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Common Investors across the Capital Structure: Private Debt Funds as Dual Holders

Author

Listed:
  • Davydiuk, Tetiana

    (Johns Hopkins U)

  • Erel, Isil

    (Ohio State U and ECGI)

  • Jiang, Wei

    (Emory U and ECGI)

  • Marchuk, Tatyana

    (Nova School of Business and Economics)

Abstract

This paper examines the dual role of Business Development Companies (BDCs) as creditors and shareholders in the private direct lending market. Utilizing a comprehensive deal-level database, our analysis shows that dualholder BDCs are more effective monitors than sole lenders, benefiting from enhanced tools for information access and governance. This effectiveness allows them to charge higher loan spreads, while simultaneously reducing credit risk and lowering the borrowing cost of portfolio firms from other lenders. We rule out alternative explanations attributing higher loan spreads to mere compensation for capital injection or to hold-up by a dominant financier. Our findings highlight a critical mechanism through which BDCs serve a market segment — mid-sized firms with low (or even negative) cash flows and a lack of collateral but high growth potentials — that is typically undesired by traditional bank lenders.

Suggested Citation

  • Davydiuk, Tetiana & Erel, Isil & Jiang, Wei & Marchuk, Tatyana, 2024. "Common Investors across the Capital Structure: Private Debt Funds as Dual Holders," Working Paper Series 2024-21, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2024-21
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    File URL: https://ssrn.com/abstract=4992219
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    More about this item

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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