<\/p>\n
Direct lending has exploded in recent years, boosting competition and putting pressure on pricing.\u00a0<\/span><\/p>\n The growth of private credit has been largely driven by direct lending\u2019s ability to replace bank debt, having grown substantially over the past 15 years. Direct lending made up just nine per cent of the private credit sector in 2010, according to Pitchbook data, but this has since swelled to 36 per cent \u2013 the largest subset of private credit, and more than asset-based and distressed debt combined. The overall private credit industry is anticipated to hit $2.3tn in size by 2028, from $1.8tn at the end of last year, and direct lending is widely expected to help lead this charge.<\/p>\n Direct lending is seen as the \u2018bread and butter\u2019 of the private credit industry, in the same way that leveraged buyouts are often synonymous with private equity.<\/p>\n \u201cA considerable amount of capital continues to be raised in direct lending, particularly within the perpetual, private business development company structures.\u201d<\/p>\n The wider macroeconomic climate has been supportive of this. Market uncertainty has created increased volatility in public markets, with more investors shifting away from public fixed income and towards private credit. Private credit\u2019s lack of vulnerability to macroeconomic swings has helped the asset class to grow according to Mark Wilton, head of European investments at Corinthia Global Management.<\/p>\n \u201cThis inherent stability has allowed the asset class to perform well and grow during challenging times, such as the Covid-19 pandemic, the Russia\/Ukraine conflict, and the aftermath of the financial crisis,\u201d adds Wilton. \u201cUncertainty in broader markets can, in fact, present opportunities for private credit.\u201d<\/p>\n Despite the continued optimism around direct lending, spreads have been steadily declining since 2023 according to KBRA data. There are mixed opinions as to whether spreads will continue to tighten this year.<\/p>\n \u201cGenerally we have seen spreads compress in public markets and, as that market tightens, so does the private credit market,\u201d reflects Stuart Mathieson, head of European private credit and capital solutions at Barings.<\/p>\n \u201cTypically around 200-250bps of spread premium has been maintained but absolute spreads themselves have come down. Another factor is that the number of new platform opportunities, driven by primary LBO activity, have been quite low. This has driven more competition on some transactions.\u201d<\/p>\n Fitch Ratings\u2019s Neenan sees spreads as \u201cclose to bottom,\u201d and points out how 2024\u2019s backdrop of intensifying competition and sparse M&A deal flow led to spreads tightening. Though the conditions remain the same she argues there \u201cis only so far\u201d that spreads can go.<\/p>\n In agreement is Will Sheridan, partner in the finance group at Travers Smith, who says that direct lending firms are having to respond to market conditions.<\/p>\n \u201cThe trend of sponsors re-pricing large cap deals in 2024 has since filtered down to the middle market, and we are seeing credit funds reduce margin significantly in order to stay in deals,\u201d says Sheridan. \u201cGiven the liquidity available in private credit and the pressure to deploy, it is hard to see the recent downward pressure on pricing fading away anytime soon.\u201d<\/p>\n Intensifying competition has placed a premium on tried-and-tested managers, and Kort Schnabel \u2013 partner and co-head of US direct lending at Ares \u2013 points to this favouring the bigger firms.<\/p>\n \u201cOften the larger and longer tenured private credit managers have global origination platforms, better due diligence capabilities and in-house portfolio management teams,\u201d says Schnabel. \u201cCouple this with the significant market opportunity and the trend of LPs consolidating their GP relationships, it\u2019s only natural that you see the larger funds with strong track records still growing.\u201d<\/p>\n Scale is key, according to Barings\u2019 Mathieson who points to the sheer challenges of trying to become organically established as a direct lending firm.<\/p>\n \u201cTo be successful in private credit, you need a big team of people, scale and incumbency, and scale isn\u2019t just about inhouse resources but means having a large and diverse capital base,\u201d says Mathieson. \u201cI don\u2019t tend to view newcomers in the space as our primary competition in the sense that at an entry-level point you need to be able to write sizeable business.\u201d<\/p>\n Mathieson knows first-hand about the intensifying competition in the space as Barings lost 22 members of its private credit team in 2024 to new direct lending specialist Corinthia. The Barings team has since become \u201cfully resourced\u201d but the episode shined a spotlight on the fierce battle for talent in the direct lending space, and raised the question of how new entrants can gain a foothold in a crowded market.<\/p>\n \u201cIt is not sufficient for new entrants to simply participate; those without a compelling plan will struggle to gain traction,\u201d says Corinthia\u2019s Wilton. \u201cDemonstrable access to hard-to-reach markets and a well-articulated reason for existence are essential for standing out and commanding market share.\u201d<\/p>\n Meanwhile, Adelbert Garcia, managing director of the investment team at NorthWall Capital, says newcomers need to target underserved areas. Here, he points to the background of narrowing spreads as a natural backdrop for newcomers to use specialist and novel approaches to prove their worth.<\/p>\n \u201cWe see a compelling opportunity to service quality borrowers overlooked due to their size,\u201d says Garcia. \u201cIn these underserviced lower middle market borrower segments, more disciplined underwriting and robust documentation can underpin attractive risk-adjusted returns.<\/p>\n \u201cExperienced managers can achieve compelling risk-adjusted returns by capturing complexity premiums and focussing on broader private credit strategies beyond vanilla direct lending.\u201d<\/p>\n Industry stakeholders are broadly positive about direct lending\u2019s prospects but some are looking beyond the eye-catching figures to what needs to happen next. Bevis Metcalfe, partner of private credit and restructuring at law firm Cadwalader, says direct lending is \u201cunquestionably\u201d here to stay but that it is now time for managers to prove their worth as more flock to the space.<\/p>\n \u201cThat all boils down to the credit basics and staying disciplined \u2013 in terms of structuring, documentation and underwriting,\u201d adds Metcalfe. \u201cThat discipline was probably less evident in a more benign economic environment that prevailed pre-2022, but in today\u2019s markets it\u2019s what will drive successful deployment.\u201d<\/p>\n Private credit may be less susceptible to macroeconomic shocks than public markets, but there is a consensus that many direct lending providers have not been thoroughly tested yet. Several metrics, such as the Proskauer Private Credit Default Index, indicate a muted default landscape but should this return, Corinthia\u2019s Wilton expects a skewed response among direct lenders.<\/p>\n \u201cThe lower mid-market and micro-business segments are particularly vulnerable to defaults,\u201d says Wilton. \u201cHowever, high-quality managers with strong market access and prudent selection processes, especially in the mid-market, where portfolios are often unique and less prone to overlap, are well-positioned to maintain solid performance and demonstrate the value of their differentiated approach.\u201d<\/p>\n Additionally, James Charalambides, head of European private credit at Adams Street Partners, points to a wide delta in fixed income after the financial crisis, which puts fresh scrutiny on direct lenders\u2019 models.<\/p>\n \u201cThis ultimately comes down to the manager\u2019s ability to be selective \u2013 what you will see is the managers that are the most selective will continue to perform like they have, and others will see materially worse performance,\u201d says Charalambides.<\/p>\n \u201cTo be selective as a manager, you need a few things to be true: firstly, your opportunity set needs to be much larger than the pools of capital you have to invest; secondly, you need to have a right to win the deals you chose; and thirdly, you need to have a credit intensive investment culture.\u201d<\/p>\n Direct lending has rapidly grown to be a significant driver of private credit, with competition continually intensifying for market share. After a stellar few years, the question is how the industry will perform amid an impending rise in default rates and ever-squeezed margins. Rockier conditions could unveil just how selective managers have been \u2013 or have not been \u2013 in the race for business.<\/p>\n <\/p>","protected":false},"excerpt":{"rendered":" Direct lending has exploded in recent years, boosting competition and putting pressure on pricing.\u00a0 The growth of private credit has been largely driven by direct lending\u2019s ability to replace bank debt, having grown substantially over the past 15 years. Direct lending made up just nine per cent of the private credit sector in 2010, according […]<\/p>\n","protected":false},"author":1,"featured_media":4767,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-4766","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-bez-rubriki"],"featured_image_src":{"landsacpe":["https:\/\/relinvestmentsgroup.com\/wp-content\/uploads\/2025\/08\/Investments-6-1-1140x445.jpg",1140,445,true],"list":["https:\/\/relinvestmentsgroup.com\/wp-content\/uploads\/2025\/08\/Investments-6-1-463x348.jpg",463,348,true],"medium":["https:\/\/relinvestmentsgroup.com\/wp-content\/uploads\/2025\/08\/Investments-6-1-300x200.jpg",300,200,true],"full":["https:\/\/relinvestmentsgroup.com\/wp-content\/uploads\/2025\/08\/Investments-6-1-scaled.jpg",2560,1707,false]},"_links":{"self":[{"href":"https:\/\/relinvestmentsgroup.com\/en\/wp-json\/wp\/v2\/posts\/4766","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/relinvestmentsgroup.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/relinvestmentsgroup.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/relinvestmentsgroup.com\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/relinvestmentsgroup.com\/en\/wp-json\/wp\/v2\/comments?post=4766"}],"version-history":[{"count":1,"href":"https:\/\/relinvestmentsgroup.com\/en\/wp-json\/wp\/v2\/posts\/4766\/revisions"}],"predecessor-version":[{"id":4768,"href":"https:\/\/relinvestmentsgroup.com\/en\/wp-json\/wp\/v2\/posts\/4766\/revisions\/4768"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/relinvestmentsgroup.com\/en\/wp-json\/wp\/v2\/media\/4767"}],"wp:attachment":[{"href":"https:\/\/relinvestmentsgroup.com\/en\/wp-json\/wp\/v2\/media?parent=4766"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/relinvestmentsgroup.com\/en\/wp-json\/wp\/v2\/categories?post=4766"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/relinvestmentsgroup.com\/en\/wp-json\/wp\/v2\/tags?post=4766"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}