Direct lending is private credit provided by non-bank institutions — predominantly asset managers and BDCs — that originate and hold loans rather than distributing them through bank syndicates.

How it works

Direct lenders target middle-market companies, software roll-ups, and sponsor-backed buyouts. Facilities include senior secured term loans, unitranche (one blended debt layer), and delayed draw term loans for add-ons.

Documentation is often covenant-lite compared to banks, with faster execution and relationship-driven amendments — priced via floating spreads over SOFR.

Venture debt is adjacent but distinct: venture lenders underwrite to VC support and equity value; direct lenders focus on cash-flow coverage and sponsor equity cushions.

When regional banks pull back, direct lending fills LBO financing gaps — sometimes alongside high-yield bonds in larger deals.

Why it matters

• Founders: If your company is PE-backed or EBITDA-positive, direct lending may appear in acquisition financing — understand covenants and cash sweeps.
• Investors: Private credit returns affect LP allocation to alternatives alongside venture. Some funds operate hybrid strategies across equity and direct lending.

Common mistake

Confusing venture debt with direct lending. Venture debt tolerates negative EBITDA with investor covenants; direct lending usually requires sustainable cash flow or strong sponsor support.

Related ideas

See also covenant-lite, delayed draw term loan, private credit, and unitranche.