We have seen the broadly syndicated loan process in detail and understand the benefits of that product. Despite the robustness of the BSL market and its issuer friendly terms and process, there has yet been further innovation in the high yield credit world, namely loans issued by and held by private credit funds. This type of financing was originally referred to as direct lending when it dealt primarily with smaller deals or smaller companies. BDCs business development companies were historically direct lenders of growth capital to the middle market. Mezzanine debt, which we will cover momentarily, is really just another form of private credit. However, as deals grew in size and investors appetite for yield also grew, asset managers were looking for more ways to get in on the fund. The reality is that competition for assets in private equity drove up multiples, pushing the envelope on how much debt could be raised. As EV multiples increase the need for more sponsor equity investment increases. This makes it challenging to earn the high returns as the greater the initial investment, the more challenging it is to make an acceptable return. This has opened up doors. First funds decided that excellent and stable returns provided by leveraged loans over the years was an appetizing market. Secondly, as non-regulated entities with relationships with sponsors, they were willing to push the envelope on leverage a little bit more. Soon. Larger deals are being done with non-bank arrangers and no syndication to investors. Loans are made directly from a fund to an issuer, hence the term direct lending lending. In a sense, the risk is still somewhat syndicated as the fund is often made up of the same kinds of high net worth individuals and institutions as those that invest directly in the broadly syndicated loan market with a credit fund, the GP LP structure or general partner limited partner structure that is used is similar to that in a private equity fund. Private credit funds are not seeking to replace banks by any means. They exist primarily because they are not banks. Private credit deals are mostly pegged to sponsors, whereas banks can market financing to anyone due to their brand recognition. The pricing for private credit is not cheaper, but as they're not regulated, they can offer more turns of leverage on EBITDA. The private credit world still feasts on the middle market and lower rated credits. As such, many of the deals have the support of financial sponsors and they often facilitate the financing relationships. The loans still go to the company, however, not the sponsor the size of bank's. Balance sheets make larger deals more feasible, although massive inflows into credit funds are now challenging this. Banks also have the ability to attach a revolver easily, whereas private credit funds do not have the day-to-day flexibility of cash available to handle large revolver draws. Private debt is also a lot like private equity. Once you have it, you are stuck with it until an exit or event such as a sale or refinance. BSLs trade in the secondary market and have the CLO market driving demand. Interestingly enough, the private creditors put issuers on a shorter leash with much more oversight of the loan than a traditional cov-lite broadly syndicated loan. This is primarily because they are stuck holding the loan or in the relationship and need to work with issuers to make sure that everything goes smoothly along the way. And that process has helped much more with oversight such as covenants.
