Private credit, and direct lending in particular, is under the spotlight. The attention is understandable: the market is larger, the investor base is broader, and bouts of volatility can make individual credit events seem representative of the whole asset class. Traditional middle-market direct lending, however, is a specific segment within that universe and is best evaluated on its underlying fundamentals rather than short-term noise.
What is middle market direct lending?
At its core, sponsor‑backed middle market direct lending involves senior secured, floating‑rate loans to established companies. While approaches vary by manager, the strategy is typically characterised by:
- Seniority and collateral: a priority claim on borrower assets and cash flows
- Contractual income: predominantly floating‑rate coupons designed to generate ongoing yield
- Negotiated protections: maintenance covenants and reporting requirements
- A buy‑and‑manage approach: outcomes driven by underwriting and ongoing portfolio oversight
Direct lending is predominantly sub-investment-grade, so defaults are not “surprises” so much as an expected feature of the market. The more relevant question is how portfolios are built to absorb stress – through structure, diversification and the ability to intervene early when performance begins to deteriorate.
What hasn’t changed in middle market direct lending?
Traditional direct lending continues to derive its value from seniority in the capital structure and contractual, predominantly floating‑rate income. These attributes are central to the strategy’s role in portfolios, particularly in environments where volatility, higher rates or shifting sentiment challenge more liquidity‑dependent markets.
The relative value case versus public credit also remains intact. Across regions, direct lending offers a structural spread premium over broadly syndicated loans – approximately 150–200 basis points in North America, 200–250 bps in Europe, and 200–350 bps in developed Asia Pacific.[1] Even as absolute spreads move through the cycle, compensation per turn of leverage continues to look attractive, reinforcing direct lending’s position within comparative credit allocations.
From a portfolio construction perspective, these characteristics have historically supported competitive returns with lower observed volatility than many liquid credit alternatives. When evaluated alongside leveraged loans, high yield, and investment grade credit, institutional investors have continued to view direct lending as a way to access yield while moderating overall portfolio risk. Over the past decade, index‑based comparisons show that private credit has delivered competitive returns with lower variability than many public credit markets, helping explain its use as a stabilizing allocation rather than a tactical trade.
Institutional demand also remains strong. In a mid-2025 Preqin survey, roughly 90% of institutional investors said they expected to increase or maintain exposure to direct lending over the next 12–24 months, citing yield, floating-rate characteristics, and contractual cash flows as key drivers. More recent Preqin data suggests commitment pacing has become more selective, but long‑term conviction is still intact.
What has changed with middle market direct lending?
What has changed is the structure of the market itself. Direct lending capital has become more concentrated and increasingly centered among a smaller group of large, established platforms. In North America, the top 10 managers completed 38% of direct lending deals in 2025; in Europe, the top five managers completed nearly half of direct lending deals that year, with the top 10 accounting for 65% of total deal activity.[2]
This concentration has reinforced a second structural shift: the rising importance of incumbency-driven origination. Managers with large, seasoned portfolios are sourcing a greater share of opportunities through refinancings, add-on acquisitions, and repeat transactions, rather than relying primarily on new platform deals. These transactions are often less sensitive to broader M&A cycles and can provide access to more proprietary opportunities during periods of volatility.
Another key change has been the broadening of the investor base, with wealth-related capital becoming a more visible component of the market. While shifts in wealth-channel flows can influence pricing at the margin, they do not necessarily signal asset class level stress and are better understood in the context of a market that remains supported by deep and durable institutional capital.
As attention on direct lending has intensified, there has also been a greater focus on underwriting standards and documentation quality – and differences in approach will be increasingly reflected in performance dispersion. Much of it will be rooted in decisions made earlier in the cycle, as underwriting choices around leverage, structure, and sector exposure are tested in a more normalized environment. More resilient portfolios have tended to include businesses with defensive characteristics or durable revenue profiles, while limiting exposure to areas more vulnerable to cyclicality or disruption, particularly as technological change reshapes certain sectors.
The future of middle market direct lending
Even as the market has evolved, several forces remain in place that should continue to support traditional direct lending over time. Private equity sponsors increasingly value certainty of execution and flexible financing, reinforcing demand for private, bilateral lending solutions across new platforms, add-on acquisitions, and refinancings. Large pools of undeployed buyout capital are another persistent source of financing need. On the supply side, bank disintermediation remains a multi-year trend, with non-bank lenders now accounting for roughly half of global financial assets.
For long-term investors, the relevant question is not whether volatility exists – it does and will – but whether the fundamentals that underpin direct lending have structurally changed. In many respects, they have not.
Discover private markets and high-impact investment strategies at FundForum, the largest asset & wealth management event in the world!
For Professional Investors / Institutional only. This document should not be distributed to or relied on by Retail / Individual Investors. Any forecasts in this material are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.26- 5532812
References:
[1] Source: Barings, LSTA. As of March 2026.