Direct Lending in the U.S. Middle Market

Abstract

The reduction in credit supply from traditional lenders following the 2007--2008 Financial Crisis contributed to a surge of direct lenders and, in particular, business development companies (BDCs). Using a novel hand-collected dataset, we provide the first systematic analysis of the BDC sector. In a difference-in-differences setting, we exploit three exogenous shocks to credit supply, including new banking regulations and a major finance company collapse, to establish that BDC capital acts as a substitute for traditional financing. Using an instrumental variable approach, we further document that access to BDC funding and, more broadly, private debt capital has stimulated economic growth.