---
title: "Direct Lending | Altss Glossary"
description: "Direct lending is the private credit strategy in which a non-bank lender originates and holds loans, usually senior secured and floating rate, negotiated…"
canonical: "https://altss.com/glossary/direct-lending"
---

Glossary · Strategy

# Direct Lending

Also called: direct loans · non-bank direct lending

Direct lending is the private credit strategy in which a non-bank lender originates and holds loans, usually senior secured and floating rate, negotiated directly with a company or its private equity sponsor rather than arranged and syndicated by a bank.

Publisher: Altss LLCContent modified 2026-10-02

ALTSS-CREDIT-002

A direct lender does the job a bank syndicate would otherwise do: it underwrites the company, negotiates the credit agreement and keeps the loan on its own books. It is paid more than a syndicated lender because it offers certainty of funding, speed, confidentiality and terms that can be tailored to the deal. A large part of the market finances buyouts by private equity sponsors; the rest lends to founder-, family- or publicly owned companies.

## How a direct-lending deal is structured

The core instrument is a first-lien senior secured term loan or a [unitranche](https://altss.com/glossary/unitranche) facility. These are often paired with a delayed-draw term loan for future acquisitions and a revolving credit facility, which a bank or the same lender may provide. Pricing is a floating base rate plus a margin. For US dollar loans the base rate is usually a term rate derived from the Secured Overnight Financing Rate (SOFR). Lenders add a base rate floor, an upfront fee or [OID](https://altss.com/glossary/oid-original-issue-discount), and prepayment premiums (call protection).

Documentation is negotiated, not marketed. Smaller loans usually carry at least one [maintenance covenant](https://altss.com/glossary/maintenance-covenant), typically a maximum net leverage test. Large loans that compete with the syndicated market are more often [covenant-lite](https://altss.com/glossary/covenant-lite).

## Segments

- **Sponsor finance vs non-sponsored lending.** In sponsor finance the lender relies partly on the sponsor's equity cushion and its willingness to support the company. Non-sponsored loans rely more on the company's own cash flow and assets, and usually have tighter terms.

- **Borrower size.** Managers and data providers divide the market into lower, core and upper middle market by borrower EBITDA. The band boundaries differ by source, so check the definition before comparing two managers' "core middle market" portfolios.

- **Lender group.** A single lender may hold the whole loan, or a club of a few lenders may share it.

## Direct lending vs broadly syndicated loans

|  | Direct lending | Broadly syndicated loan |
| --- | --- | --- |

| Arranger | the lender itself | investment bank |

| Holders | the originating lender, alone or with a few co-lenders, held to repayment | many institutions, collateralised loan obligations (CLOs), loan funds |

| Rating and trading | usually unrated, no regular secondary market | rated, traded, quoted prices |

| Covenants | often maintenance covenants (smaller deals) | mostly covenant-lite |

| Information | private, direct access to management | public-side lenders get more limited information |

| Price | higher margin plus fees | lower margin, priced by the market |

The two markets compete for the same large borrowers, and borrowers refinance between them.

## Vehicles and fund leverage

Direct-lending strategies are offered through closed-end funds, [BDCs](https://altss.com/glossary/business-development-company), evergreen funds and separately managed accounts. Leverage at the vehicle level is common.

- **BDCs** (US): section 61(a) of the Investment Company Act requires 200% asset coverage, reducible to 150% if the required majority of directors or the shareholders approve, under the conditions in section 61(a)(2). Because asset coverage is total assets less liabilities other than senior securities, divided by senior debt (section 18(h)), 150% coverage means debt of up to twice equity.

- **EU loan-originating alternative investment funds (AIFs)**: the Alternative Investment Fund Managers Directive (AIFMD), as amended in 2024 (AIFMD II), caps the leverage of a loan-originating AIF at 175% of net asset value if it is open-ended and 300% if it is closed-ended, calculated under the commitment method (Article 15(4b)). An AIF that originates loans may lend no more than 20% of its capital to a single borrower that is a financial undertaking, an AIF or a UCITS (Article 15(4a)), and must retain 5% of the notional value of each loan it originates and transfers (until maturity for loans of up to eight years and for loans to consumers, otherwise for at least eight years), subject to listed exceptions (Article 15(4i)). Under the transitional provisions (Article 61(6)), AIFs constituted before 15 April 2024 are deemed to comply with the single-borrower and leverage limits until 16 April 2029, but may not increase exposures that already exceed the limits or take others above them; those that raise no additional capital after 15 April 2024 are deemed to comply without an end date, and loans originated before 15 April 2024 are outside the retention requirement.

Unlevered and levered versions of the same strategy should be compared on the same basis.

## How LPs evaluate a direct lender

- **Sourcing.** Breadth of sponsor relationships, incumbency in existing borrowers, and the share of deals led rather than joined.

- **Underwriting.** Leverage measured on lender-defined EBITDA and how far it relies on [adjusted EBITDA](https://altss.com/glossary/adjusted-ebitda) add-backs; loan-to-value; interest coverage at higher rates.

- **Portfolio health.** Non-accruals, payment-in-kind (PIK) income as a share of total income, amendments and covenant resets, and realised losses through a full cycle.

- **Terms of the fund.** Management fee basis (invested or committed capital), incentive fee and hurdle on income, recycling, and fund-level leverage.

Compare managers on net IRR and net yield after losses, not headline coupon.

## Risks

The Fed's 2024 note counts borrower leverage and illiquidity among its financial-stability concerns. In its April 2024 Global Financial Stability Report, the International Monetary Fund (IMF) adds stale and subjective valuations and layered leverage. Floating-rate structures move rate risk to borrowers, so defaults and PIK usage tend to rise with base rates. Concentration in a few sponsors, sectors or vintages is a further portfolio-level risk. The Bank for International Settlements (BIS) reported in September 2026 that technology firms' share of direct lending roughly doubled between 2020 and 2025, to over 40%.

## Worked examples

### Illustrative sponsor-backed unitranche pricing

A sponsor buys a company with $60m of EBITDA. A direct lender provides a $300m unitranche term loan, 5.0x EBITDA, at Term SOFR plus 5.50% with a 0.75% floor. Term SOFR at 4.30% is above the floor, so the coupon is 4.30% + 5.50% = **9.80%**. Annual cash interest is $29.4m.

### Same loan: interest coverage

EBITDA of $60m covers $29.4m of interest **2.04x**. If base rates rose by 2 percentage points, interest would rise to $35.4m and coverage would fall to about 1.69x. That is why lenders test coverage at higher base rates when they underwrite.

Examples are illustrative; figures are not market data.

## Not the same as

- [Private Credit](https://altss.com/glossary/private-credit): Private credit is the asset class. Direct lending is one strategy within it, about half of the total in a February 2024 Federal Reserve staff estimate.

- Broadly Syndicated Loans: Syndicated loans are arranged by banks and traded. Direct loans are originated and held by the lender.

- Asset-Based Lending: Asset-based lending (ABL) sizes the loan to a borrowing base of receivables and inventory. Cash-flow direct lending sizes it to EBITDA.

## How it is classified

- Direct lending requires that the lender (or its club) originated the loan and negotiated its terms. Buying loans in the secondary market is not direct lending.

- A cash-flow loan sized on EBITDA is direct lending. A loan sized to a borrowing base or to a pool of financial assets belongs to asset-based lending or asset-based finance.

## Common mistakes

- Comparing direct-lending yields with syndicated-loan yields without adjusting for leverage, borrower size and fees.

- Assuming all direct loans carry maintenance covenants. Larger deals are often covenant-lite.

- Reading a fund's gross portfolio yield as its expected return. Losses, fees and the cost of fund leverage come off first.

- Comparing levered and unlevered direct-lending funds on IRR alone.

## Edge cases

- Bank-arranged private credit partnerships, in which a bank originates and a fund holds the loan, blur the line between direct and syndicated lending.

- A direct lender that sells part of a loan to other funds after closing is still direct lending if the loan is not distributed for trading.

## Questions

### Why do borrowers choose direct lenders over the syndicated market?

They get certainty of execution with no market-flex risk, faster closing, confidentiality and a single counterparty for amendments. In exchange they pay a higher margin and fees.

### Is direct lending senior debt?

Most of it is first-lien senior secured, including unitranche loans. Some direct lenders also provide second-lien, holdco or PIK loans, so check the portfolio's split by lien.

## Sources

- [Private Credit: Characteristics and Risks](https://www.federalreserve.gov/econres/notes/feds-notes/private-credit-characteristics-and-risks-20240223.html). Fang Cai; Sharjil Haque, Board of Governors of the Federal Reserve System (FEDS Notes), 23 February 2024. Status: Published (checked 2026-10-01). Characteristics; financial stability implications — supports: Direct lending of about $800bn, about one half of private credit; bilaterally negotiated, floating-rate loans; borrower leverage and illiquidity among the financial-stability concerns

- [Global Financial Stability Report, April 2024, Chapter 2: The Rise and Risks of Private Credit](https://www.imf.org/-/media/files/publications/gfsr/2024/april/english/ch2.pdf). IMF staff (team led by Caio Ferreira and Nobuyasu Sugimoto), International Monetary Fund, April 2024 GFSR ("The Last Mile"), published 16 April 2024. Status: Published (checked 2026-10-01). Chapter 2 — supports: Valuation and layered-leverage vulnerabilities

- [Financing the digital economy: the role of private credit](https://www.bis.org/publications/qr-202609/financing-digital-economy-role-private-credit). Puriya Abbassi; Inaki Aldasoro; Sebastian Doerr, BIS Quarterly Review, September 2026, 14 September 2026. Status: Published (checked 2026-10-01). Main findings — supports: Technology firms' share of direct lending roughly doubled to over 40% between 2020 and 2025

- [15 U.S.C. 80a-60 - Capital structure (Investment Company Act sec. 61, BDC asset coverage)](https://www.law.cornell.edu/uscode/text/15/80a-60). U.S. Congress (United States Code; LII mirror), Current US Code; sec. 61(a)(1)-(2) added by Pub. L. 115-141, div. S, title VIII, sec. 802 (2018-03-23, Small Business Credit Availability Act). Status: in force (checked 2026-10-01). Sec. 61(a)(1)-(2) — supports: BDC asset coverage 200%, or 150% with director or shareholder approval under the sec. 61(a)(2) conditions

- [Directive (EU) 2024/927 amending Directives 2011/61/EU and 2009/65/EC (AIFMD II)](https://eur-lex.europa.eu/eli/dir/2024/927/oj/eng). European Parliament and Council, Official Journal of the EU, L series, 26.3.2024, Adopted 13 March 2024; Member States to adopt and apply measures by 16 April 2026 (some reporting provisions later). Status: In force; transposition deadline passed 16 April 2026; national transposition status varies by Member State (checked 2026-10-01). Art. 1 of Directive (EU) 2024/927, inserting into Directive 2011/61/EU: Art. 4(1) definition of loan-originating AIF; Art. 15(4a) (20% single financial-sector borrower), 15(4b) (175%/300% leverage, commitment method), 15(4i) (5% retention and exceptions); Art. 61 transitional provisions (AIFs constituted before 15 April 2024, until 16 April 2029); Art. 3(1) (adopt and apply by 16 April 2026) — supports: Loan-originating AIF leverage caps, 20% single-borrower limit, 5% retention with exceptions, transitional relief to 16 April 2029

- [15 U.S.C. 80a-18 - Capital structure of investment companies (ICA s.18)](https://www.law.cornell.edu/uscode/text/15/80a-18). U.S. Congress (US Code via LII), Current US Code text as published by LII (accessed 2026-10-01). Status: in force (checked 2026-10-01). Sec. 18(h) — supports: Definition of asset coverage of senior securities representing indebtedness

## Related terms

6 terms

- [First Lien](https://altss.com/glossary/first-lien)

- [Business Development Company (BDC)](https://altss.com/glossary/business-development-company)

- [Maintenance Covenant](https://altss.com/glossary/maintenance-covenant)

- [Debt-to-EBITDA (Leverage Multiple)](https://altss.com/glossary/debt-to-ebitda)

- [Private Credit](https://altss.com/glossary/private-credit)

- [Unitranche](https://altss.com/glossary/unitranche)

## Referenced by

2 terms

- [Asset-Based Finance (ABF)](https://altss.com/glossary/asset-based-finance)

- [Venture Debt](https://altss.com/glossary/venture-debt)

## Concept record

Concept ID

ALTSS-CREDIT-002

Classification

Strategy

Topics

Private credit

Version

2.0.0

Last reviewed

2026-10-02

Structured data

[JSON](https://altss.com/reference/concepts/direct-lending.json)

Source check

Legal and regulatory statements checked against the cited primary sources on 2026-10-02 ([how](https://altss.com/methodology)). General information, not advice.

## Canonical URL

https://altss.com/glossary/direct-lending