Direct lending.

In plain English

Direct lending is the largest slice of private credit, in which one fund or a small club of funds provides an entire loan to a borrower and holds it. There is no underwriting bank distributing the debt to hundreds of buyers, so terms, covenants, and pricing are negotiated privately between a few parties. The lender does its own credit work and monitors the borrower directly, often with the right to see monthly financials. Loans are usually senior, secured by the company's assets, and floating rate. Concentration is the built-in risk: a fund holding whole loans to a few dozen borrowers has nowhere to hide if several go bad at once.

01Why it matters

The higher income these funds advertise is compensation for holding a loan you cannot sell to a business whose financial condition the public cannot check.

02The math, step by step

Say a fund holds 25 loans of $20,000,000 each, a $500,000,000 portfolio. If two borrowers default and recover only 60 percent, the loss is $40,000,000 times 40 percent, or $16,000,000. That is 3.2 percent of the portfolio wiped out by two names.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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