Direct lending
Direct lending is when lenders other than banks provide loans directly to companies, skipping intermediaries like investment banks or private equity firms. It mainly funds smaller and mid-sized businesses, not large publicly traded ones. The lenders are typically asset managers or private debt funds.
These loans are usually senior, secured debt, meaning the lender has priority for repayment, and some deals use unitranche structures (a single loan that combines different debt layers). Direct lending often uses some leverage, but generally less than banks or complex debt funds. Borrowers pay quarterly interest, creating a steady cash flow for the lenders.
Why it matters: after the 2008 financial crisis, banks pulled back from lending, so direct lending grew to fill the gap. The private credit market has expanded a lot in the last decade, with direct lending playing a key role. A benchmark size was about $263 billion by the end of 2022.
Investors, including US pension funds and other institutions, have allocated money to direct lending, with growing interest in Europe as well. European governments have encouraged direct lending to help smaller companies; for example, the UK launched a program in 2012 to lend public money to smaller firms with asset managers.
Performance has been strong. In 2018, private credit funds in the US posted returns equal to or better than leveraged loans and high-yield bonds. Direct lending tends to have a low beta and some alpha, with low correlation to leveraged loan or high-yield markets, making it an attractive alternative in a diversified portfolio.
Industry growth continues as many asset managers start direct lending funds, and some US firms have focused on expanding into Europe since around 2013.
This page was last edited on 3 February 2026, at 14:53 (CET).