk. Commercial banks may also stipulate their own covenants, including accelerated repayment of the loan should the value of a direct lender’s portfolio decline, thus creating added liquidity problems for direct lenders in times of broader economic distress.

Key Players in the Market

US direct lenders are often arms of asset managers, including middle market investment banks, private equity firms, business development companies and hedge funds. 

Some of the key players in US direct lending include:

• Apollo Global Management: One of the largest direct lenders in the world, with over $400 billion in assets under management.
• Ares Management: Another large direct lender, with over $300 billion in AUM.
• Blackstone: One of the largest private equity firms in the world, with nearly $1 trillion in AUM. Blackstone has a large direct lending business, with over $60 [JF2] billion in assets.
• KKR: Another major private equity firm, with nearly $500 billion in AUM. KKR also has a large and growing direct lending business that sits within its nearly $200 billion credit division.
• Oaktree Capital Management: A leading direct lender, with over $150 billion in assets under management.
• TPG: Another large private equity firm with over $100 billion in assets under management. TPG has a direct lending business, with over $20 billion in assets.

Direct lenders must raise capital from outside investors—their LPs. Much like traditional PE funds, they earn income through management fees and carry (incentive fees).

Direct lenders source pools of capital from larger institutions, including:

• Asset managers: Many direct lenders are affiliated with broader asset management firms that implement a range of investment strategies. This encompasses everything from large investment banks like Goldman Sachs and Morgan Stanley, to private equity and hedge funds / multi strategy funds. Asset managers looking to exploit new avenues for growth and diversify their revenue streams are attracted to the relatively esoteric nature of direct lending. 
• Insurance companies: Insurance companies are another major source of capital for direct lenders, as they seek investment opportunities uncorrelated with the broader market.
• Pension funds, Endowments and Sovereign Wealth Funds: These large institutional players often provide long-term financing for direct lenders.  

Growth of US Direct Lending

Over the decade following the Great Recession, US direct lending assets under management jumped by nearly 1,000%. By 2020, total US direct lending had grown to around $800 billion, according to a Refinitiv estimate. The consolidation of banks has played a major role here, as regional middle-market investment banks were gobbled up by larger national entities, which focused on more lucrative financings of larger firms. That left an opening for direct lenders to exploit. In the last year alone (Q2 2021 – Q2 2022) the value of the US direct lending market increased 30%, from $52Bn to $68Bn.

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted in response to the global financial crisis of 2008, also helped spark the direct lending boom of the last decade by introducing new rules and regulations for banks. As a result of Dodd-Frank, banks have reduced their allocation of loans to middle-market firms, especially those with riskier credit profiles. Direct lenders have been able to fill this void by providing financing to middle-market companies that might not otherwise be able to access capital.

The JOBS Act, which was signed into law by President Obama in 2012, also had an impact on US direct lending. The JOBS Act lifted some of the restrictions on advertising and solicitation for private placement deals. It also reduced regulation and oversight of companies earning less than $1 billion in annual revenue. As a result of the JOBS Act, US direct lenders have been able to reach a wider audience of potential investors, and middle-market companies face less stringent rules as they look to scale their business.

Trends to Consider

• Middle-Market Refinancing: According to Oaktree Capital, over $550 billion in middle-market debt is scheduled to mature through 2027. As economic constraints continue to weigh heavily on banks, BDCs and other large institutions, forced asset sales may be on the horizon, which implies attractive M&A opportunities for patient investors. Direct lenders may well benefit from this paradigm, as increased M&A activity should give rise to lending opportunities.   
• Dry Powder + Increased Competition = Active Marketplace: Private equity firms are sitting on mountains of dry powder (capital sitting on the sidelines, waiting to be put to work). P requin estimates the global dry powder figure to be $1.8Tn. Many firms built up record reserves during 2020, unsure of how the COVID pandemic would unfold. The worst-case scenario failed to materialize, yet uncertainty continues to plague the macro-economy, thanks to various headwinds including inflation, the Fed pullback, supply chain woes, and the Russia-Ukraine conflict. That excess dry powder can’t stay dry forever—PE firms exist to put capital to work, hence many are speculating a sustained uptick in direct lending activity. And with competition rising in the direct lending sector, lenders cannot afford to be too stringent with their lending requirements. Those are the ingredients for a very active marketplace going forward.
• Uncertainty is the Name of the Game: One thing remains clear—that nothing is clear. Are we headed into a recession? If so, will it be mild or massive or something in between? How sustained will inflation be? How will the Russia-Ukraine conflict play out? Will China invade Taiwan? When will supply chain troubles resolve? Some of these are impossible to predict, and others only with a minimal degree of certainty. Hence, many firms are approaching the current moment with something akin to cautious optimism. No one wants to overcommit, yet no one wants to be left out in the cold, either. Should troubles resolve and the economy land on sturdier footing by 2023, direct lenders issuing capital now stand to reap massive benefits.

Direct Lending Solutions

Direct lending is an asset class that has historically generated attractive, risk-adjusted returns through a variety of business cycles. Indeed, over the long-term, direct lending has consistently outperformed other income-oriented strategies on a risk-adjusted basis.

Regulatory changes and bank consolidation have exposed a gap in the market for direct lenders to exploit. As a result, the industry has grown steadily over the last decade, with larger deals materializing, and prominent institutional brands entering the space.

No one knows what the future holds. That said, direct lenders who exhibit patience, leverage relationships, and structure bespoke deals that meet the shifting needs of middle-market borrowers will position themselves to capture alpha should the economy recover in the short to medium-term.

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• Details regarding your activity on the Site, amount of time spent on the Site, pages viewed, information derived from your User Content, if any, and other performance and usage data.
• Type of device;
• Advertising Identifier (“IDFA” or “AdID”);
• Operating system and version (e.g., iOS, Android or Windows);
• MAC address;
• Network type (WiFi, 3G, 4G, LTE); and
• Location information. With your permission, we will collect your device’s location for security and verification purposes. You may turn off this feature through the location settings on your device.
• authenticate Registered Users (including Master Users);
• personalize your experience;
• analyze which portions of the Site are visited or used most frequently; and
• measure and optimize advertising and promotional effectiveness.

If you do not want us to deploy cookies in your browser, you can opt out by setting your browser to reject cookies or to notify you when a website tries to put a cookie in your browser software. If you choose to disable cookies in your browser, you can still use the Service, although your ability to use some of the features may be affected.

We may also use clear GIFs are tiny graphics with a unique identifier, similar in function to cookies. In contrast to cookies, which are stored on your computer’s hard drive, clear GIFs are embedded invisibly on Site pages. We may use clear GIFs (a.k.a. web beacons, web bugs or pixel tags), in connection with our Site to, among other things, track the activities of Site visitors, help us manage content, and compile statistics about usage of our Site. We and our third party service providers also use clear GIFs in HTML emails to help us track email response rates, identify when our emails are viewed, and track whether our emails are forwarded.

We also use automated devices and applications, such as Google Analytics, to evaluate usage of our Site. We also may use other analytic means to evaluate our Site. We use these tools to help us improve our Site’s performance and user experiences. These entities may use cookies and other tracking technologies, such as web beacons or local storage objects (LSOs), to perform their services. To learn more about Google’s privacy practices, please review the Google Privacy Policy at https://www.google.com/policies/privacy. You can also download the Google Analytics Opt-out Browser Add-on to prevent their data from being used by Google Analytics at https://tools.google.com/dlpage/gaoptout. We use third parties such as network advertisers to serve advertisements on third-party websites or other media (e.g., social networking platforms). This enables us and these third parties to target advertisements to you for products and services in which you might be interested. Third-party ad network providers, advertisers, sponsors, and/or traffic measurement services may use cookies, JavaScript, web beacons (including clear GIFs), Flash LSOs and other tracking technologies to measure the effectiveness of their ads and to personalize advertising content to you. These third-party cookies and other technologies are governed by each third party’s specific privacy policy, not this one. We may provide these third-party advertisers with information, including personal information, about you.

Users in the United States may opt out of many third-party ad networks. For example, you may go to the Digital Advertising Alliance (“DAA”) Consumer Choice Page for information about opting out of interest-based advertising and their choices regarding having information used by DAA companies . You may also go to the Network Advertising Initiative (“NAI”) Consumer Opt-Out Page for information about opting out of interest-based advertising and their choices regarding having information used by NAI members .

Additional information that we collect or receive from third-party sources in accordance with their privacy policies.

How We Use and Share the Information

We use the Personal Information, Business Information, Transaction Information, and Other Information (collectively, “ Information ”) to provide you with access to the Site and the Service, solicit your feedback, for marketing purposes, including to market our products and services to you, and to improve our services to you. Also, we may share Information as described below, to the extent not prohibited by applicable federal and state laws, rules, and regulations.

• If you are a Capital Seeker, some of your Personal Information, Business Information, and Transaction Information is shared with potential Capital Providers as part of the Services, as is more fully described in the applicable Supplemental Agreement.
• If you are a Capital Provider, we may provide your Information in anonymous, summary format to Capital Seekers with whom you are matched by the Service, as is more fully described in the applicable Supplemental Agreement.
• Following any Introduction, the Capital Seeker’s and Capital Provider’s identities are revealed to one another as well as certain contact information (such as email addresses and telephone numbers). This gives the Capital Seeker and the Capital Provider an opportunity to negotiate directly, either via the Service portal or outside of the Site by email or phone.
• In an ongoing effort to better understand our users and our Service, we might analyze the Information in individual or aggregate form in order to operate, maintain, manage, customize and improve the Service and to develop new products and services. The aggregate information does not identify you personally. We may share, sell, and/or license the aggregate data with our affiliates, agents, and business partners, and other third parties. We may also disclose aggregated user statistics in order to describe our products and Service to current and prospective business partners and to other third parties for other lawful purposes.
• We may employ other companies and individuals to perform functions on our behalf. Examples may include companies and individuals providing information technology support, data collection services, ID verification, maintaining databases, and customer service. Without limiting the generality of the foregoing, we may share your Information with certain third party identity verification services (such as LexisNexis and Dunn & Bradstreet) to prevent identity fraud as part of the registration process for the Service and to comply with our legal obligations. These third-party companies will have access to the Information only as necessary to perform their functions and to the extent permitted by law. Our contracts with all such third parties require them to protect the confidentiality of the Information we provide to them.
• We may share some or all of your Information with any of our parent companies, subsidiaries, joint ventures, or other companies under common control with us.
• As we develop our businesses, we might sell or buy businesses or assets. In the event of an actual or contemplated corporate sale, merger, reorganization, third-party investment, sale of assets, dissolution, or similar event, the Information may be disclosed or part of the transferred assets.
• To the extent permitted by applicable law, we may also disclose the Information when required by law, court order, or other government or law enforcement authority or regulatory agency, or whenever we believe that disclosing such Information is necessary or advisable, for example, to protect the rights, property, or safety of CAPX, our users, or others.

To ensure that our users are maintaining the confidentiality of other users’ Information, the Supplemental Agreements contain express confidentiality obligations. In addition to users’ consent to the Supplemental Agreements at the time of registration, we require users to affirmatively consent to the confidentiality obligations set forth in the Supplemental Agreements each time they log into the Site.

If we intend to use your Information in any manner that is not consistent with this Privacy Policy, you will be informed of such anticipated use prior to or at the time at which the Information is collected.

Sharing of Your Information with Non-Affiliated Third Parties

We will not share your Personal Information with non-affiliated third parties that may use such information to market to you, without obtaining your opt-in consent. For example, we may offer you a product opportunity that requires us to share your Personal Information with non-affiliated third parties that may use such information to market to you. We will obtain your opt-in consent to such sharing of your Personal Information when we present you with the terms of such offer. If you have opted-in for this kind of sharing, then you may: (i) choose to opt-out of such sharing by contacting us at [email protected]; or (ii) request certain information regarding our disclosure of such information to such non-affiliated third parties by contacting us at [email protected]. Further, if you would like to opt-out of our sharing of your Information with our affiliates so that such affiliates can use your Information to market to you, please contact us at [email protected].

How We Protect Your Information

We treat the Information we receive as confidential, and only use it and share it as expressly permitted under this Privacy Policy. We take commercially reasonable steps to protect the Information from loss, misuse, and unauthorized access, disclosure, alteration, or destruction. We maintain physical, electronic, and procedural safeguards to guard non-public personal financial information from unauthorized access, use, and disclosure. Please understand, however, that no security system is impenetrable. We cannot guarantee the security of our databases, nor can we guarantee that the Information you supply will not be intercepted while being transmitted to and from us over the Internet.

Accessing and Modifying Personal Information and Communication Preferences

You may access, review, and make changes to your Personal Information, Business Information, and Transaction Information by following the instructions on your own profile page, or the Business Profile. In addition, you may manage your receipt of marketing and non-transactional communications by clicking on the “unsubscribe” link located on the bottom of any CAPX marketing communication. Registered Users (including Master Users) cannot opt out of receiving transactional e-mails or other communications related to their account. We will use commercially reasonable efforts to process such requests in a timely manner. You should be aware, however, that it is not always possible to completely remove or modify information in our databases.

Important Notice to Non-U.S. Residents

The Site and our servers are operated in the United States. Please be aware that your Information may be transferred to, processed, maintained, and used on computers, servers, and systems located outside of your state, province, country, or other governmental jurisdiction where the privacy laws may not be as protective as those in your country of origin. If you are located outside the United States and choose to use the Site and/or Service, you do so at your own risk.

We do not knowingly collect Personal Information from children under the age of 13 through the Service. If you are under 13, please do not give us any Personal Information. We encourage parents and legal guardians to monitor their children’s Internet usage and to help enforce our Privacy Policy by instructing their children to never provide Personal Information through the Service without their permission. If you have reason to believe that a child under the age of 13 has provided Personal Information to us, please contact us, and we will endeavor to delete that information from our databases.

California Residents

Under California Civil Code Section 1798.83, California residents who have an established business relationship with CAPX may choose to opt out of our sharing your Personal Information with third parties for those third parties own direct marketing purposes. If you are a California resident and (1) you wish to opt out; or (2) you wish to request certain information regarding our disclosure of your Personal Information to third parties for the direct marketing purposes, please send an e-mail to [email protected].

In addition, CAPX does not monitor, recognize, or honor any opt-out or do not track mechanisms, including general web browser “Do Not Track” settings and/or signals.

External Websites

The Service may contain links to third-party websites. CAPX has no control over the privacy practices or the content of any of our business partners, advertisers, sponsors, or other websites to which we provide links. As such, we are not responsible for the content or the privacy policies of those third-party websites. You should check the applicable third-party privacy policy and terms of use when visiting any other websites.

Changes to This Privacy Policy

This Privacy Policy is effective as of the date stated at the top of this Privacy Policy. We may change this Privacy Policy from time to time, and will post any changes on the Service as soon as they go into effect. By accessing visiting the Site or using the Service after we make any such changes to this Privacy Policy, you are deemed to have accepted such changes. Please refer back to this Privacy Policy on a regular basis.

How to Contact Us

If you have questions about this Privacy Policy, please e-mail us at [email protected].

CAPX Terms of Service Introduction

Welcome to CAPX, where we are dedicated to transforming how companies find and get financing. CAPX is not a financial institution , but we have years of experience that has given us powerful insights to make the corporate finance process uniform, efficient and transparent. Please explore our site to find out more about what we do, and feel free to email us at [email protected] to learn more.

The following Terms of Service apply to your use of the CAPX website ( www.capx.io ), and also include some general information about the services we offer. Our lawyers insist that we include the terms, so we insisted that they let us know what they actually mean. Fortunately, as the publicly available portions of the site only include general information, this is actually pretty simple.

CAPX is a technology company with a platform that helps connect companies with sources of financing. The site features information about us and our services, and is provided to help inform potential users of the services. Unless you register an account with us and enter into separate terms for the use of our platform, that is the only thing you can use it for – to learn more about us. We own all information on the site and, if you send us any suggestions about the site or service, we can use them however we choose (and what we will choose is to try to make the site and the service better).

If you want to use the service, you will have to register with us, provide certain information about you and your company, and agree to additional terms. While we do our best to keep the site up to date and accurate, we are not responsible for any errors on the site. If you send us any information about yourself (for example, when emailing to learn more about the service), we will only use that information as described in our privacy policy available at www.capx.io/privacy. You are responsible for your use of the site, and, in the unlikely event that you cause us harm in doing so, will “indemnify” us (pay for) any harm we suffer.

General Terms of Service

Last Updated: November 27, 2018

CAPX, LLC, d/b/a as CAPX (" CAPX ") licenses a proprietary, cloud-based platform that helps connect companies seeking capital (“ Capital Seekers ”) with financial institutions (" Capital Providers ") as further described below (the “ Service ”). These Terms of Service (the " Terms "), including any Supplemental Agreements (as defined below) applicable to you, are a legally binding agreement between you and CAPX. As used in these Terms, “ you ” and “ your ” refer to any user of CAPX's website(s), services or applications at www.capx.io (collectively, the “ Site ”). " We ", " us ", and " our " refer to CAPX and our directors, officers, employees, contractors, owners, agents, licensors, or licensees. CAPX IS NOT A BANK OR FINANCIAL INSTITUTION AND DOES NOT PROVIDE INVESTMENT ADVICE OR CONSULTING SERVICES TO USERS OF THE SERVICE. WE ARE SOLELY THE PROVIDER OF THE SERVICE DESCRIBED ON THIS SITE.

• By accessing the Site, you agree to, and are bound by, the terms and conditions of these Terms. To use the Service you must register with us, and as part of the registration process you will be required to affirmatively accept these Terms and certain additional terms and conditions depending on whether you are a Capital Seeker or Capital Provider (such additional terms and conditions, “ Supplemental Agreements ”). If there is a conflict between these Terms and any Supplemental Agreement, the Supplemental Agreement will control. You may not use the Site or Service if (a) you are not of legal age to form a binding contract with CAPX; or (b) you are prohibited by law from visiting the Site. SECTION 11 OF THESE TERMS REQUIRES THE USE OF ARBITRATION ON AN INDIVIDUAL BASIS TO RESOLVE DISPUTES, RATHER THAN JURY TRIALS OR CLASS ACTIONS, AND ALSO LIMITS THE REMEDIES AVAILABLE TO YOU IF THERE IS A DISPUTE ABOUT THE SERVICE OR THESE TERMS.
• CAPX may amend these Terms at any time upon reasonable notice, as determined by CAPX in its sole discretion. CAPX will post notice of any amendment on this page, including the date such amendment takes effect. You should regularly check this page for updates to Terms. By using the Site after such notice is provided, you accept and agree to the amended Terms. If you do not agree to an amendment, you must stop using the Site and Service. If you have any questions about these Terms, please contact us at [email protected].
• PRIVACY CAPX is committed to protecting your privacy. All information related to you that we collect and use in connection with the Site and Service, including information that may be used to identify you, is subject to our Privacy Policy (available at www.capx.io/privacy ), which is incorporated by reference into these Terms. The Privacy Policy describes our collection and possible use of information provided by you. By using the Site or Service, you agree to, and are bound by, the Privacy Policy.
• YOUR ACCOUNT If you wish to access the Service, you must register as a master user for a Capital Seeker or Capital Provider or receive invitation to register by a master user affiliated with a Capital Seeker or a Capital Provider with a registered profile on CAPX. Requirements for registering an entity or individual with the Services are made available during the sign up process, and governed by the Supplemental Agreements. All users who register with the Service are responsible for keeping their access credentials safe and secure and ensuring that all information submitted in connection with their account is accurate and current at all times. Any entity registered with the Service is responsible for the acts of its employees and other registered users on the Service. No registration is required to simply access the Site without using the Service.
• THE SERVICE The Service allows Capital Seekers and Capital Providers to more efficiently identify, analyze, and engage with potential counterparties for financing transactions, as more fully described in the Supplemental Agreements.
• FEES We do not charge Capital Seekers a fee for the general access of the Service. Fee information is available in the Supplemental Agreements.
• Grant and Restrictions . CAPX grants you a limited, non-exclusive, non-transferable, non-sublicensable, and revocable license to access and use the Site, subject to these Terms. You may not (a) copy, reproduce, record, or make any part of the Site available to the third parties except as explicitly permitted herein, (b) attempt to gain access to the Service if you are not authorized to do so, or otherwise circumvent any technology used by CAPX to protect the Service, (c) use any manual or automated means to “scrape” or download data from the Site (except that public search engines may do so to create publicly available searchable indices of the publicly available pages of the Site, but may not cache or archive any information from the Site); (d) remove or alter any copyright, trademark or other intellectual property notices contained on or provided through the Site, or (e) violate any terms of these Terms in your use of the Site. Additional terms with respect to the Service are included in the Supplemental Agreements.
• Business Purpose . You will only use the Site or Service for bona fide internal business purpose. Except as expressly permitted in any Supplemental Agreement applicable to you, you may not use the Site or Service to obtain information about or make decisions about anyone but yourself and/or your business. For avoidance of doubt, you are only permitted to use the Site if you are, or intend to be, the principal party of a proposed financial transaction. You are not permitted to use the Site to broker financing transactions for a third party Capital Seeker and you are not permitted to use the Site to arrange financing transactions in which a third party Capital Provider is the principal capital provider.
• Compliance with Law. You will comply with all applicable laws, statutes, ordinances and regulations in your use of the Site and Service and in conduct of your business related to your use of the Service. Use of the Site for illegal, fraudulent or abusive purposes may be referred to law enforcement authorities without notice.
• Feedback . Any feedback, comments, or suggestions you may provide regarding us, the Site, or the Service (“ Feedback ”) is entirely voluntary and we will have a perpetual, irrevocable, unrestricted and royalty-free right to use such Feedback as we see fit and without any obligation to you.
• A physical or electronic signature of a person authorized to act on behalf of the owner of an exclusive right that is allegedly infringed.
• Identification of the copyrighted and/or trademarked work claimed to have been infringed, or, if multiple works at a single online site are covered by a single notification, a representative list of such works at that site.
• Identification of the material that is claimed to be infringing or to be the subject of infringing activity and that is to be removed or access to which is to be disabled at the Site, and information reasonably sufficient to permit us to locate the material.
• Information reasonably sufficient to permit us to contact you as the complaining party, such as an address, telephone number, and, if available, an electronic mail address at which you may be contacted.
• A statement that you have a good faith belief that use of the material in the manner complained of is not authorized by the copyright and/or trademark owner, its agent, or the law.
• A statement that the information in the notification is accurate, and under penalty of perjury, that you are authorized to act on behalf of the owner of an exclusive right that is allegedly infringed.

Our agent for notice of claims of copyright or trademark infringement can be reached as follows:

Attn: Rocky Gor Email: [email protected] Please also note that for copyright infringements under Section 512(f) of the Copyright Act, any person who knowingly materially misrepresents that material or activity is infringing may be subject to liability.

• INDEMNIFICATION . You agree to release, indemnify, and hold harmless CAPX and its affiliates, and their respective officers, directors, employees and agents, from and against any claims, liabilities, damages, losses, and expenses, including, without limitation, reasonable legal and accounting fees, arising out of or in any way related to: (a) your access to, use of, or inability to use the Site or Service; (b) your breach of these Terms; (c) your violation of any rights of a third party in connection with your use of the Site or Service; (d) your interaction with any other user of the Site or Service; and (e) your violation of any applicable law.
• General . EXCEPT AS EXPLICITLY SET FORTH HEREIN, CAPX EXPLICITLY DISCLAIMS ALL WARRANTIES, EXPRESS ANG IMPLIED, ARISING OUT OF THESE TERMS, THE SITE, OR THE SERVICE. YOUR ACCESS TO AND USE OF THE SERVICE IS PROVIDED ON AN “AS IS” AND “AS AVAILABLE” BASIS. The entire risk as to satisfactory quality, performance, accuracy, and effort of the Site and Service is with you. CAPX does not represent or warrant that the Site or Service will be available, accessible, uninterrupted, timely, secure, accurate, complete, or error-free. This disclaimer of warranty extends to each user of the Site and/or Service and is in lieu of all warranties and conditions whether express, implied, or statutory, including the implied warranties of merchantability, fitness for particular purpose, title, and non-infringement with respect to the Site and Service, and any implied warranties arising from course of dealing or course of performance.
• No Financial Advice . YOU AGREE AND ACKNOWLEDGE THAT CAPX IS NOT A FINANCIAL OR INVESTMENT ADVISOR, BANK, LENDER, INVESTOR, BROKER DEALER OR FINANCIAL INSTITUTION OF ANY KIND AND SHOULD NOT BE RELIED UPON FOR FINANCIAL, LEGAL, TRANSACTION, TAX, ACCOUNTING OR CAPITAL STRUCTURE RELATED ADVICE. All information provided by CAPX should be individually verified and considered by you without any assumption of expertise on the part of CAPX. You are encouraged to seek necessary advice from relevant third party professionals. CAPX MAKES NO REPRESENTATIONS OR WARRANTIES AS TO THE QUALITY OR SUITABILITY OF ANY THIRD PARTY PRODUCTS OR SERVICES THAT MAY BE MADE AVAILABLE TO YOU ON THE SITE OR THROUGH SERVICE, OR AS THE CONDUCT OF OTHER USERS OF THE SITE OR SERVICE. YOU AGREE TO TAKE REASONABLE PRECAUTIONS IN ALL COMMUNICATIONS AND INTERACTIONS WITH OTHER USERS OF THE SITE OR SERVICE AND WITH OTHER PERSONS OR ENTITIES WITH WHOM YOU COMMUNICATE OR INTERACT AS A RESULT OF YOUR USE OF THE SITE AND/OR SERVICE, PARTICULARLY IF YOU DECIDE MEET OR CONDUCT BUSINESS WITH SUCH PERSONS OR ENTITIES.
• LIMITATION OF LIABILITY . UNDER NO CIRCUMSTANCES WILL CAPX OR ITS AFFILIATES BE LIABLE TO YOU FOR (A) EXCEPT AS REQUIRED UNDER APPLICABLE LAW, ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR EXEMPLARY DAMAGES ARISING FROM OR RELATING TO THESE TERMS, THE USE OR INABILITY TO USE SITE, OR THE USE OR INABILITY TO USE THE SERVICE (EVEN IF CAPX KNOWS OR HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES), INCLUDING DAMAGES FOR LOSS OR CORRUPTION OF DATA OR DOCUMENTATION, SERVICE INTERRUPTIONS, OR CAPX'S OR YOUR LIABILITIES TO THIRD PARTIES ARISING FROM ANY SOURCE, OR (B) ANY DIRECT DAMAGES IN EXCESS OF $100.
• TERM AND TERMINATION . These Terms will commence on the date you first access the Site and remain in effect until either Party terminates these Terms as set forth herein (the “ Term ”). CAPX may terminate these Terms at any time in its sole discretion by providing notice of such termination either generally or to you. You may terminate these Terms at any time by ending your use of the Site and the Service and notifying CAPX at [email protected].
• Choice of Law . These Terms, for all purposes, will be governed and interpreted according to the laws of the State of New York, without giving effect to its conflicts of laws provisions that would require a different result.
• YOU ARE GIVING UP YOUR RIGHT TO GO TO COURT FOR ANY DIPUTE ARISING UNDER THESE TERMS EXCEPT FOR MATTERS THAT MAY BE TAKEN TO SMALL CLAIMS COURT. YOUR RIGHTS WILL BE DETERMINED BY A NEUTRAL ARBITRATOR AND NOT A JUDGE OR JURY. YOU ARE ENTITLED TO A FAIR HEARING, BUT THE ARBITRATION PROCEDURES ARE SIMPLER AND MORE LIMITED THAN RULES APPLICABLE IN COURT. ARBITRATOR DECISIONS ARE AS ENFORCEABLE AS ANY COURT ORDER AND ARE SUBJECT TO VERY LIMITED REVIEW BY A COURT.
• ANY CLAIMS BROUGHT BY EITHER PARTY MUST BE BROUGHT IN THE PARTIES’ INDIVIDUAL CAPACITY, AND NOT AS A PLAINTIFF OR CLASS MEMBER IN ANY PURPORTED CLASS OR REPRESENTATIVE PROCEEDING, AND THE ARBITRATOR MAY NOT CONSOLIDATE MORE THAN ONE PERSON’S CLAIMS, MAY NOT OTHERWISE PRESIDE OVER ANY FORM OF A REPRESENTATIVE OR CLASS PROCEEDING, AND MAY NOT AWARD CLASS-WIDE RELIEF.
• The arbitration award will be final and binding upon the parties without appeal or review except as permitted by State of New York law or United States federal law.
• Notwithstanding the foregoing, (i) either Party may bring an individual action in small claims court, and (ii) claims of (1) defamation, (2) violation of the Computer Fraud and Abuse Act, or (3) infringement or misappropriation of the other party’s intellectual property rights, may be exclusively brought in the state or federal courts located in New York County, New York. The Parties agree to submit to the exclusive personal jurisdiction of such courts for such purpose. A request for equitable relief will not be deemed a waiver of the right to arbitrate.
• With the exception of Section 11.2(a), if any part of Section 11.2 is deemed to be invalid or unenforceable for any reason then the balance of Section 11.2 will remain in effect. If, however, Section 11.2(a) is found to be invalid or unenforceable for any reason, then Section 11.2 will be null and void, neither party will be entitled to arbitration, and any claims relating to these Terms will be exclusively brought in a state or federal court located in New York County, New York.
• Electronic Communications . By using the Site and/or the Service you consent to receiving electronic communications from CAPX. These electronic communications may include notices about applicable fees and charges, transactional information and other information concerning or related to the Site and/or Service. These electronic communications are part of your relationship with CAPX. You agree that any notices, agreements, disclosures or other communications that CAPX sends you electronically will satisfy any legal communication requirements, including that such communications be in writing.
• Waiver . The waiver by CAPX of a breach of any provision contained herein will be in writing and will in no way be construed as a waiver of any subsequent breach of such provision or the waiver of the provision itself.
• Interpretation . References to “Sections” are references to the sections of these Terms. The singular includes the plural, and the plural includes the singular. All references to “hereof’ and other similar compounds of the word “here” mean and refer to these Terms as a whole rather than any particular part of the same. The terms “include” and “including” are used for example and not limitation. The headings, captions, headers, footers and version numbers contained in these Terms are intended for convenience or reference and will not affect the meaning or interpretation of these Terms.
• Third Party Beneficiaries . Nothing in these Terms, expressed or implied, is intended to confer upon any person, other than the Parties and their successors and permitted assigns, any of the rights hereunder.
• Survival . All provisions of these Terms that by their nature extend beyond the expiration or termination of these Terms will survive the termination of these Terms.
• Severability . Subject to Section 11.3, if any provision of these Terms is determined to be invalid or unenforceable, the remaining provisions of these Terms will not be affected thereby and will be binding upon the Parties and will be enforceable, as though said invalid or unenforceable provision were not contained in these Terms.
• Assignment . Neither these Terms nor any rights hereunder may be transferred by you without the prior written consent of CAPX.

Create your CAPX account

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Capital Providers on CAPX

Find the right capital.

How much capital can you get? Under what type of structures? From which lenders?

Should you approach banks or non-bank lenders? Are you getting the best terms?

CAPX is designed to answer all these questions and get you the capital you need, quickly and efficiently.

Our technology multiplies your efforts  and resources for a better outcome. 

Let us show you how.

HOW CAN WE HELP?

+1.310.299.9787 [email protected]

ORIGINATE NATIONWIDE

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KNOW THE MARKET FOR YOUR CREDIT

See capx in action.

• Learn about the current debt market trends and transaction activity. 
• Get our views on the most efficient ways to address your capital needs.

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I invest on behalf of my clients.

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Global Institutional Website Attestation

Please read this page before proceeding, as it explains certain restrictions imposed by law on the distribution of this information and the countries in which our funds are authorised for sale. It is your responsibility to be aware of and to observe all applicable laws and regulations of any relevant jurisdiction.

By clicking to enter this website, the entrant has agreed that you have reviewed and agreed to the terms contained herein in entirety including any legal or regulatory rubric and have consented to the collection, use and disclosure of your personal information as set out in the Privacy section referred to below.

By confirming that you have read this important information, you also:

• Agree that all access to this website by you will be subject to the disclaimer, risk warnings and other information set out herein; and
• Agree that you are within the respective sophisticated type of audience (or professional/sophisticated /institutional/ qualified investors, as such term may apply in local jurisdictions), and where applicable, meet the requisite investor qualification, for your respective jurisdictions.

The information contained in this website (this “Website”) including the documents herein (together, the “Contents”) is made available for informational purposes only.

Access Subject to Local Restrictions

The information contained on the LifePath Paycheck website is intended for the following audiences in the U.S. only : Eligible collective investment fund investors who are: (1) U.S. retirement, pension, profit-sharing or stock bonus plans that are qualified under Internal Revenue Code (“IRC”) Section 401(a) and tax-exempt under IRC Section 501(a); or (2) U.S. Governmental 457(b) plans.

The information contained on all other websites denoted as “Institutional” in the top right corner is intended for the following audience in the U.S. only : institutional investors including any: (A) person described in FINRA Rule 4512(c), regardless of whether the person has an account with a member; (B) governmental entity or subdivision thereof; (C) employee benefit plan, or multiple employee benefit plans offered to employees of the same employer, that meet the requirements of Section 403(b) or Section 457 of the Internal Revenue Code and in the aggregate have at least 100 participants, but does not include any participant of such plans; (D) qualified plan, as defined in Section 3(a)(12)(C) of the Exchange Act, or multiple qualified plans offered to employees of the same employer, that in the aggregate have at least 100 participants, but does not include any participant of such plans; (E) member or registered person of such a member; and (F) person acting solely on behalf of any such institutional investor.

This website and its content is not intended for, or directed to, investors in any countries or jurisdictions that are not enumerated above. 

This Website and the Content herein is not intended for, or directed to, any person other than to any sophisticated type of investors (or professional/sophisticated /institutional/ qualified investors, as such term may apply in local jurisdictions), and should not be relied upon by any other persons or redistributed to retail public in certain aforementioned jurisdictions.

This Website or information contained or incorporated by reference has not been, and will not be submitted to, become approved/verified by, or registered with, any relevant government authorities under the local laws. This Website is not intended for and should not be accessed by persons located or resident in any jurisdiction where (by reason of that person's nationality, domicile, residence or otherwise) the publication or availability of this Website is prohibited or contrary to local law or regulation or would subject any BlackRock entity to any registration or licensing requirements in such jurisdiction. It is your responsibility to be aware of, to obtain all relevant regulatory approvals, licenses, verifications and/or registrations under, and to observe all applicable laws and regulations of any relevant jurisdiction in connection with your entrant to this Website.

If you are unsure about the meaning of any information provided, please consult your financial or other professional adviser.

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The Growth of Direct Lending – An investor Q&A

Key takeaways.

Fast growing area

Private credit is a fast-growing area of the alternatives market, with direct lending the biggest part of the asset class.

Drivers behind the growth

The drivers behind direct lending’s growth – its appeal to lenders and borrowers, as well as structural market trends – are likely to continue.

Returns and loss rates

Direct lending’s returns and loss rates compare favorably with HY and leveraged loan indices.

On the investor side, demand for direct lending has reflected a favorable return profile, loss rates comparable with (or better than) the public markets, and diversification from a traditional investment portfolio. On the borrower side, companies have valued the ease and simplicity of the transactions, the certainty of execution and the value of having a strategic partner. Structural market shifts have also allowed the private credit market to grow, as seen in the higher “barriers to entry” in the public markets.

What is private credit, and how is it related to direct lending?

Within the US$11.7 trillion alternative asset universe lies the US$1.3 trillion private credit market (see chart on page 2). Direct lending represents the largest category in private credit, at 44% of AUM, and refers to financing that is directly negotiated between a lender (often an alternative asset manager) and a borrower (usually a small-to-mid-sized company).

How does its size compare to public markets?

Private credit’s strong growth since the global financial crisis has established it as a sizable and scalable asset class for a variety of buy-and-hold investors. It’s now on par (in terms of size) with the Bloomberg U.S. HY Corporate Bond Index (US$1.3 trillion) and the S&P/LSTA U.S. Leveraged Loan Index (US$1.3 trillion). Growth is expected to continue -- Preqin estimates that the global private credit market will reach US$2.3 trillion by 2027, with the strongest growth expected in North America.

What have been the most significant growth drivers of private credit?

There have been many drivers. On the investor side, demand for private credit – and the resulting inflows – have reflected favorable return profiles, loss rates comparable with the public markets, and diversification from a traditional investment portfolio. On the borrower side, companies value the ease and simplicity of the transactions, as well as the certainty of execution.

Structural market shifts have also allowed the private credit market to grow. Beyond the enhanced bank regulations in the wake of the financial crisis, the “barriers to entry” in the public markets have increased, as seen in the growth in the average deal sizes in the U.S. HY corporate bond and leveraged loan markets.

How have returns of direct lending compared to publicly traded investments?

To track the performance of the direct lending asset class, we use the Cliffwater Direct Lending Index (CDLI) as a proxy. The CDLI is an asset-weighted index of 12,000 directly originated middle market loans totaling US$260 billion as of Sept. 30, 2022. Since its inception, the CDLI has outperformed the U.S. HY bond and U.S. leveraged loan indices for 12 of the last 17 years, as well as through the first three quarters of 2022 (most recent data available). On a global basis, private credit returns also compare favorably to the global HY and leveraged loan indices, as measured by the Preqin Global Private Debt Index (which includes all private credit strategies).

How does direct lending perform in a recession?

Historical loss rates for direct lending compare favorably to the public HY and leveraged loan markets. In periods of market stress such as the global financial crisis, the energy sector disruption of 2014-2015, and the COVID-19 pandemic in early 2020, net realized losses in direct lending were either similar to or lower than our estimate of loss-given-default in the U.S. HY bond and leveraged loan markets.

BlackRock Alternatives

2023 private markets outlook.

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Direct Lending Solutions: Everything You Need To Know

With traditional banks more likely in recent years to lend to large corporations, small and mid-sized companies — major drivers of the U.S. economy — have been forced to look elsewhere for capital that will enable them to fulfill their growth potential. An increasingly popular option is direct lending.

Described by some as bank lending without the bank , direct lending’s rise can be traced to the aftermath of the 2008-09 recession, when Congress imposed stricter regulations on banks .

Banks in turn found upper-tier companies to be far more appealing lending options because of cash flow, collateral and debt-to-income considerations. Left out in the cold, middle-market companies turned to alternative and direct lending solutions to raise money and fuel their growth plans.

Unlike traditional banks, direct lenders are not regulated and do not have to conform to leveraged lending guidelines. As a result, these lenders can flexibly finance the more difficult or disaffected segments of the capital structure , including small and middle-market businesses.

Though the direct lending market has long been borrower-friendly, lenders have also found direct lending highly appealing. It’s one of the few options that provides strong , consistently high returns in the private debt market.

During an economic downturn, for example, a standard stock portfolio might lose 33 percent of its accrued value. But direct lending cuts out intermediary actors like banks, so returns are stronger and more predictable for investors.

According to Preqin data, roughly 50 percent of surveyed investors believe that direct lending presents the best opportunities in private credit. As of December 2018, direct lending assets under management totaled an all-time high of  $266.4 billion : That’s more than one-fourth the amount of capital that comprises the entire private credit market.

But what is direct lending, exactly? What are the benefits to businesses and lenders? And which companies benefit most from direct lending solutions?

This article provides answers to those questions, and more. Let’s dive in.

What is Direct Lending?

As the name implies,  direct lending is a credit provision that cuts out all middleman institutions, like investment banks, brokers, or private equity firms.

Most borrowers that seek direct loans are small to medium-sized businesses categorized as SMEs (Small and Medium Enterprises). Lenders are often wealthy individuals, asset management firms, business development companies or even peer-to-peer crowdfunding sources for very small companies.

As mentioned above, alternative-lending options became a better alternative for SMEs when traditional institutions were subject to stricter regulations after the ‘08-09 financial crisis. There are roughly 29 million businesses with 500 employees or fewer in the U.S., accounting for 99.7 percent of all the nation’s companies and nearly half of its employees, and those small and mid-sized businesses are in constant need of capital for growth.

Business development companies (BDCs) have been as adept as any private lender at supporting SMEs. BDCs grew out of two pieces of legislation, passed 40 years apart. First was the Investment Company Act of 1940 , which in the wake of the Great Depression limited the number of people or companies who could invest.

That also reduced the amount of capital available to smaller businesses, but the Small Business Incentive Act of 1980 corrected that by allowing for the creation of BDCs. (And unlike traditional financial institutions, a wide range of investors can invest with BDCs, not just the wealthiest.)

Direct lending, whether by BDCs or other lenders, meets companies where they are, providing dynamic funding options for businesses that have limited credit history or considerable debt. Not only does direct lending fill a gap in the market, it provides lenders and borrowers with opportunities that might otherwise be economically unfeasible.

How do these loans work? Asset managers raise capital from a variety of investment sources before making a leveraged loan offer directly to the potential borrower. As one of the most flexible categories of debt financing, direct lending can be contracted in three ways:

• First lien: The borrower must pay off the loan before all other classes of debt.
• Second lien: That debt that must be paid off after a senior lien.
• Unitranche debt : Any hybrid loan structure that combines both junior and senior debt into one blended interest rate of repayment. Unitranche structuring increases the flexibility of direct lending options, providing companies increased access to capital.

The flexibility offered by alternative lenders is one of the things lendees find most appealing. BDCs and similar institutions can take on more risk than traditional lenders. They can also develop stronger, deeper relationships with the company, the result being that everybody wins: The company realizes its growth potential, and investors see higher yields.

As an example of the latter, consider the Arizona Retirement System, which recently increased its direct funding allocation to 17 percent of the $41 billion pension fund. Arizona’s senior portfolio manager said that the allocation “attempts to replicate what we could do in the public markets but in the private world … with superior due diligence, superior covenants, and superior returns.”

What Companies Benefit Most From These Loans?

Direct lending represents a continually increasing share of the American corporate loan market. Before the financial crash, direct lending sources primarily served small companies with an EBITDA of less than $50 million.

Over time, the funding option has grown to comfortably accommodate large-market figures and publicly traded companies. In 2017, direct lenders once again topped historic figures by committing financing packages as large of $1.45 billion to borrowers.

It should be no shock as to why the unitranche deal size record has been continuously broken: Direct lenders are largely unregulated in contrast with traditional institutions, allowing them to provide highly flexible loans without strictly adhering to leveraged loan guidelines.

“Several years [ago], it seems like a couple hundred million for a private credit manager was a large deal — then it was $500 million ,” Ryan Lynch, one KBW analyst, commented. “The limitation gets higher (every year).”

Though larger businesses are rushing into the market, small and mid-sized businesses remain the most prominent type of borrower. The flexibility offered by alternative lenders is a big reason for that. Middle market companies get access to multi-layered funding that makes it possible for them to realize their growth potential.

Direct lenders still favor the middle market, too, since it is one of the largest investment pools they can draw upon. In the United States, over 200,000 businesses fall into that category, comprising a third of the American economy. The middle market creates two out of every three new jobs in America, and employs over 50 million people.

The middle market can actually be broken down even further into the lower, middle and upper middle market.

Lower market companies are those with an EBITDA of $15 million or less, seeking loans between $5 million and $25 million. The squarely middle market companies have an EBITDA between $15 million and $40 million (seeking loans under $100 million), while upper middle market companies feature an EBITDA over $40 million and net loans over $100 million.

Direct lending has had a tremendous impact on the middle market in recent years. In 2019, private equity activity in the mid-market sector of the economy surpassed $500 million for the first time ever. Equally telling is the fact that unitranche lending rose to 23 percent of the total US sponsorship of the middle-market (up from the 14 percent just two years prior).

The Advantages of Direct Lending

The growth of direct lending has enabled mid-sized businesses and lenders to prosper from favorable terms, greater term flexibility, high yields and negotiable risk.

Middle market businesses are far more likely to secure a sizable loan from a direct lender than from a traditional financing institution. While banks are scared off by the risk of providing loans to small businesses, direct lenders aren’t beholden to strict institution-wide financing regulations.

Not only are direct loans less difficult to secure, the terms are, by comparison, much more favorable for middle market companies. Banks secure loans with high-interest rates and fees to mitigate risk while direct lenders are more capable of working personally with the borrower during negotiation and throughout the term of the investment.

While businesses have found bank loans harder and harder to procure, direct loans enable them to acquire working capital that will allow them to immediately finance their growth activities. This is especially important for businesses that struggle early on due to a lack of immediately available cash.

Since the business works directly with the lender, both parties can work on a creative loan arrangement that fits their needs. It’s rare for direct lenders to saddle small businesses with large down payments, for example, even if the particular company has limited credit history.

In short, direct lenders boast the flexibility that banks are unable to offer. Borrowers get access to favorable loan terms and, in some cases, the guidance to effectively navigate a growth phase.

At the same time, direct lending has proved very beneficial for lenders and other financiers as well: it’s one of the few fields that provides investors the ability to net high-yield, consistent returns.

Of course, all financial investments carry inherent risk. By its very nature, direct lending runs unregulated and isn’t backed by the same guarantees provided by traditional bank lending. Some analysts feel growing concern over the rapid growth of the immediate capital lending environment, stating that the market has gotten “too hot.”

Like all loans, success is entirely reliant on good strategy and great execution. Lenders need to undergo a significant underwriting process to ensure that loans are only granted to borrowers with a high probability of success.

According to Preqin, the average annual yield from direct lending funds rose 13 percent from 2013 to 2018. Even the highest-yield corporate bonds trail at just 7 percent returns, while the US 10-year treasury yielded only 1.71 percent as of 2019 (which has sunk below 1 percent during the COVID pandemic).

To drive the point home even further, compare direct lending’s 13 percent growth to the S&P ’s average annual return of 9.8 percent over the past nine decades — a yield that comes with significant losses during periods of recession.

The Verdict: How Will Direct Lending Adapt to Challenges?

Over the past decade, direct lending has become one of the most attractive segments of the alternative funding market. Investors are increasingly realizing that it’s more than possible to achieve high yield with low risk and favorable liquidity.

Put simply, direct lending is now a primary component of well-diversified investment portfolios. According to the Bank of America, the US private debt market has more than doubled in the past decade. The Alternative Credit Council (ACC) has predicted that worldwide direct lending will overtake the $1 trillion mark this year.

Once a relatively minor player, direct lending accounts for more than half of all private debt fundraising. Average fund sizes have grown enormously, with direct lenders amassing $185.7 billion since 2017.

How do we account for this surge to the top? There are three primary reasons: the steady retreat of commercial banks from lending to SMEs, increasing demand for capital among mid-market companies, and investors’ strong desire for fixed income with high yield.

Of course, it would be remiss to not mention the recent impact of the COVID-19 pandemic . Preliminary data demonstrates that the pandemic is disproportionately affecting the middle market, with smaller companies experiencing depressed revenue and an inability to adjust.

It’s likely that the COVID market effect will have lasting ramifications: 51 percent of company survey respondents expect a steady decline that progresses well into late 2020.

Still, there are plenty of reasons to be optimistic . Over 80 percent of mid-market businesses believe the situation will normalize after six months, at which point direct lending solutions will enable them to gain access to capital to realize their growth potential.

Direct lending was, is, and will continue to be one of the most popular forms of financing for small and medium-sized businesses.

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Direct lending.

• Case Studies
• Private Markets
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• Pension Funds
• Client Country/Type: Canadian Public Pension Fund
• Asset Class: Private Markets
• Mandate Size: %50m per manager
• Mandate Geography: North America/Europe
• Return/risk objectives: 7-11%
• Mandate Type: Private debt
• bfinance Services: Manager research

Our specialist says:

This case study demonstrates an important point: even when an investor has reached the stage of looking for managers, there is often a uncertainty regarding the appropriate strategies, portfolio composition and so forth. Educating the board, approaching the engagement creatively and working flexibly with the investor to provide different forms of analysis were all important here. In addition, this example shows how deeper understanding of the asset managers available in a particular sector can greatly affect the investor’s opinion on how comfortable they are with the relevant sub-strategies.

• 76 Considered

• 38 Long List
• 21 Second stage
• 7 Shortlisted

Client-Specific Concerns

This client was uncertain about the types of private debt strategy that they wanted, making flexibility and education particularly important. During the middle stages of the direct lending manager search the investor decided to avoid unsponsored loans and junior debt, having initially been open to these at the onset of the project. Yet deeper understanding of the managers and their processes ultimately led them to select funds with significant exposure to these sectors. The investor was also concerned about the speed of deployment, the managers’ allocation policies and how quickly capital would be returned to them, and had a strong preference for managers with a lead origination style.

The investor ultimately selected two managers that would have been excluded by a more simplistic approach.

• bfinance issued a customised RFP for this investor, encompassing a range of strategies including lower middle market, middle market, sponsored and sponsorless loans in Europe and the US. Out of the 76 managers considered, 38 were examined and 21 scrutinised in more detail.
• After the initial RFP, the client expressed a preference to adjust the criteria further, focusing on sponsored loans and funds with a larger proportion of senior/unitranche deals, and to limit leverage to 1x.
• While the analysis was adapted accordingly, bfinance also advised giving further consideration to a handful of managers that did not fit the adjusted requirements due to significant sponsorless/junior debt exposure. Our specialists considered them to be particularly well suited to complement the investor’s existing portfolio and deliver the desired objectives. The investor ultimately selected two managers that would have been excluded by a more simplistic approach (one in opportunistic junior debt, one with a significant proportion of unsponsored lending).
• Making this possible required deep analysis of the shortlisted managers and how they would fit within/diversify the existing portfolio, board education, and intensive due diligence Through the process the client became more comfortable with sponsorless loans and junior debt, particularly in view of the diversification characteristics and the processes of the particular managers involved.
• Serious consideration was given to the allocation policies of the managers to determine how quickly the investment may be deployed and how loans are allocated to the relevant vehicles (fund, SMAs, part of BDC etc). Conflicts of interest can arise and allocation polices are not well documented by many private debt managers.
• Supported by bfinance analysis of US and European private debt markets , the investor ultimately preferred to focus on US opportunities due to manager track records, GDP predictions, LIBOR movements, loan issuance figures and more. They are likely to revisit the European private debt market as the situation evolves.

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Distressed debt interview questions and interview format.

I've been asked quite a bit to write about distressed debt interview questions and more generally about how to think about distressed investing. So since credit markets are absurdly tight, there's an excess of capital sloshing around chasing any modicum of yield, etc. I have some free time so I figured I'd walk through some questions.

Before beginning, I'll just say what you probably already know: credit recruiting in general is quite ad hoc relative to other areas of the buy-side (like private equity if you're coming out of M&A). 

Distressed Debt Interview Format

Speaking in the most general terms, whether your recruiting for a position in direct lending, private credit, or distressed debt you should expect a series of pretty ad hoc interviews - that will be both fit and technical - followed by a modeling test or case study of some kind (it'll vary as to what the test or case entails, unlike in PE where it's pretty predictable and standardized).

While I hesitate to make any sweeping generalizations, I would say when you think about the structure of credit buy-side recruiting you should anticipate having somewhere between five and eight roughly 30-minute rounds of interviews that will be primarily one-on-one. 

If we assume there are six rounds, then the first four are likely to be one-on-one sit-down interviews. These will look more or less like what you went through in banking. However, the primary difference is that while in banking you're getting quite a few short questions that have relatively objective answers, for distressed debt or special situation interviews these will feel much more like intelligent conversations that will flow relatively naturally.

In these one-on-one interviews - I mean, maybe some will be two-on-one, but whatever - you'll certainly get some fit questions, but most of how you will be evaluated on fit will come through how you articulate your answers to relatively broad questions surrounding your background, deals, why distressed debt, etc. 

For example, when discussing a deal you worked on are you articulate and succinct? Are you skewing your answer toward what a distressed debt investor is most interested in, as opposed to what a banker would be most interested in? Did you consider how a distressed debt hedge fund was thinking about their 2L position, even though you were advising the debtor so didn't necessarily need to that much? And, just as importantly, do you seem at all interested in discussing the deal and have some general level of enthusiasm?

You will likely be asked some more pure "technical" interview questions as well. Depending on your background - especially if you're coming out of a non-restructuring job - you may get some that have quite objective answers. For example, what's contained in a plan of reorganization (POR)? What out-of-court solutions exist for a troubled debtor? What kind of consideration could you receive as part of a Chapter 11?

With that being said, most technical interview questions will be slightly more open-ended and difficult (which is what we'll be going over in this post).

Like with everything in the realm of restructuring and distressed debt, reasonable people can disagree about almost everything. What your interviewer is looking to see is that you have thought about how someone on the buy-side would think about the question, can articulate your answer in a definitive and reasonably persuasive manner, and that you aren't caught completely blind by the very nature of the question. 

Moving on, the final few rounds of the interview process will involve some kind of modeling test or case study. Normally there's a bit of modeling and then a few slides you have to create pitching buying (or not) a certain part of the capital structure. 

While every firm will view these differently - and give different tests / cases - I think it's fair to view these as more of a competency test. I think (generally) you can view it as a bar to hurdle as everyone knows these aren't overly representative of the work done in practice. It's more about showing that you have the capacity to model and then put some thoughts to paper in a limited time frame than showing that you are some kind of modeling savant. 

Most often, you'll have one "round" where an interviewer just pokes around your model and slides, asks some questions, etc. Then another round will follow where an interviewer - or group of interviewers - will hear you walk through what you've done, etc. They'll probably be quite aggressive and contrarian, because that's what you should expect in investment committee meetings anyway.

My personal view - which, again, may not extend to everyone else! - is that probably the most important thing to do when you're doing these tests or cases is to make sure you have a slide or two going over "Additional Considerations".

Because you definitely won't have the time to go through - or perhaps even be given - all the credit docs, etc. you should make reference to what else you'd want to look at before making a definitive decision. You should frame the investment you're choosing (or not) as a kind of initial indicative decision, subject to change based off of these "Additional Considerations" you've laid out. 

Because any test or case study is necessarily stripped down and simplified, you want to show that you understand what additional things you'd need to consider. If nothing else, this will help buffer any deficiencies in what you actually did (e.g. "Well they missed a few things, but they had some good points for what else to consider, so chances are if they had more time they would've picked up some of the things they missed as well"). 

Note: Some firms are more apt to do the test or case upfront -- especially if they view it as just being a hurdle to weed out candidates.

Distressed Debt Interview Questions

Obviously in banking there are some questions that everyone gets asked and this is more or less the way you compare and contrast candidates.

On the buy-side - at least in the distressed world, in my view - questions are asked much more with an eye toward your process of answering, what you prioritize including in answers to open-ended questions, etc. as opposed to just being expected to give a definitive one-sentence answer. 

The following interview questions aren't necessarily ones that you will invariably get if you interview across enough distressed debt funds. Rather, I've put these together to kind of be a representation of what style of questions you can expect and so you can see what they're testing.

I'd treat these as being indicative, not illustrative, and as a way to help prod your thinking on areas where perhaps you haven't given much thought.

When asked questions like these, I wouldn't restrict yourself to a one or two minute answer like you may in banking. Chances are these questions will spark follow-up questions and a conversation will more naturally develop. 

Question 1: Let's say we're looking at a company with a Term Loan trading at par due January 2023, Senior Notes due July 2021 trading at 85, and Senior Notes due January 2023 trading at 70. What would you estimate the max downside risk of the July '21 Notes to be?

Question 2: Let's say this capital structure now has Subordinated Notes as well and they're trading at 50. Let's say you like the idea of buying the July '21 Senior Notes, but want to hedge your exposure within this capital structure in some way. How would you think about doing that?

Question 3: Let's say we do go long the '21 Notes and short the Subordinated Notes. What do we need to be careful here?

Question 4: Non-pro rate uptiers have obviously been a big story line in the distressed debt world over the past year. What do you think of them?

Let's say we're looking at a company with a Term Loan trading at par due January 2023, Senior Notes due July 2021 trading at 85, and Senior Notes due January 2023 trading at 70. What would you estimate the max downside risk of the July '21 Notes to be?

This is a typical question in that there's no objective answer necessarily (who knows what is truly ever baked into debt pricing and what the ultimate downside will be in the future?), but we can ramble on for quite a bit of time about this and circle around a potential answer. 

Note:  Let's pretend the we're looking at all of this at such a time in which the '21s are a year away from maturing and so we'll have a few coupons between now and maturity.

So first of all, let's set the stage a bit. There are a few things that should immediately jump out here.

• Given the current credit environment we have debt trading at levels that are at least stressed if not distressed
• The Term Loan is trading at par, so it is likely fully covered without much issue
• The July '21 Notes are coming due first and the Term Loan and January '23 Notes are due at the same time (the TL probably springs before the Notes)
• Despite the pari status of the Notes in the event of filing, we see a 15 point spread between the '21s and the 23s

I think the best way to frame the answer to broad questions like this is to begin by stating a simple answer - a kind of best first guess - and then provide complicating factors that need to be considered that could lead to a closer, more real-world answer.

So the simple answer is that the '23 Notes are probably pricing in the recovery value with a touch of optionality (reflecting a potential turnaround in the company's fortunes that would lead to the ability to roll these over in a few years).

What the '21 Notes are pricing is the enhanced probability that given that current state of the company - whatever it is - there's a higher likelihood these will be able to be dealt with.

In other words, the spread between the '21 Notes and '23 Notes is likely reflecting a scenario where the '21 Notes have a good shot at being refinanced, but that the '23 Notes will probably not when they come due (thus they're trading at more or less what their recovery value would be should filing occur).

Simplistically, if we assume just two outcomes - refinancing of the '21 Notes or filing before maturity - then we can say the market is pricing in a 50% probability of either happening as 50%*0.70+50%*1.0=0.85 (this assumes the actual recovery value is just the market price of the '23 Notes).

Therefore, carrying this simplistic example forward, we can think of the potential upside as involving buying at 85 and getting back par. Similarly the potential downside would be buying at 85 and getting back 70 in recovery. Therefore, the max downside would be 15 cents on the dollar.

However, this is all a bit too simple! There are obviously a few nuances that should be considered.

First of all, is our downside really 15 cents on the dollar if we buy at 85? Even assuming we're certain (for whatever reason) as to the recovery value being 70, what about the coupons we'd be clipping between now and when filing occurs? They need to be blended in because chances are you wouldn't have the company file immediately after buying the Notes at 85 (or before the first coupon is clipped). So, the actual downside would be some amount lower than 15 cents.

The other nuance to consider is our belief that the '23 Notes are pricing in the recovery value. Chances are the recovery value is actually lower than what is priced into the '23 Notes as the '23 Notes will have some level of optionality reflected in the price (as previously mentioned). This optionality is not just reflective of the potential capacity for the company to turn things around, but also reflective of perhaps the belief that the '21 Notes will be dealt with before filing occurs so that the impaired class would just be the '23 Notes (not the '21 and '23 Notes in the same class, diluting down the recovery values for all holders). 

So, when thinking about the max downside risk to the '21 Notes we know it will be whatever their recovery would be in the event of filing. We can say this is certainly some non-zero value as the term loan is trading at par and the Senior Notes are the only things behind the Term Loan.

For the purposes of the '21 Notes max downside, we would need to assume filing occurred when both were outstanding so you have both pari tranches getting recovery. We can't per se look to the '23 trading levels as reflecting filing happening when both are outstanding, as one could imagine them pricing in a) optionality of a full company turnaround that allows both tranches to refi and b) the recovery level that would be obtained if the '21 Notes are dealt with before filing.

So, a more fulsome picture of what the true max downside is would need to be obtained by modeling out the company and making your best guess as to the recovery value if filing were to occur prior to maturity of the '21 Notes. Chances are, we'd come up with a downside between 13 and 20 cents. The fact that 13 cents (which is just an illustrative number, since we haven't actually assigned any coupons here) is  less of a downside than the 15 cents priced between the '21 and '23 would reflect being able to clip some coupons before filing occurs and then getting a 70 cent recovery, which would be the best case scenario. In other words, the 70 price of the '23 Notes is probably the ceiling on any recovery value.

Note: You may look at this little cap structure and say obviously the company will try some out-of-court solution. That's probably true! But remember, we're just looking to our max downside risk and an out-of-court solution involving the '21 Notes would probably be providing us a level of compensation well in excess of ~70 cents on the dollar (probably closer to where the '21s are trading now give or take). So our max downside must involve the company filing.

Let's say this capital structure now has Subordinated Notes as well and they're trading at 50. Let's say you like the idea of buying the July '21 Senior Notes, but want to hedge your exposure within this capital structure in some way. How would you think about doing that?

Taking a step back, if we're interested in buying the '21 Notes then the rationale behind it is obvious: we think these Notes will be able to be refinanced.

So our belief is that we'll be able to clip some coupons and pick up 15 points when the Notes mature, which provides a great YTM (I mean, we haven't specified a coupon rate for anything in this little capital structure, but even if it was absurdly low it'd still provide a great YTM in the current credit environment given where the '21 Notes are trading now).

Now what risk are we really trying to hedge here? Obviously, we're trying to hedge the risk of the '21 Notes not being refinanced, but instead the company filing prior to that event. As we discussed in the last question, the '21 Notes would then fall pari with the other Senior Notes due in '23 and provide a recovery significantly below where the '21s are trading now (and probably below where the '23 Notes are trading too).

Now if we're looking to hedge our exposure - operating within this capital structure - then we first need to find the most ideal part of the capital structure that would move the most in the event of a default.

Hypothetically, we don't care if our hedge position moves down or up a lot as we can express our hedge via a functionally long or short position. We just want to find a hedge that:

• Will provide the largest gain in the event of a default (offsetting our losses at least partially on how our long '21 Notes position will fall)
• Will not be too costly to execute at initiation and to hold
• In the event the 21' Notes are refi'ed we don't want our hedge to move so negatively that it offsets our gains as well

If we think about this little capital structure, what would we expect to move the most in the event of a default? Chances are it will be the tranche of debt that has the highest level of "optionality" priced into it.

If we think about the TL, there's really no optionality priced in. If the company magically becomes the picture of ideal health, the TL will probably trade around par like it is now.

However, when we begin moving down the capital structure more and more of the price we see in the market will reflect the optionality of the company potentially turning things around (as these areas of the capital structure will provide for larger gains should a turnaround occur). 

This is most evident, obviously, when we look at equity for a distressed company where you have a very clear asymmetric profit profile. If you buy equity - when the debt above you is significantly distressed - you know when the company files you'll almost certainly have no recovery, but if the company does turn things around you could expect equity to trade up many multiples. A real-world example of this is Tupperware, which went from $1.15 in March 2020 to ~$32 at year end after skirting needing to file after it appeared likely they would (the most junior part of the capital structure trading below fifty cents on the dollar at one point).  

The same holds true for debt, but of course debt has a more obvious upper-bound on how high it could ever trade up. 

So if the lower down the capital structure we go, we find more optionality priced in then we'd expect in the event of default for the lowest parts of the capital structure to trade down the most all things being equal. 

Perhaps another way to say this is that you can consider debt trading levels the further you go down the capital structure as becoming more and more detached from what the recovery value will actually be. Or, said yet another way, as you move down the capital structure there will be more optionality premium layered over the market consensus for what the recovery value of the tranche will be. This premium, of course, is extinguished when filing becomes evident.

So one would imagine (probably!) that the piece of the capital structure (excluding equity) that will move down the most in the event of filing will be the Subordinate Notes. This is because it is probably trading at a premium due to outsized gains that could occur if the company turns things around or is able to forestall filing by dealing with the '21 Notes.

Therefore, the trade we could do within the current capital structure is going long the '21 Notes (expressing our bullish view on refinancing these) and hedge this by going short the Subordinated Notes (since they will likely fall the most in the event of filing, given that the optionality premium will evaporate). 

Note: Of course, we could also go short the equity if it's publicly traded as well since it will have the sharpest reaction to a filing. But I'm assuming we're dealing with the capital structure in the strictest sense of the word for this question. 

Let's say we do go long the '21 Notes and short the Subordinated Notes. What do we need to be careful here? 

The obvious thing to be mindful of here is that we're dealing with a negative carry scenario.

Although I haven't specified what the coupon rates are for anything in this capital structure, it's safe to say the Sub Notes are going to have a much higher coupon than the Senior Notes. 

So let's say the Sub Notes have a coupon of 8% and the Senior Notes have a coupon of 4%. We're clipping coupons on the 4%, but having to pay out the 8% coupons. 

As long as we have this trade on we are dealing with a negative carry of 4%. Assuming that over a year no prices on either of these tranches of debt are moving, then we're just bleeding money.

Now given how I've set up the question, this isn't a huge deal as the catalyst for the trade (refi or not) will take place in a year so we won't be bleeding this negative carry over a prolonged period of time.

But with that said, you should be mindful of how this hedge is dampening returns. If our thesis proves true, then the Sub Notes will probably increase in value (as the '21 Notes being refi'ed will almost certainly be good news for the Sub Notes prospects) and we will be paying negative carry.

If our thesis does not prove to be true, then we'll have a sharp decline in the '21 Notes we're long, a gain in the Sub Notes that trade down, and we will still be paying negative carry. 

So the fact we're paying negative carry dampens down the upside potential of the trade and adds insult to injury should the trade not go our way (although, of course, negative carry is the price you pay to have the hedge, which dampens the max negative returns you'd get in this scenario).

Of course, how much this effects our returns is contingent on how large of a hedge we're dealing with here. 

If we're dealing with a YTM of ~21% on the '21 Notes - assuming a year to maturity and a 4% coupon - then we may be reluctant to engage in any hedge that limits our upside to anything below a 14% IRR. 

If we think we the company won't file until after a few coupons have been clipped, then that income dampens down the max downside risk.

So, if we think the recovery is - just to throw out an example - 70 cents on the dollar, but we'll be able to clip two coupons, then our IRR would be ~(15%) if the company files. So we already have a bit of asymmetry between the downside (-15%) and upside (+21%) due to the coupon income embedded in this trade. 

If placing a small hedge within the capital structure - that has negative carry - causes our range of outcomes to go from +21% / -15% to +14% / -10% then maybe we have enough conviction in the trade (assign a high enough probability to the refi occurring) that we roll the dice without a hedge since we don't want to crimp our upside too heavily. 

Non-pro rate uptiers have obviously been a big story line in the distressed debt world over the past year. What do you think of them?

This question is emblematic of the kind of open-ended, more conversational style that many interviews can devolve into. 

I could ramble on this subject in a number of different directions for far too long, but I'll try to keep it short given how long this post already is and try to provide a more interesting take. 

Many have commented that the case of Serta - where we saw a non-pro rata uptier done - is indicative of the increased "creditor on creditor violence" we've seen over the past few years.

I mean, sure, that's true. But traditionally when we think of creditors battling it out we're talking about more activist distressed funds getting involved as a company heads into distress; jockeying for position, arguing over valuation, fighting over language or priority nuances, etc. 

One side of the Serta case had traditional players (Apollo, Angelo Gordon, et al.), but the other side had, uh, mutual funds? Rather robust mutual funds, etc. etc. but still not exactly the kind of classic activist distressed players we're used to seeing.

This strikes me as being a natural out growth of the size these kinds of funds control within the secured tranches of large debtors in general and their realization that they don't need to be entirely passive players through the process. 

From a distressed seat, this is troubling as you're faced with needing to be more careful not to get into a position and then get squashed by a large holder - or consortium of similar large holders - who decide they want to more actively dictate a restructuring.

It also poses a challenge in that if you're going to get involved in one of these larger debtors, proposing something controversial, you may need to up the size of your position (which is logistically difficult and likely will lower your return or require more leverage).

As for non-pro rata uptiers themselves, I think it's quite clear that there's no getting around an anti-subordination provision if they exist in the underlying credit docs. So if they exist in credit docs, then worry about something else. If they do exist, pay attention to current holders and think about how you could be blind sided by this kind of transaction. 

I think the open-market purchases language argument around non-pro rata uptiers is of more interest in general. I would be curious to see it tested in the courts when it is not so explictly defined in the underlying docs as it was for Serta. 

Hopefully this has all been somewhat helpful or at least enjoyable to read. Given that distressed debt and special situations interviews tend to be a bit more conversational and open-ended, I've tried to reflect that in how the questions above were answered.

Of course, for some of these questions you could go on at much more length and perhaps take them in different directions.

For example, while the hedging question limited the type of hedge to being within the current capital structure itself, you could be asked about how you would think about using CDS and how that would work. 

I've often been asked to put out a guide - like I did for restructuring - focusing on distressed debt and credit more broadly. While it'd be impossible to create a comprehensive overview guide - given how diverse the buy-side is in credit - I do have fun writing up these questions and talking through my perspective on them.

If you think more of these kinds of questions would be good, be sure to let me know and I'll work away  (as time permits) on  putting forty or fifty of these questions together in a little guide.

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This is an excellent resource. I would like to see more questions on the credit buy side. You are a legend!

Super informative would love to see another post on distressed debt questions. Thanks for this write up!

Thanks for the kind words — always makes my day! Probably the closest posts would be the ones on special sits, structural subordination, and rights offerings. I tried to infuse all of them with some interesting side tangents, etc.

this was a fantastic read, and super helpful. are there more blog entries similar to this?

Thanks for the write up man. Very helpful.

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What should I know for a Private Debt/Direct Lending Interview?

I have an interview at a large private debt house (in the UK) and I have been tasked with a case study as the first part of the interview.

Private debt/direct lending seems to be a bit mysterious on the internet, and I'm not totally sure what models/tools are typically used by private lenders in the industry.

Are there any analysts who have worked in this sector that are willing to share some insight into the hard skills commonly used on the job, and those that I should drill before my interview?

Any tips would be really appreciated!

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Direct lending / private credit case study

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I have a case study interview at a direct lender coming up shortly and wondered if I could ask fellow WSO followers on what to expect and how to think about laying out my presentation.

I think that the transaction will likely be a buy-and-build play or a carve out, and would have a significant capex facility.

I come from a debt advisory background and so whilst I feel that I have a good grasp on fundamentals of companies / credit metrics, I have less experience in 'structuring a transaction' from a lenders' perspective. This will obviously be key point of the case study and so any additional guidance on structuring / analysing debt capacity would be greatly appreciated.

Secondly, I wanted to get people's view on FCCR covenants. I've never actually seen this in one of my deals (the joy of cov-lite), and wondered how this has been calculated in the past? (I have seen DSCR and IC covenants) There seems to be a number of differences in the definitions that I have read.

Thank you in advance, Dave

Hmm... I'll attempt to tackle this. Your questions aren't super specific, but I'd expect a CIM and then you build a model + a 3-5 page write-up. Quick background, investment merits, risks & mitigants, and brief model outputs. In terms of structuring, it'll be firm specific. Try to figure out where the firm invests in the cap structure, what rates they typically recieve, etc. and base it off that. Another idea is to scan DebtWire or any other research platform and see what comps' leverage profiles look like. I've interviewed candidates in this position before, and the one thing you are assessing (aside from not fucking up the model) is their ability to sift through what's important and what isn't. How are they thinking about the business and can they accurately identify the key downside levers.

As for FCCR, honestly people calculate it different ways. I don't think you will get penalized here, but the one I see the most is: (EBITDA - capex - mgmt fee - taxes) / (Interest + Mandatory Amort).

I am happy to answer more specific questions on here and/or hop on the phone if you PM me.

Sorry to bump an old thread, but when you say model outputs what exactly would you be showing? I understand in an LBO , you would be showing sensitivity tables around IRR and MOIC. But how would that be different for credit?

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