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

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.