Direct Lending is a form of corporate debt provision in which lenders other than

bank A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Becau ...

s make

loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that ...

s to companies without intermediaries such as an

investment bank Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing is ...

, a

broker A broker is a person or firm who arranges transactions between a buyer and a seller for a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. Neither role should be con ...

or a

private equity In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a typ ...

firm. In direct lending, the borrowers are usually smaller or mid-sized companies, also called mid-market or

small and medium enterprises Small and medium-sized enterprises (SMEs) or small and medium-sized businesses (SMBs) are businesses whose personnel and revenue numbers fall below certain limits. The abbreviation "SME" is used by international organizations such as the World Ban ...

, rather than large, publicly listed companies. Lenders are generally

asset management Asset management is a systematic approach to the governance and realization of value from the things that a group or entity is responsible for, over their whole life cycles. It may apply both to tangible assets (physical objects such as buildings ...

or private debt fund manager firms. Direct lending funds use leverage, but generally less than banks or

collateralized debt obligation A collateralized debt obligation (CDO) is a type of structured asset-backed security (ABS). Originally developed as instruments for the corporate debt markets, after 2002 CDOs became vehicles for refinancing mortgage-backed securities (MBS).Le ...

funds (CDO/CLO). Private Debt primarily focuses on investing at the top of the capital structure, primarily in senior, secured first lien debt. Investing at or near the top of the capital structure reduces risk relative to equity. Direct Lending includes Senior Debt and Unitranche Debt. Quarterly interest payments drives a constant cash flow stream throughout the deal life. Because the total AUM of both Private Equity and Private Credit exhibited strong growth from 2013-2023, the proportion of Private Credit has remained relatively steady for the past decade. The assets under management (AUM) in Private Credit has grown by almost 4 times over the past decade. Private Credit metrics are proxied by Direct Lending which has exhibited strong performance through economic cycles.

CalPERS The California Public Employees' Retirement System (CalPERS) is an agency in the California executive branch that "manages pension and health benefits for more than 1.5 million California public employees, retirees, and their families".CalPERSFac ...

references a Direct Lending benchmark as represented by the Cliffwater Direct Lending Index having market size of $263 billion as of December 2022. The market has grown in importance since around 2009 in response to banks reducing their lending activities to companies in the wake of the

Financial crisis of 2007-08 Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fin ...

. The need for direct lending has been put at €100 billion in Europe alone between 2013 and 2015. However, other sources report that in 2014 asset managers are struggling to find enough direct lending opportunities to invest in.

Asset managers Asset management is a systematic approach to the governance and realization of value from the things that a group or entity is responsible for, over their whole life cycles. It may apply both to tangible assets (physical objects such as buildings ...

cite the higher returns available from direct lending strategies as a main reason that people should invest in direct lending. US

pension A pension (, from Latin ''pensiō'', "payment") is a fund into which a sum of money is added during an employee's employment years and from which payments are drawn to support the person's retirement from work in the form of periodic payments ...

funds are among the investors who are reported to have made allocations to direct lending strategies, especially in Europe. Several European governments have taken initiatives to boost direct lending to smaller companies since the financial crisis. For example, in 2012, the UK government introduced a scheme to lend £700 million of public money to smaller companies in partnership with asset managers. 2018 U.S. data shows performance returns for private credit funds equal or better than leveraged-loan, high-yield and BDC indexes. Direct lending funds have relatively low beta with positive alpha when benchmarked to leveraged loan/high yield indices. Low correlation is observed between direct lending funds with leveraged loan/high yield indices. A large number of asset management firms have started funds to invest in direct lending, and several US firms have targeted European direct lending since around the start of 2013.

References

{{reflist Financial services Credit

See also

References