Non-bank lenders have existed for decades but were typically considered a last resort option for companies on the brink of failure. However, in the decade following the financial crisis, middle market CFOs, business owners, and financial sponsors have been turning to non-bank lenders as a viable solution for growth capital, recapitalizations, acquisition financing, and other capital needs. This shift begs the question – what caused the change?

After the financial crisis abated, traditional banks faced increased regulatory scrutiny that resulted in tighter lending criteria. Credit committees declined more borrowers and reduced lending limits. Gone were the days when a long standing relationship could tip the scales for companies who were just outside the bank criteria. Many middle market companies who still had strong performance were left asking where to turn. Over the past decade, the vacuum created in the market was quickly filled by a proliferation of non-bank lending. With an ability to provide credit in structures and amounts a traditional bank cannot, these lenders experienced strong demand from well-performing firms willing to pay higher interest rates to ensure access to capital.

This demand was met by a strong supply of investment capital from institutional investors like pension funds and insurance companies. To help the economy recover faster, the Federal Reserve introduced low interest rate policy, which reduced the yield on traditional fixed income assets like treasuries and resulted in billions of dollars migrating to higher yield investments like direct lending.

In just the past two decades, “globally, private credit, which includes distressed debt and venture financing, has ballooned from $42.4 billion in 2000 to $776.9 billion in 2018. By one estimate, the total is likely to top $1 trillion in 2020.” – Bloomberg (Butler)