By
Key Takeaways
• Direct lending is a core strategy of private credit, focused on loans to private companies—primarily in the middle market.
• Loans are typically senior secured, offering strong downside protection.
• Floating-rate structures help manage interest rate risk.
• Direct relationships and deep due diligence allow for greater access and control over terms and structure.
• Investors benefit from enhanced yield, downside protection, and portfolio diversification.
Direct lending is a form of private credit where non-bank lenders provide loans directly to private companies. In most cases, lenders focus companies seeking a tailored financing solution that is not accessible to them in the public credit markets or through bank lenders.
This type of lending is distinct from the traditional sources of debt capital for corporate borrowers, namely bank loans and broadly syndicated loans. Like syndicated loans (but unlike most high-yield bonds), these private loans typically feature interest payments at a spread above a floating reference rate and a floor on the minimum rate, reducing interest-rate risk for investors and providing protection in an inflationary environment.
Borrowers value the speed and flexibility. Investors benefit from higher yields, downside protection, and low correlation to public markets—making it a compelling fixed income strategy.
Direct lending is a relationship-based lending model focused on middle market companies. The process typically includes:
This direct approach offers speed, flexibility, and control—benefiting both borrowers and investors.
Private credit offers more lender protections than public credit. Unlike public loans, which often have fewer restrictions, private loans typically include stronger terms, more direct oversight, and tighter controls—helping reduce risk for investors.
Private credit offers more lender protections than public credit. Unlike public loans, which often have fewer restrictions, private loans typically include stronger terms, more direct oversight, and tighter controls—helping reduce risk for investors.
| Public | Private | |||
| Investment Grade |
High Yield |
Broadly Syndicated Loans (BSL) |
Direct Lending |
|
| Borrower Size | Mega | Large | Large | Typically, Middle Market |
| Default Risk | Low | High | Medium | Typically, Low to Moderate |
| Interest Rate Risk |
Medium/High (Fixed Rate) |
Medium/High (Fixed Rate) |
Low (Floating Rate) |
Low (Floating Rate) |
| Due Diligence | Limited | Limited | Limited | Extensive |
| Covenants | Strong | Weak | Weak | Strong |
| Monitoring Rights | Weak | Weak | Limited | Strong |
Source: iCapital. For illustrative purposes only.
Implementation Insight: Institutional investors seeking to compliment traditional fixed income allocations may use direct lending to enhance yield and reduce volatility.
Implementation Insight: Because direct lending vehicles are less liquid than their public counterparts, investors should align these allocations with longer-term investment horizons.
| Myth | Fact |
| Direct lending is too risky | Most loans are senior secured with strong covenants and due diligence. |
| Only institutions can invest | Access is expanding via feeder funds and private vehicles for high-net-worth investors. |
| It’s illiquid | Direct lending is less liquid than public investments but may be offered through business development companies (“BDCs”) and interval fund structures |
| It’s just like high-yield bonds | Direct lending is typically senior, directly negotiated, and covenant-rich. |
ENDNOTES
1. Bloomberg Index Services Limited, Cliffwater Direct Lending Index, Morningstar, iCapital Alternatives Decoded
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