1/21/2024 0 Comments Leveraged loans arrangement fees![]() Both types of loans may charge commitment fees, prepayment penalties, and other fees, but these fees tend to be higher for mezzanine.There is rarely equity participation with direct loans, but it’s common with mezzanine.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.īut the risk and potential returns differ significantly: ![]() The work is more interesting than DCM since you get modeling and credit analysis exposure rather than constant market update slides.īut 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. Loan sizes tend to be smaller because direct lenders focus on middle-market companies.Ĭareer-wise, direct lending is “better than DCM but not as good as LevFin.”.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. 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.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.”.Leveraged Finance and Debt Capital Markets “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.Īlso, as the name implies, private debt is not publicly traded, so its market value is more difficult to determine.īut 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. These terms are often used interchangeably, but private debt is broader and includes direct loans, mezzanine, and forms of distressed debt. I’ve used this image before, but this graph from Marquette Associates sums up various credit fields quite well: 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. 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.ĭL funds can also make deal processes more efficient by reducing the number of parties involved and the risk of leaks about the deal. 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). 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. 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. Direct Lending Jobs: Deals, Work, and Hoursĭirect 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.Direct Lending Case Studies and Modeling Tests.Direct Lending Fund Interview Questions and Answers.Direct Lending Recruiting & Ideal Candidates.
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