When is a direct lender not a direct lender?
When it's a bank
In the words of one high yield banker in London this week, “there has been a lot of nonsense spoken about direct lending this year, hasn’t there?”
Even as the purveyor of some of that nonsense, it is hard to disagree.
The idea that direct lenders could pick up all the deal flow diverted from the syndicated loan and high yield bond markets when they closed down was obviously never realistic. That said, the competition for some of the biggest and best sponsor-backed deals has intensified and direct lenders have in places had the upper hand.
After developments this week, though, when MUFG set up a direct lending operation, we might have to start using different language to describe this competition, because the narrative that it is simply direct lenders versus banks falls apart when the banks start setting up “direct lending groups”.
Many banks, MUFG included, have been doing leveraged lending from their balance sheets for a long time. You can argue the semantics of whether this could be called direct lending, but it’s not the way the market has generally understood the term over the past 10 years.
Some banks, most notably Goldman Sachs, have established direct lending units in the past. But these generally sit outside the bank structurally, allowing them to raise third party capital for closed-end funds and operate much like their competitors at private institutions, with the advantage of seed capital from the bank.
One way of looking at it is that the first generation of banks getting into direct lending were rebranding for the sake of their investors and the next generation is rebranding for the benefit of their sponsor clients.
Whether there is any tangible benefit to sponsors in terms of services provided will prove to be the true test. But, for now, the results are about as clear as the nomenclature.