Michael Cibelli, CFA®, Product Specialist, Alternatives: In this video, we’ll look at the key parts of the $1.7 trillion private corporate lending market.1

This is Lord Abbett Explains: Private Credit.

Direct Lending

Private corporate lending can take many forms. But at the forefront is senior direct lending. It’s also the category on which many business development companies, or BDCs, are focused. Senior direct lending refers to private loans made by non-bank lenders that are first in line to get paid back if a company goes bankrupt. That makes them less risky relative to any subordinated debt. These loans are often used to finance the purchase of a company, to fund growth initiatives, or to refinance existing debt.

A Focus on Middle Market

Within middle market direct lending, borrowers are often grouped by company size, typically measured by earnings, or EBITDA.

Smaller companies, generally those with less than $100 million in annual earnings, would historically source capital from banks. However, in recent years, their ability to acquire loans from banks has decreased as a result of changes in banking dynamics.

And that’s where private lenders step in. The U.S. middle market encompasses over 200,000 businesses that may be prime candidates for private loans.2 The middle market can be defined as:

The lower middle market:                Between $10 and $25 million in annual earnings

The core middle market:                  Between $25 and $100 million

And the upper middle market:        Between $100 and $300 million

Also worth noting that even larger borrowers beyond the upper middle markets have begun to source financing from the private markets, as they assess the benefits of private financing against public debt.

Let’s Recap

So. what are the key takeaways?

1. A diverse space with roughly $1.7 trillion in assets

First, the private corporate lending market is a diverse space with roughly $1.7 trillion in assets.

2. Senior direct lending is the largest share

Second, senior direct lending is the largest piece of that market.

3. Senior direct lending covers first lien, senior secured private loans to the middle market

And third, senior direct lending encompasses first lien, senior secured private loans to companies of various sizes in what we call the middle market, which can be subdivided into the lower, core, and upper middle market.

Thanks for joining us. Don’t miss our next Lord Abbett Explains: Private Credit video on yield and performance.