Direct Lending is Eating the World

April 06, 2023

In 2011, Marc Andreessen famously proclaimed that software is eating the world, meaning more and more industries and businesses are relying on software for their operations. This statement has since proved incredibly accurate, as evidenced by our daily dependence on software applications. What was said about software over a decade ago can be said about direct lending today, supported by the growing percentage of companies that rely on direct lenders or private credit managers to finance their operations. Direct lending is a form of financing where borrowers receive loans directly from lenders, without intermediaries such as banks or financial institutions. In this type of lending, borrowers can access funds more quickly and with more flexibility than via traditional lending channels. The terms and conditions of the loans are typically negotiated directly between the borrower and lender, allowing for greater customization and potentially more favorable rates for borrowers.

A number of different supply and demand tailwinds have contributed to the growth of direct lending, including a shift in banking practices post-GFC, including Dodd-Frank legislation and Basel III, the growth of private equity and its preference for direct lending financing, and the investment premiums inherent to the asset class. From here, Marquette expects direct lending to continue to grow, providing attractive investment opportunities for clients. The fallout from the failure of Silicon Valley Bank and the issues facing regional banks may continue to force small and mid-sized borrowers into the arms of private credit lenders. Private equity managers, who tend to prefer financing provided by non-bank institutions over those influenced by the mercurial nature of traditional capital markets as well as the certainty of execution offered by direct lenders, are armed with a record nearly $2 trillion in dry powder.¹ And lastly, we believe institutional investors will continue to allocate to direct lenders and private credit given the attractive risk-adjusted returns and portfolio diversification benefits the asset class provides, particularly in today’s challenging market environment.

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¹Thomas, Dylan. “Global Private Equity Dry Powder Approaches $2 Trillion.” S&P Global, December 21, 2022.

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.