Direct Lending

Direct lending is the largest segment of private credit: funds or investors lend directly to companies, bypassing banks and the public bond markets. The borrowers are typically mid-sized businesses, often owned by private equity firms, that want speed, certainty, and flexibility a bank syndicate may not offer, and they pay more for it. Direct loans are usually senior in the capital structure, secured against the borrower's assets, and floating-rate, meaning the interest resets as market rates move, and they carry a yield premium over comparable public debt.

The segment grew as banks retreated from mid-market corporate lending after the 2008 financial crisis, leaving room that dedicated credit funds moved in to fill.

Why it matters for family offices

For family offices, direct lending has become a core allocation within private markets, prized for contractual income and, given the floating rate, less sensitivity to rate rises than fixed-coupon bonds. The trade-offs are the standard private markets ones: capital is locked up, valuations are periodic rather than daily, and returns depend heavily on credit selection, since a lender's upside is capped at the interest earned while a bad loan can lose principal. Families typically access the segment through funds, which involve capital calls and multi-year terms, and a growing number also participate directly in loans sourced through their own networks, where the office itself must underwrite the borrower.

How it shows up in practice

Consider a family office that commits $10 million to a direct lending fund and separately lends $2 million to a business in its network. The fund position behaves like other private fund commitments: capital is drawn over time, interest income arrives as distributions, and quarterly statements report the portfolio's value. The direct loan is different in kind. The office holds the loan agreement, monitors covenants (the borrower's contractual promises), collects interest, and tracks principal itself. Both positions are private credit, but they generate very different record-keeping, and offices that track loans in the same system as their fund positions get a single picture of income and exposure instead of two.