Institutional Model

Investing Ideas

Direct lending: Does borrower size matter?

A closer look at risk and returns. The rest of the story…

By: Audie Apple David Gaito

Updated: 12/10/2024

Key Takeaways

Defaults are generally viewed as a sign of an imminent loss, but not all defaults are the same.
Financial covenant defaults protect capital by forcing the borrower back to the negotiating table before a payment is missed.
Leverage matters. Larger borrowers generally use more debt in their capital structure, increasing the risk profile of the loan.
Financial covenants, combined with lower capital structure leverage, have produced slightly higher returns and narrower dispersion for direct loans in the lower middle market versus the upper middle market.

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Direct Lending: Does Borrower Size Matter?

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