Private Credit and Direct Lending: The Opportunity and the Risks

Private credit — lending to companies by non-bank lenders — has emerged as one of the most significant developments in global finance since the 2008 financial crisis. The tightening of bank capital requirements (Basel III, IV) made lending to middle-market companies less profitable for banks, creating a supply vacuum that private capital filled eagerly. What was once a niche institutional strategy has grown into a roughly $3 trillion global asset class.

For investors, private credit's appeal is straightforward: higher yields than public credit markets, floating rate income in a rising rate environment, and access to a portion of the economy — the middle market — that is largely invisible to public market investors. The risks are equally clear: illiquidity, credit risk in unrated, leveraged companies, and the management quality dispersion that characterises any less efficient market. This guide examines the opportunity and the risks with the analytical rigour the asset class requires.

What Is Private Credit?

Private credit is an umbrella term covering multiple strategies united by the common feature of lending outside the public bond markets:

Direct lending. Bilateral or club loans to mid-market companies, typically secured and floating rate. A direct lending fund might provide a £50 million loan to a company with £30–150 million of EBITDA, financing an acquisition or refinancing existing bank debt. This is the largest and most mainstream sub-strategy.

Mezzanine debt. Subordinated loans sitting below senior secured debt in the capital structure. Higher yielding (to reflect the higher risk) and often with equity participation features (warrants, PIK — pay-in-kind — components). More complex credit analysis required.

Special situations. Bespoke, complex financings that don't fit standard categories: rescue financing, bridge lending, covenant-heavy restructuring. Higher risk, higher potential return, requires specialised expertise.

Infrastructure debt. Lending to infrastructure projects and companies (toll roads, renewable energy, utilities). Longer duration than corporate direct lending, often investment grade equivalent in credit quality, typically lower yield.

Real estate debt. Senior and subordinated loans secured on commercial or residential property assets. The UK specialist property P2P market (Assetz Capital, CrowdProperty) sits at the smaller end of this spectrum; institutional real estate debt funds invest in larger assets.

Asset-based lending. Loans secured against specific asset pools — trade receivables, royalties, equipment, inventory. The collateral provides a direct recovery mechanism in default that may not exist in unsecured corporate lending.

The Growth of Private Credit

The global private credit market grew from approximately $500 billion in assets under management in 2015 to an estimated $3 trillion or more by 2025 (industry estimates vary: Preqin places 2025 AUM at around $2.3 trillion, while the Alternative Credit Council and Houlihan Lokey put it at roughly $3.5 trillion at the end of 2024). This remarkable growth reflects several structural forces:

Bank retreat from mid-market lending. Post-2008 capital adequacy regulations made bank loans to leveraged mid-market companies (the primary direct lending market) capital-intensive. Banks increasingly focussed on investment grade or larger corporates. Private credit funds filled the gap.

Investor demand for yield. In the 2010s era of ultra-low interest rates, institutional investors (pension funds, insurance companies, endowments) sought higher-yielding alternatives to government bonds and investment grade credit. Private credit offered 5–8% returns (then) with less correlation to public markets.

The floating rate advantage. Most private credit loans are floating rate — typically priced as SOFR (Secured Overnight Financing Rate) or SONIA (Sterling Overnight Index Average) plus a spread of 5–7%. When interest rates were near zero, this floating rate feature was neutral. When rates rose sharply from 2022, floating rate loans benefited significantly — the yield on direct lending portfolios rose from approximately 7–8% to 11–14% as base rates moved. This was a direct windfall for private credit investors during the most severe rate-hiking cycle in decades.

Institutional acceptance. Private credit has transitioned from a niche allocation to a core allocation in many institutional portfolios. Large US and European pension funds, endowments, and sovereign wealth funds now hold 5–15% of their portfolios in private credit.

The UK Private Credit Market

The UK direct lending market is one of the most developed in Europe. Key managers active in the UK mid-market include:

Intermediate Capital Group (ICG): listed on the LSE (making it unusual in this space), ICG manages over $120bn across private credit and equity strategies (total AUM as of 2025–26). Its direct lending funds have strong track records in UK and European mid-market lending.

Ares Management: one of the world's largest alternative asset managers, with a significant direct lending presence in the UK and Europe. The Ares Capital Corporation (ARCC) in the US is the largest Business Development Company (BDC) globally.

Apollo Global Management: active across the credit spectrum including investment grade, high yield, and direct lending. Apollo's emphasis on asset-based lending and insurance channel capital distinguishes it.

Pemberton Asset Management: a mid-market focused European direct lender with significant UK presence.

Hayfin Capital Management: specialises in senior secured lending to European mid-market companies.

Barings and M&G Investments: both have long-established UK direct lending and private placements capabilities.

Current Return Expectations

As of mid-2026, with UK SONIA at approximately 3.7–3.75% (the Bank of England base rate stands at 3.75%) following the rate normalisation cycle:

• Senior secured direct lending (first lien): SONIA + 5–6% spread = approximately 9% gross yield
• Unitranche loans (combining senior and junior): approximately 10–12%
• Mezzanine / subordinated lending: approximately 12–15%
• Infrastructure debt (investment grade quality): approximately 6–8%

These are gross yields before manager fees. Typical fee structures are 1.0–1.5% management fee plus 10–15% carried interest (profit share above an 8% hurdle). Net returns to investors on senior direct lending might be approximately 7–9%.

The critical comparison: are 7–9% net returns from illiquid, unrated direct lending attractive relative to:

• Investment grade corporate bonds at 4.5–6% (liquid, rated, FSCS-eligible platform)
• High yield bonds at 6–8% (liquid, rated, UCITS-accessible)

The direct lending premium over equivalent rated public credit is the "illiquidity premium" — the compensation for accepting 7–10 year lock-up and no secondary market. As of 2026, this premium has compressed from its 2021 peak (when rate rises pushed public yields up faster than private credit repriced) but remains positive for most investors with genuine long-term capital.

Risk Assessment for Private Credit

The risks in private credit require explicit consideration — they are often understated in marketing materials:

Credit risk. Direct lending targets mid-market companies that are typically unrated, leveraged (2–5× EBITDA at the time of lending), and often backed by private equity sponsors. These are not blue-chip credits. In an economic downturn, defaults rise — the leveraged loan market showed default rates of 3–6% in 2023–2024 as rising rates stressed highly levered borrowers. Private credit defaults are less visible (no public price discovery) but are not lower in aggregate.

Illiquidity risk. Private credit funds have lock-up periods of 7–10 years for closed-end structures. You cannot sell your position if circumstances change, markets deteriorate, or you need the capital back. This is a genuine constraint that must be matched with the investor's actual liquidity profile.

Manager selection risk. The quality of credit analysis varies enormously between direct lending managers. The best managers have deep origination networks, experienced credit teams, and robust covenant structures in their loans. Weaker managers take greater risks to generate higher headline yields — particularly problematic when the economy turns. This is an area where manager due diligence and track record analysis are more important than in public market strategies.

Valuation opacity. Private credit loans are valued quarterly using mark-to-model methodologies — there is no daily market price. Funds do not necessarily reflect current market conditions in their NAVs in real time. This "smoothing" of valuations makes private credit look less volatile than it is on a true mark-to-market basis.

The 2022–2024 stress test. Rising rates increased borrowing costs for the leveraged companies underpinning direct lending portfolios. "Loan-on-loan" structures (borrowing to fund loan portfolios) were particularly exposed. Some direct lenders saw portfolio company stress and covenant waivers increase. The stress was manageable for most quality managers but served as a reminder that the "senior secured" label does not mean risk-free.

Access Points for UK HNW Investors

Institutional closed-end funds: minimum investment typically £10–50 million+. Standard access route for large family offices and institutional investors.

UK-listed debt investment companies: vehicles like Carador Income Fund, TwentyFour Income Fund, Volta Finance (listed on Euronext), and BioPharma Credit provide listed access to private and structured credit. These are liquid via the stock exchange, though they may trade at discounts to NAV. Smaller minimum investments (from £1,000).

US Business Development Companies (BDCs): publicly listed vehicles in the US that provide retail access to direct lending strategies. Ares Capital Corporation (ARCC), FS KKR Capital, Prospect Capital are examples. UK investors can access these via SIPP/ISA through international trading accounts, though the US tax treatment of BDC dividends and the withholding tax implications should be assessed.

UCITS-compliant private credit funds: some managers structure UCITS-compliant vehicles for European retail investors, with enhanced liquidity terms. These typically invest in more liquid private credit instruments (broadly syndicated loans, higher-quality assets) and accept less illiquidity premium in exchange.

How Global Investments Can Help

Private credit is a compelling allocation for investors with genuine long-term capital, a meaningful minimum investment (typically £500,000+ for feeder vehicles, £10m+ for direct fund access), and the expertise to evaluate manager quality. At Global Investments, we assist clients in accessing private credit through appropriate vehicles, conducting manager due diligence, and sizing the allocation correctly within the broader portfolio.

We pay particular attention to ensuring that private credit allocations are genuinely additional yield per unit of risk — not simply credit risk in illiquid form at a premium to public market equivalents.

Capital is at risk. Private credit investments are illiquid and subject to credit risk, default risk, and manager risk. Returns quoted are indicative and based on information available as of June 2026 — actual returns will differ. Past performance is not a reliable indicator of future results. This guide is for information purposes only and does not constitute financial advice. Seek independent professional advice before making investment decisions.