Direct Lending
Private Credit glossary · Fund Structures, Returns & Economics
Definition
Origination of loans directly by nonbank lenders (BDCs, direct-lending funds, separately managed accounts) to middle-market borrowers — bypassing the bank syndication channel. Distinguished from BSL by bilateral pricing negotiation, illiquid secondary market, maintenance covenants, smaller borrower size ($5M–$250M EBITDA), and a 150–250 bps illiquidity-and-size premium over comparable BSLs.
Direct Lending in plain English
Direct lending is when investment funds — not banks — lend money straight to mid-sized companies, cutting the bank out of the middle. Normally a bank arranges a big loan and then chops it up to sell pieces to lots of investors; direct lenders skip all that and negotiate the loan one-on-one with the borrower, then hold it themselves. The trade-off: these loans can't be easily sold to someone else later (there's no busy resale market), and the companies are smaller, so lenders demand extra reward — often about 1.5% to 2.5% more interest — for taking on that lower liquidity and size risk. In exchange, they usually get tighter protective rules ('maintenance covenants') that force the borrower to stay financially healthy, giving the lender an early warning if things go south.
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