Direct lending

October 2017

The term “direct lending” has grown considerably in popularity over the past ten years. However, as with “smart beta”, “hedge funds” and other industry jargon, its definition is somewhat ambiguous. As direct lending has become more widely accepted by investors, its meaning has evolved and there has been a proliferation of different strategies and approaches. Terms such as “senior lending,” “private credit,” and “private debt” are frequently used as synonyms for direct lending which can create even more confusion.

The broadest definition of direct lending is all lending executed exclusively between a debtor and a non-bank creditor. This paper uses the term direct lending to refer to an investment manager (i.e., non-bank creditor) lending capital directly to a company (i.e., debtor/borrower). Direct lending transactions typically take place with smaller or middle market borrowers. This lending looks similar to that which occurs with larger companies in the bank loan and high yield markets, with the major difference being that the direct lending loans are bilaterally negotiated transactions and not freely traded. Finally, traditional bank lending (where the bank retains the loan) and direct lending are not mutually exclusive, as many middle market companies utilize both sources of capital financing.