Direct lending

Direct lending is a type of private debt financing, i.e. it refers to debt investments that come from institutions other than banks. Lenders (usually asset management companies) combine their capital together into a professionally managed fund, which provides debt products to businesses. Unlike publicly listed corporate bonds, private debt products are usually illiquid and not regularly traded on public markets.

You could consider private debt if you are looking to raise working capital for business growth (see growth finance), infrastructure, real estate development or a buyout.

The tighter regulatory capital requirements that followed the 2008 global financial crisis forced banks to cut back on lending to businesses. Non-bank lenders stepped in to plug the gap by providing direct lending to fast-growing, medium-sized and large businesses. 

How does a direct lending fund work? Asset management companies (AMCs) such as hedge funds, private equity firms and insurance companies raise pools of money from investors who are interested in high-risk, high-yielding debt. These AMCs then lend directly to companies, corporate groups and subsidiaries – or to special purpose vehicles established to finance specific projects or assets – in the same way that banks would lend to them. A direct lending fund might act alone or club together with other funds.

Direct lending comes under the umbrella of private debt (also known as private credit), which includes mezzanine finance and special situations.

Defining terms

The term ‘direct lending’ is sometimes used interchangeably with ‘private lending’, ‘private debt’ or ‘private credit’ but we see direct lending it a subset of ‘private debt’.