Direct lending

A direct lending fund originates and holds the loan itself, alone or in a small club. There is no arranging bank, no syndication process and no traded market for the paper afterwards. It has become a primary source of buyout debt across the European mid market and now competes for larger deals as well.

The borrower pays more than the syndicated market would charge and buys certainty with the difference. One counterparty commits the whole amount, so there is no market flex clause letting arranging banks reprice the deal before it closes, no ratings process, no public disclosure of terms and no risk of a deal being hung. In a competitive auction judged partly on deliverability, that can beat a lower spread.

The lender usually keeps a genuine maintenance covenant, where a broadly syndicated loan is typically covenant lite with at most a springing test on the revolver. That is the trade being made on both sides: the fund is paid more and is better protected, because it will still be holding the exposure when a problem arrives.

Two honest caveats. Comparing all in cost is harder than the headline margin suggests once arrangement fees, original issue discount and undrawn commitment costs are counted. And these positions are marked by model rather than traded, so the sector's reported performance is less directly observable than the syndicated market's.