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

This paper examines the dual role of Business Development Companies (BDCs) as both creditors and  shareholders in funding middle-market firms. We find that dual-holder BDCs charge 45 basis points higher loan spreads than pure creditors, controlling for loan characteristics and unobserved time-varying heterogeneity in firm credit quality and lender funding conditions. We examine three mechanisms: enhanced monitoring, capital injections as “public good,” and hold-up behavior by dual holders. Differentiating tests indicate that monitoring is the primary channel driving the loan pricing differential.  Our study highlights the real economic impact of private credit, beyond merely filling gaps left by regulation-constrained banks.