Direct Lending

Direct lending refers to the practice of non-bank financial institutions providing loans directly to mid-market companies, typically outside the realm of traditional syndicated lending or capital markets issuance. It has become the largest and most established segment within the private credit landscape. These loans are most commonly senior secured in nature, placing the lender at the top of the borrower’s capital structure and affording them first claim over assets in the event of a default. In many cases, direct lending transactions also take the form of “unitranche” loans, which consolidate senior and subordinated risk into a single facility, simplifying borrower relationships while maintaining differentiated returns for investors via internal tranching.

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What distinguishes direct lending is its ability to offer customised, flexible capital solutions to companies that may be constrained by banking regulations or are seeking a faster, more private alternative to traditional debt markets. Since the Global Financial Crisis, increased capital requirements imposed by Basel III and equivalent frameworks have caused many banks to reduce their middle-market lending activities, creating a structural opening for asset managers, private credit funds, and insurers to step in. These lenders typically work closely with private equity sponsors, offering capital for leveraged buyouts, growth financing, dividend recapitalisations, and refinancing needs. From an investor’s standpoint, direct lending strategies are typically “buy and hold,” focused on generating contractual interest income with relatively low turnover, and are underpinned by detailed due diligence, bespoke structuring, and active covenant monitoring.

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The typical investment process involves several distinct phases. Origination often occurs via sponsor relationships, investment banks, or direct sourcing efforts. Due diligence requires robust bottom-up financial analysis, sector benchmarking, management interviews, and assessment of business model resilience. Once a credit is approved by the investment committee, the structuring phase determines the specific loan terms—such as base rate plus spread pricing (e.g., SOFR + 500–700 bps), amortisation schedule, financial covenants, collateral packages, and intercreditor agreements. Once deployed, direct lending investments are actively monitored on a monthly or quarterly basis for covenant compliance and early signs of underperformance. Most loans mature in three to seven years, with exit routes typically involving repayment from cash flows or refinancing events, often tied to the sponsor’s exit.

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For junior professionals entering the private credit space, direct lending provides foundational exposure to credit underwriting, corporate finance principles, legal documentation, and sponsor negotiation dynamics. It is both analytically rigorous and operationally disciplined, offering a window into the interplay between cash flows, risk protection, and investment structuring.