By Atul Sehgal, Opus Connect
Direct lending has gained significant traction over the past few years as an alternative to traditional bank loans. This shift is driven by a variety of factors, including the increasing demand for more flexible, customized financial solutions and the retreat of banks from certain lending markets. To explore these trends, insights from industry experts were gathered, highlighting the key opportunities and challenges within the direct lending market. These perspectives shed light on the evolving landscape and the factors driving its growth.
Growth of direct lending
Over the past three to five years, the direct lending market has seen considerable growth. One of the primary reasons for this growth is the flexibility it offers, especially in comparison to the traditional banking sector. Pankaj Gupta, President of HIG WhiteHorse U.S. and Global Head of Originations, shared that “The private credit market continues to offer more flexibility and customized solutions with less uncertainty relative to the bank market.” This customization allows companies to secure financing that is more aligned with their unique business needs, such as acquisition facilities or delayed draw term loans, which banks may struggle to provide.
Moreover, the certainty and speed of execution have also been attractive to borrowers. Companies looking for capital to pursue mergers and acquisitions (M&A) or other growth initiatives find that direct lenders can provide the necessary funds quickly and reliably.
Market Segmentation and Specialized Approaches
The development of the direct lending market has varied across market segments, depending on the size and nature of the transactions. As Pankaj explained, “The evolution has been different when considering the upper middle market and large-cap sponsor-backed transactions versus lower middle market transactions.” Each segment has its dynamics, but overall, direct lending has captured a significant share of the market, particularly among healthy businesses looking for capital to fuel their growth. Rob Gallivan, Partner and Head of Investment Team at Colbeck Capital, shares that “There is a huge bifurcation in private credit. The bigger funds are getting larger and larger, but there is still a significant number of middle market companies in the U.S. not owned by private equity—that need more bespoke structuring.”
Some direct lenders have further set themselves apart through their local and regional sourcing strategies. For instance, several firms have established a network of origination professionals across various cities in the U.S., enabling them to maintain a stronger presence in these regions and build better connections with businesses seeking capital.
Challenges and Competition
Despite the positive trends, the direct lending market faces challenges, particularly when it comes to competition from larger funds. As the market grows, large firms like Ares have raised record-sized funds, making it increasingly difficult for smaller funds to compete. However, this trend does not spell doom for all smaller players. Rob shares “Our niche strategy is what allows us to compete. We aren’t trying to go head-to-head with the larger funds—we offer a differentiated product that focuses on non-sponsored deals and provides flexibility that the larger players can’t.” This differentiation, combined with creativity in structuring deals and targeting smaller companies in need of bespoke financing, has allowed Colbeck Capital Management to carve out a unique space in the market.
Technological Influence
While direct lending remains a relationship-driven business, technology is increasingly playing a role in improving the efficiency of deal evaluation and execution. The contributors shared the sentiment that they can now perform all of their processes in a quicker, more accurate manner thanks to advancements like AI and data analytics. While these tools don’t necessarily change the fundamental aspects of deal-making, they help lenders process deals more efficiently, enabling them to react swiftly to new opportunities.
Future Outlook
Looking ahead, direct lending is expected to continue its upward trajectory, with some estimates projecting the market could grow to $2.8 trillion by 2028. As the sector evolves, we can expect further consolidation at the top, with large funds becoming more dominant. At the same time, niche players will continue to thrive by focusing on specialized, lower-middle, and middle-market opportunities.
The retreat of banks from certain markets due to regulatory pressures also provides additional room for growth. As Rob noted, “Regulation in the U.S. has created challenges for banks, which opens up more opportunities for direct lenders to step in.” Direct lending has proven to be a dynamic and rapidly growing sector, offering businesses more flexible and customized financing options than traditional banks. While there are challenges present in the market, there are plenty of growth opportunities, and the private credit industry is expected to continue to grow for the foreseeable future.
Join us at the upcoming Opus Connect Private Debt Summit to be part of these engaging conversations! Check out our calendar here or contact us for more information at atul@opusconnect.com
