Direct Lending

Direct lenders negotiate loans privately with borrowers and typically hold them until they are repaid, rather than selling them on to other investors.

Direct lending loans are usually senior secured loans, meaning they are repaid first and backed by the company’s assets. They typically carry floating interest rates and often include covenants, conditions that the borrower must meet, such as limits on debt levels.

A common form is the unitranche loan, which combines senior and junior debt into a single loan with one interest rate, simplifying financing.

For example, a mid-sized manufacturing company owned by a private equity firm might borrow 150,000,000 from a direct lending fund to finance an acquisition, rather than arranging a syndicated bank loan.

Borrowers value direct lending for speed, certainty of execution, confidentiality and flexibility, and often accept higher interest rates in return. Investors value the relatively high income and lower volatility in reported values. Risks include borrower defaults, limited liquidity and the possibility that reported valuations do not fully reflect losses until they are realized.