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Investing Ideas
Private Credit: Growth has consequences
Dramatic capital growth has compressed spreads and eroded key risk mitigating features of direct lending. The rise of the semi-liquid vehicle has amplified that pressure—particularly in the upper middle market.
Key Takeaways
- Direct lending assets have nearly tripled in recent years to roughly $1.3 trillion,1 intensifying pressure on lenders to maintain underwriting and structural discipline as they compete for deals.
- Much of that growth has come from monthly subscription vehicles (e.g., business development companies, or BDCs) aimed at individual investors. Continuous inflows may pressure managers to deploy capital on a schedule set by fundraising rather than by the quality of the opportunity.
- Direct lending managers serving the largest borrowers now compete with the broadly syndicated loan (BSL) market—a cheaper, more borrower-friendly capital source. That alternative has allowed large borrowers to extract meaningful concessions that have reshaped risk-reward dynamics in the upper middle market (UMM).
- Traditional middle market (TMM) lending remains focused on borrowers that have limited access to the BSL market. These managers still capture a meaningful spread premium to public markets and are able to negotiate material financial covenants—consistent with the asset class’s history.
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Private credit: Growth has consequences
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Private Credit: Growth has consequences
Dramatic capital growth has compressed spreads and eroded key risk mitigating features of direct lending. The rise of the semi-liquid vehicle has amplified that pressure—particularly in the upper middle market.
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1. LSEG Data and Analytics, Preqin, Fidelity Direct Lending Estimates, as of 12/31/25, see Exhibit 1 in paper.
For important information, see the full linked content.
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