If you’re considering a career in direct lending, it’s important to understand the job duties and requirements. Although there are a few differences between direct lending and other types of credit roles, both fields offer a similar set of benefits. For example, direct lending offers shorter hours, less pay, more variety, and more exit options. And mezzanine funds, on the other hand, are more flexible. Compared to direct lending, mezzanine fund positions also pay well.
As an alternative source of capital, direct lenders often provide lower interest rates than other sources of funding. In addition, the nature of the funding allows these lenders to get higher coupon rates and origination fees. Middle market companies often prefer the certainty of a direct loan because their borrowing options are limited. Furthermore, direct lenders often offer less risky investments, with marked-to-market valuations averaging five to six times EBITDA directlendersfunding.com. In addition, the demand for private investments is reducing illiquidity premiums, enabling some borrowers to dilute their lenders’ call protection.
While institutional borrowers often enjoy higher yields, direct lenders generally expect better terms and conditions. Compared to institutional lenders, direct lenders are more hesitant to adopt basket structures or bond-like covenant packages. This is why they typically receive higher indicative pricing. Also, unlike institutional lenders, direct lenders have no risk of market deterioration. A typical direct lender deal is structured so that it is difficult to adjust the price of a company after the transaction closes.
Direct lending has become popular with nontraditional companies, as banks are no longer as prevalent in middle-market financing. The decline in the bank’s share of middle-market lending has made this form of funding very appealing to borrowers who prefer to close deals. The main advantage of direct lending is that it requires little syndication. In addition, direct lenders typically hold the loan until maturity. While large banks have largely abandoned the industry after the 2008 financial crisis, the growth of the direct lending market reflects the changing economics and consolidation in the financial industry.
While there are differences between the two types of direct lending, both have one thing in common: they provide flexible and tailored financing. While many direct lending strategies focus on senior secured loans, others allow investors to invest in non-senior-secured loans. And while all of these are beneficial, a direct lender has the upper hand on many cases. But there are some important differences. For example, traditional first-lien senior loans carry less credit risk than a subordinated loan.
The preferred nationwide direct lender for real estate investors is Pioneer Realty Capital. Pioneer Realty Capital has over 1,000 capital partners, and participates in deals as an equity or mezzanine/senior debt lender. Their crowdfunding platform allows investors to fund real estate projects and service more than 40 states. Its program options are diverse and include 100% financing on 1-4 units, a three-month seasoning period for rental loans, and many competitive options for experienced investors.
If you’re a tax-exempt investor, the BDC route may offer some tax benefits. In many cases, direct lenders may offer exposure to this sector without triggering ECI tax on investors who are based outside of the United States. However, BDC investments may not be appropriate for all situations. For example, an Ex-U.S. investor may not pay ECI tax if the loans are to companies outside the U.S.
Direct lenders have also tapped into private equity investors to jump-start digital transformation strategies within portfolio companies. Using virtual reality and other software to modernise property management has been common among real estate investors. While traditional brick-and-mortar distribution centers and supply chains are rapidly changing, technology has created a new category of investment for infrastructure investors. This new market offers investors an opportunity to access high-net-worth investors while leveraging their existing capital.
The low interest rate environment has made direct lending a viable alternative to traditional banking. As a result, it has become a popular strategy in today’s competitive finance borrowing market. Furthermore, investors seeking lower risk investments will continue to seek out this option. It’s an excellent alternative to private equity and carries minimal risks. And as long as there are low interest rates, direct lenders will remain a viable investment option. And, while direct lending may seem riskier than private equity, the opportunity to earn a substantial ROI is likely to remain.