In an increasingly crowded direct lending market, relationship capital remains a powerful differentiator, influencing transaction access, execution certainty, and long-term investment outcomes.
In direct lending, sources of origination, competitive market positioning, and the relationships developed over careers are crucial to selecting the best credit opportunities. It is critical in direct lending to avoid adverse selection. It is important to be on the first set of calls that a sponsor makes when looking to finance its deals, not the calls after other primary relationship lenders have passed. To be in the set of first calls, it’s essential to develop a reputation of being a reliable partner with sponsors and non-sponsored sourcing channels. Reliability does not mean doing every deal that comes from a sponsor or non-sponsored deal source – everyone understands there can be reasonable disagreements on the attractiveness of an investment. What’s critical is communicating quick “no’s” where appropriate and providing a clear due diligence path that gives sponsors and borrowers confidence in execution.
Higher-quality opportunities tend to be shown first to a smaller set of trusted lenders; tougher/residual deals move further down the call list.
In order to provide a consistent and credible due diligence path, a direct lender must ensure originators are closely aligned with the investment committee. This can become difficult as direct lending groups grow or are acquired and become more hierarchical and bureaucratic. We improve “certainty to close” on desirable transactions by having everyone on the team invited to investment committee presentations so they hear and participate in discussions. Through the discussion each deal team carefully documents key issues, diligence items, and terms approved by the investment committee. Prior experience within a sector is incorporated at the initial screening stage, ensuring relevant insights help shape diligence priorities and investment decisions from the outset. We believe tapping into diverse perspectives across the team makes us a better investor and more reliable partner.
Post-close relationships may be even more important to sponsors and borrowers than the initial deal execution. Sponsors often decide on financing partners based on how they have acted or how a sponsor thinks they will act post-close. If a lender is working alongside a sponsor and asking intelligent questions pre-close by diving into key risks and being a pragmatic investor, sponsors tend to trust that lender will act rationally with an economic lens post-closing. The approach a lender takes post-close has become increasingly important to sponsors through time. In the early days of LBOs, private equity sponsors could borrow such a large portion of the purchase price that the borrower only needed to modestly grow, pay down debt, and achieve 20%+ IRRs for their investors. Today, private equity sponsors are generally paying higher multiples for businesses than historically, and lenders no longer lend 60% - 80% of purchase price. Now, private equity firms often only borrow 35% - 40% of the purchase price, especially in the lower middle market where we focus.
Ultimately, relationship strength is more than an origination advantage—it is a competitive asset that influences access, selectivity, and investment outcomes. For sponsors and borrowers, certainty of execution and post-close flexibility are often as important as pricing.
To explore why strong sponsor and borrower relationships remain a competitive advantage in an increasingly crowded direct lending market, read the full report.
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Risk considerations
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