Finance · Fintech

Direct Lending Mid Market Entrepreneurship Opportunities?

Hugo Troche Software Engineer. Entrepreneur

January 21st, 2019

Direct lending from private equity funds to companies with yearly revenues between $5M and $100M has exploded:


- https://www.bloomberg.com/graphics/2018-private-credit-yields/

- https://www.reuters.com/article/us-middlemarket-fundraising/u-s-middle-market-direct-lending-strategies-still-raking-in-capital-idUSKBN1KU2ES


Anybody looking to tap into this market by providing origination, underwriting or loan serving services? These types of services are standard in other lending markets, but not in this one. Anybody knows why?


Andrew Chalk Co-Founder of a startup. CEO of a startup. CTO of a Hedge Fund. Quantitative Researcher. Superb COO.

February 6th, 2019

@Chad: " Companies in many sectors, especially early-stage companies, might be valued based on sales/revenue multiples, regardless of earnings. "


Wow! Demand curves slope downwards so I ought to lower prices until price elasticity of demand is one (and maybe price is below costs), which maximizes sales for a given demand curve, and buyers will pay more due to my higher sales?


There is one born every minute!

Andrew Chalk Co-Founder of a startup. CEO of a startup. CTO of a Hedge Fund. Quantitative Researcher. Superb COO.

January 27th, 2019

What is the structure and seniority of the loans? At first blush I am not sure why the banks are not heavily into this space.

Chad Buchanan Chief Investment Officer, Private Equity, Seniors / Elderly Healthcare, Housing & Real Estate

February 7th, 2019

@Andrew Chalk " These firms have EBITDA between $10m and $250m. Could they not make a loan to them?"


The question was about "companies with yearly *revenues* between $5MM and $100MM", not EBITDA.

Andrew Chalk Co-Founder of a startup. CEO of a startup. CTO of a Hedge Fund. Quantitative Researcher. Superb COO.

February 7th, 2019

@Chad: " The question was about "companies with yearly *revenues* between $5MM and $100MM", not EBITDA. "


I wasn't trying to repeat the question. The Bloomberg article has the numbers that I used.

Swarna Esther Founder, CTO, Data Scientist, Freelancer

January 21st, 2019

How do I yake it forward?

Hugo Troche Software Engineer. Entrepreneur

January 28th, 2019

@Andrew Chalk. The seniority depends. There are deals with seniority on tranches where the senior note holders get paid first, but have a lower yield than other notes.


I am also trying to figure why banks are not heavily in this space. So far I have not been able to find any regulatory reason. All the answers that I am getting is that these types of loans don't fit the risk profile of banks. Also, banks seem to be allergic to CLOs after 2008.

Mr. Kelly Johnson Looking for Co-founder

January 29th, 2019

I am currently Stealth Beta testing my entry into a similar concept of private capital lending. Much more grass-roots approach though.


I found the same answers when consulting with bank mentors, "It's not bankable" because they perceive non-traditional lending as more risky even if it's not. If they can't fit the concept into one of their existing buckets, they won't even try to understand it. Brick wall, run away mentality. Square peg, round hole, does not compute.


In my private capital version, my obstacle was very much regulatory, and continues to be. But only because of the specific way I am approaching it. There is tons of potential in private capital, but more so, there is tons of potential to innovate in the sector and disrupt.



Andrew Chalk Co-Founder of a startup. CEO of a startup. CTO of a Hedge Fund. Quantitative Researcher. Superb COO.

January 29th, 2019

@Mr. Kelly Johnson: " I found the same answers when consulting with bank mentors, "It's not bankable" because they perceive non-traditional lending as more risky even if it's not. If they can't fit the concept into one of their existing buckets, they won't even try to understand it. Brick wall, run away mentality. Square peg, round hole, does not compute. "


Did you pin them down on what they mean by all the analogies? These firms have EBITDA between $10m and $250m. Could they not make a loan to them?

Chad Buchanan Chief Investment Officer, Private Equity, Seniors / Elderly Healthcare, Housing & Real Estate

February 6th, 2019

Direct lending from private equity funds has increased because banks can not efficiently lend to all companies in the space that you're referencing. Banks must size their business loans based on debt service coverage (cash earnings before debt service, or typically EBITDA). Companies in many sectors, especially early-stage companies, might be valued based on sales/revenue multiples, regardless of earnings. That's in direct conflict with how a bank must view the credit of the loan in the post-2008 world.


For example, an early stage company might have $20MM of revenue but only $1MM of EBITDA. If that company is valued at $30MM (1.5x sales) it may seek a $15MM secured financing commitment. Unfortunately its $1MM EBITDA doesn't come close to providing enough earnings to service that debt at a coverage ratio that allows the bank to classify it as a good credit. That means it has to charge a higher interest rate, which makes nearly punitive for the company to accept.


Direct lenders are able to fill that void because they aren't regulated in nearly the same way as banks. They can be more aggressive on proceeds and terms while still providing a rate of return to their investors that satisfies them for a managed portfolio of secured debt investments.

Wally Barr Business Owner at Undrnu Management

January 30th, 2019

Like most I believe it is in risk management. The gap is between traditional low risk banks and VC which generally look for explosive returns. The model would be dependent on finding investors that are middle ground. Research is often a challenge in all areas. These type of investors are probably involved with some form of online trading systems on an individual basis. Maybe that could be a model to copy?