What is direct lending?

The loans are typically senior and secured, pay a floating rate, and are negotiated with one lender or a small group, which then holds and monitors the loan instead of trading it. Many borrowers are owned by private equity firms. Lenders include private credit funds and business development companies. Banks made over 70% of US mid-market loans in 1994 and about 10% by 2020, as non-bank lenders took the market, especially after the 2008 financial crisis.

Say a fund lends $50 million to a mid-sized company at the benchmark rate plus 6 percentage points. With the benchmark at 4%, the company pays 10%, or $5 million a year in interest. Simple example. Terms vary by fund.

It is the largest part of private credit, and it is how many private equity buyouts of mid-sized companies are now financed.

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