The Evolution of Middle-Market Direct Lending: 2010–2025

1. Direct Lending 1.0: Post-GFC Repair

In the early 2010s, direct lenders primarily stepped into situations abandoned by deleveraging banks—simple capital structures, modest leverage, and strong covenant packages.

• Club deals with a small group of relationship lenders.
• Lower leverage (3–4x) and tighter documentation.
• Limited competition and attractive illiquidity premia.

2. Direct Lending 2.0: Institutionalization

As the asset class matured, larger funds, dedicated CLOs, and multi‑strategy managers entered the space. Deal sizes increased, sponsors became more sophisticated, and structures evolved.

• Rise of unitranche facilities and “one‑stop” solutions.
• Growing use of covenant‑lite structures in larger deals.
• More dispersion between managers in terms of sourcing, underwriting, and portfolio management.

3. Where We Are Now—and What to Watch

With scale and competition come new risks: tighter spreads, higher leverage, and more complex documents. At the same time, the opportunity set has broadened beyond classic sponsor‑backed buyouts.

• Increased exposure to recurring‑revenue and software models.
• Greater use of junior capital and structured solutions.
• Importance of workout capabilities as a core differentiator between managers.

For LPs, the key question is no longer “should we allocate to direct lending?” but “which managers have the sourcing, structuring, and servicing capabilities to navigate a more crowded market?” Our own approach emphasizes smaller, specialist teams with demonstrated cycle experience.