Why this matters now

Direct corporate lending has become a core holding in many private credit portfolios. As banks reduced lending, private capital stepped in, offering borrowers speed and certainty. For investors, the trade looked straightforward: senior exposure, floating-rate income, and predictable cash flows. Over time, this exposure came to be treated as the stable centre of private credit rather than a cyclical strategy.

That assumption is now being tested. Higher rates, slower deal activity, and tighter refinancing markets have changed how these loans behave. Risk that once felt remote has become operational. Investors are being forced to examine not just credit quality, but how these structures perform when conditions tighten.

Why direct lending became the sensible middle ground

Direct lending earned its place by appearing balanced. It sat between broadly syndicated loans and more complex asset-backed strategies. Investors gained exposure to operating companies without daily price volatility or structural complexity. Senior ranking, floating coupons, and regular interest payments made it a natural income allocation.

Performance supported that view. Over recent years, direct lending delivered steady returns, even as spreads narrowed and base rates shifted. Yields remained attractive compared with public credit, reinforcing the idea that direct lending could anchor a private credit portfolio (UBS, 2025)

Another draw was flexibility. When public markets became volatile, private lenders could still transact. Borrowers valued certainty of execution. Investors saw continuity of income. Direct lending began to look resilient across cycles rather than dependent on market timing.

The shift towards correlation with public credit

That middle-ground role is now changing. Capital has flowed into private credit at scale. Deal sizes have increased, and borrower profiles have improved. At the same time, the broadly syndicated loan market has reopened. Borrowers can now refinance between public and private markets with greater ease. According to CreditSights, approximately USD 28 billion in BSL deals are priced to take out private credit tranches while USD 14 billion of private credit deals are going to refinance existing BSL deals.

The result is convergence. Spreads between direct lending and BSLs have compressed. Assets move both ways between markets. Direct lending outcomes are now more closely tied to wider credit conditions than many investors expected.

This matters for portfolio construction. Direct lending still differs from public credit in form, but its behaviour is less distinct. When liquidity tightens or risk appetite shifts, correlations rise quickly.

Where the core risk sits

At its core, direct corporate lending is exposure to a single business. Interest payments and capital repayment depend on that company continuing to perform. There is no separate pool of assets producing cash flow alongside it. The lender is underwriting management, strategy, and balance sheet strength at the same time.

This concentration is often understated. Even diversified portfolios can share the same refinancing assumptions or sponsor behaviour. When stress appears, results depend less on models and more on documentation, control rights, and execution.

This dynamic echoes the allocation tension explored in our article Family Offices and Private Credit: Beyond the Mid-Market Allocation Trap, where we discuss how portfolios that lean too heavily on single-name direct exposure can end up replicating mid-market beta rather than earning true private credit premium. In that analysis, we emphasise that diversification across structures and risk drivers matters as much as diversification across names.

Liquidity and refinancing risk

Most direct loans are held to maturity because there is little choice. Secondary markets are thin, pricing is opaque, and transfers require consent. When investors need to exit, they often do so at a discount.

Refinancing risk sits at the centre of this issue. Many loans assume borrowers will refinance rather than amortise. If markets close or pricing shifts, lenders face extensions or restructurings. Capital stays tied up longer than planned, often at higher risk.

What this means for investors

The conclusion is not that direct lending should be avoided. It is that it should be sized and assessed with more precision. Single-name exposure needs to be priced properly. Refinancing risk should be treated as central, not peripheral.

This has led some investors to reassess how risk is structured and distributed. There is growing interest in approaches that define credit exposure more tightly or spread it across pools rather than single companies. Kingsbury & Partners has examined these themes in its work on structured credit and alternative private credit instruments.

Where direct lending fits today

Private credit is not one asset class. Direct lending sits alongside asset-backed strategies, receivables finance, and structured credit, each with different risk mechanics. The challenge is matching capital to strategies that behave as expected when conditions tighten.

Direct lending will remain a core allocation for many investors. Its risks are now clearer and more correlated than before. Investors who recognise that shift will be better placed to decide when direct exposure is appropriate, and when structure needs to absorb more of the risk.