Why Private Credit and Banks Ask Fundamentally Different Questions

Every credit conversation I have witnessed in emerging markets follows the same pattern. The borrower walks in having already been to the banks. Sometimes the banks said no. Sometimes they said yes, but on terms that did not work: too short, too rigid, too collateral heavy for a business whose real value sits in its people and its client relationships rather than its balance sheet.

These companies come to private credit having exhausted the conventional options, or having found those options too slow or too costly for what they actually need. What they discover, often for the first time, is a form of capital that asks a genuinely different question. Not "what can we take if this goes wrong" but "what makes this business worth backing in the first place."

Last week I attended the Private Capital Symposium at London Business School, organized by the Institute of Entrepreneurship and Private Capital. The symposium brings together global investors, industry practitioners, and academics to explore emerging trends in private equity, private credit and venture capital. Two days: the first practitioner focused, the second dedicated to academic paper presentations and research discussions.

It was on the second day that I sat in on a session where a working paper titled 'The Lending Technology of Direct Lenders in Private Credit' by researchers at Penn State, the U.S. Office of Financial Research, and Chicago Booth was presented. I had read it beforehand, partly because private credit is what I do, and partly because the question it asks is one I have been thinking about for years in a different context. I left the session with notes in the margin and a few thoughts I wanted to share.

The findings are striking. And for anyone building or deploying private credit capital outside the United States, they are worth understanding carefully.

What follows is a reading of the research, through the lens of someone who has spent the better part of two decades doing transactions in markets the paper does not cover.

What the Research Shows

A note on terminology: private credit is a broad term. It encompasses direct lending, mezzanine, asset based lending, senior secured facilities, and distressed strategies, among others. The arguments that follow apply most directly to direct lending and mezzanine, where the credit logic diverges most sharply from traditional banking. Asset based lending and senior secured lending sit closer to the bank model in their collateral approach, and the distinction matters.

The study is built on a dataset that covers the near-universe of U.S. private middle market firms. Nearly 450,000 companies. Over a decade of lending data. The backbone is Uniform Commercial Code filings, legal documents that any secured lender must submit when claiming collateral against a borrower. Because every lender, whether a bank, a finance company, or a direct lender, files the same document, the dataset allows for a direct comparison across lender types that has rarely been possible before.

The central finding is that direct lenders are not a substitute for banks. They serve different borrowers, use different collateral, and operate on a different credit logic. The differences, when you look at the data closely, are categorical. And the clearest expression of that difference sits in a single data point.

The Collateral That Reveals Everything

Among direct lenders, 79% of loans are secured with a blanket lien. Among banks, that figure is 15%. Among finance companies, 3%.

A blanket lien is a security interest over all of a borrower's assets. Not a specific machine, not a specific receivable, but everything the company owns and everything it might become. Its value is not tied to what you could sell the assets for today. It is tied to what the business is worth as a going concern, operational, intact, continuing to generate cash.

Banks lend against fixed assets: equipment, vehicles, property. Or against current assets: inventory, accounts receivable. These are claims on things that can be separated from the business and sold independently. Their value survives the death of the company. A blanket lien's value does not.

Financial economists describe this as the difference between liquidation value and continuation value.

• Liquidation value asks: if we had to sell everything today, what would we recover?

• Continuation value asks: if this business keeps operating, what is it worth?

Banks are built around the first question. Direct lenders have built their entire model around the second.

Why This Distinction Matters Now

The most valuable companies being built today, in professional services, software, healthcare, and business services, are not asset heavy. Their value lives in relationships, processes, people, and institutional knowledge, things that cannot be easily separated, appraised, and auctioned off.

The research confirms this pattern at scale. Direct lenders' borrowers operate in industries with significantly higher intangible capital intensity than bank borrowers. The gap is nearly two standard deviations at the lender portfolio level. Direct lenders have gravitated, systematically and deliberately, toward precisely the kinds of companies that traditional collateral frameworks struggle to finance.

Banks are not failing here. They are operating exactly as their regulatory environment and historical model requires. But that model was built for a different economy, one where value was embedded in tangible things. The economy has moved. Private credit moved with it.

The Private Equity Connection and the Open Question

The paper also quantifies something that practitioners have long known: direct lenders lend overwhelmingly to private equity backed firms. When weighted by employment, 69% of direct lender borrowers are PE backed. For banks, the equivalent figure is 12%.

This is not incidental. Private equity sponsors create the conditions that make continuation value lending workable: detailed financial information, active governance, clear exit horizons, and high leverage ratios that require lenders willing to look beyond liquidation value. The PE sponsor, in effect, prepares the company for institutional debt capital and hands it to the lender ready to underwrite.

But the paper surfaces a more specific finding. The direct lending growth story is concentrated in PE backed firms operating in intangible capital intensive industries. PE presence in tangible industries, oil and gas, heavy transportation, pipeline infrastructure, predicts almost no growth in direct lending. The mechanism is the gap between continuation value and liquidation value. In intangible industries, that gap is enormous. That gap is where direct lenders earn their returns.

This leads to the most important open question in the paper: what happens to direct lending in markets where private equity ecosystems are underdeveloped? In the United States, PE sponsored deal flow has functioned as the primary origination channel for direct lending. Remove that channel, and the model has to be rebuilt from scratch. For most of the world, that question is already the daily operating reality.

A Different Entry Point

The paper's findings are built on U.S. data, and the U.S. model has a specific architecture. Sponsors source the deals. Sponsors provide the financial information. Sponsors create the governance structures that make continuation value lending readable to an outside lender. The PE ecosystem, in this model, is not just a source of deal flow. It is the infrastructure on which direct lending runs.

Across Turkey, the GCC, North Africa, and Sub-Saharan Africa, that infrastructure does not exist at the same depth. And yet private credit is growing in all of these markets. The entry point is just different.

In these markets, private credit arrives as an alternative to private equity, not as its companion. The borrowers are founder led, family owned businesses that have spent decades building enterprises with real cash flows and real market positions. They are not looking for a financial sponsor to restructure their ownership or govern their operations. They are looking for capital that respects what they have already built and gives them room to keep building it.

What I observe consistently across these geographies is that the borrower's primary reference point is the bank, not the PE fund. They come to private credit because the bank could not or would not move. The conversation is about flexibility, tenor, and structure. Non-dilutive capital is not a feature for these borrowers. It is the starting condition.

This changes what direct lending requires in practice. The U.S. model outsources origination to sponsors. In emerging markets, that work falls entirely on the lender. Building deal flow means building relationships directly with founders, family offices, financial advisors, and local intermediaries. Underwriting means developing judgment about businesses without the financial transparency that PE ownership typically provides. Structuring means working within legal and collateral frameworks that are still maturing in many of these jurisdictions.

That is harder work. It also creates something that is difficult to replicate: a local origination capability, built on trust and track record, in markets where institutional capital is still scarce and relationships still determine access. The continuation value logic that the paper identifies as the core of direct lending applies here just as it does in the United States. A family owned industrial company in Istanbul, a technology enabled services business in Dubai, a healthcare platform in Nairobi: these are enterprises whose value lives in their operations, their people, and their client relationships. A lender willing to underwrite that value, on terms that preserve the founder's ownership, is offering something that neither local banks nor private equity funds can replicate.

The credit philosophy is the same. The infrastructure around it has to be built from the ground up. That is not a limitation. It is a moat.

A Closing Thought

For two decades, private credit's growth has been explained as a response: to the Global Financial Crisis, to tighter banking regulation, to large institutions pulling back from middle market lending.

The research suggests the real explanation runs deeper. Private credit did not rise primarily because banks stepped back. It rose because it developed a fundamentally different answer to the question that defines all lending.

What are we really financing?

Banks finance assets. Direct lenders finance businesses.

That distinæction, captured in the difference between a lien on equipment and a lien on everything, sits at the core of private credit's rise over the past two decades. And for those building lending platforms in markets where this shift has not yet fully arrived, the research offers something useful: not just a description of what has happened in the United States, but a way of thinking about what the same logic demands in a different context.

The collateral that matters is not what you can sell. It is what survives.

The paper referenced in this article: Jang, Y.S., Kim, D., Sufi, A., and Chen, X. "The Lending Technology of Direct Lenders in Private Credit." NBER Working Paper 34500, 2025. Available at: https://www.nber.org/system/files/working_papers/w34500/w34500.pdf