The rise of direct lending
02 April 2025
Following their recent white paper, MUFG Investor Services’ Treabhor Mac Eochaidh and Des Fullam speak to Justin Lawson about the meteoric rise of direct lending
Image: greenbutterfly/stock.adobe.com
The landscape of global finance has undergone a remarkable transformation in recent years.
As traditional banks retreated from certain lending markets following the Global Financial Crisis, direct lending emerged as a powerful force, reshaping how businesses access capital and finance multi-billion-dollar transactions, as well as how investors seek returns.
To gain deeper insights into this evolving sector, Asset Servicing Times sat down with two industry experts who recently collaborated on a white paper, ‘A Market Matures: Navigating the Rise of Direct Lending’.
The explosive growth of private credit
Your white paper highlights remarkable growth in the private credit market. Can you put this growth into perspective?
Treabhor Mac Eochaidh: The numbers are truly staggering. Depending on methodology, current estimates of private credit assets under management (AUM) vary but it is clear that the numbers continue to increase.
For example, private credit assets under management topped US$3 trillion globally in 2024, according to research from the Alternative Credit Council.
To put that in context, industry stakeholders observed that private credit AUM were roughly 10 times larger at the end of 2023 than it was in 2009. Even more impressively, private debt assets doubled from US$818 billion in 2019 to US$1.6 trillion by September 2023.
Des Fullam: What is particularly interesting is where this growth is projected to go. Preqin forecasts that total private debt AUM will grow at a compound annual growth rate of 9.88 per cent from the end of 2023 to 2029, reaching US$2.64 trillion. Within that, direct lending specifically is showing the strongest growth trajectory, with projections suggesting it will reach US$1.33 trillion by 2029.
What is driving this explosive growth?
Fullam: Several factors are at play. After the Global Financial Crisis, new regulations forced banks to hold more capital and reduce their risk exposure. This created a void in lending markets that direct lenders stepped in to fill. Initially, direct lenders focused on middle-market companies that were too small for public markets or had specialised needs.
Mac Eochaidh: Then, as interest rates rose and equity markets stalled, investors increasingly turned to direct lending as a way to increase returns. The floating-rate nature of most direct lending provides protection against inflation, typically offering returns ranging from 5 to 9 per cent.
Additionally, the resilient structure of closed-ended funds proved attractive during periods of economic uncertainty.
Transforming transaction dynamics
Your report highlights some massive direct lending deals. How is this changing the financial landscape?
Mac Eochaidh: One of the most attractive features about tapping the direct lending space, particularly for large transactions, is that speed of execution is typically much faster than in public markets.
Companies raising capital through public markets must disclose extensive financial information to numerous counterparties and conduct road shows with lenders. In contrast, direct lending transactions can be completed much more rapidly, often with fewer counterparties involved.
Fullam: We are seeing this play out in transformative deals across industries. For instance, in the past year, transactions by Apollo Global Management, BlackRock, Ares Management, Blackstone, and others are examples of how direct lending funds are providing financing that would have traditionally been managed by public financing and syndications.
We see these deals as part of a ‘virtuous circle’ — investors pour capital into direct lending funds, which grow significantly, and then those asset managers become lenders of choice to finance transactions throughout many industries.
How are smaller players competing in this space?
Fullam: While large firms dominate fundraising, smaller and mid-sized firms are competing effectively by specialising in specific, niche industries like technology, healthcare, and infrastructure. They are leveraging their agility and deep industry knowledge to target up-and-coming firms in places like Silicon Valley and other technology corridors.
Mac Eochaidh: These smaller funds often have a distinct advantage in terms of speed. With less internal bureaucracy, they can move quickly to provide capital to innovative companies. This is particularly valuable in fast-moving sectors where timing can be everything.
The retail investor influx
Your report mentions retail investors are increasingly entering the private credit market. What challenges does this present?
Mac Eochaidh: Traditionally, private credit funds raised money from a handful of sophisticated institutional investors subscribing with tens or hundreds of millions of dollars.
The emergence of retail investors means fund managers may end up working with hundreds or thousands of new investors with varying amounts of capital, making it more challenging to manage capital calls and drawdowns. And it is critical to ensure retail investors fully understand the distinctions and suitability of private markets.
Fullam: There is also a fundamental difference in expectations. While institutional investors like insurance companies or pension funds have been comfortable trading access to their capital for illiquidity premiums, retail investors typically want some liquidity with their investments.
Fund managers are exploring approaches to provide that liquidity, such as placing some money in liquid assets for redemptions while deploying larger amounts into less liquid investments.
How significant is this retail influx?
Fullam: It is substantial. By some estimates, retail investors may bring as much as US$1.3 trillion into the global private markets. When you add that to another US$3.9 trillion in asset managers’ uninvested capital — known as ‘dry powder’ — plus the shift from the traditional 60/40 capital allocation mix toward alternatives, we are looking at significant global opportunities and challenges for private markets.
The outsourcing imperative
Your report suggests a significant trend toward outsourcing. Why is this happening?
Mac Eochaidh: To better manage the influx of capital coming into private debt, managers are developing deeper partnerships with trusted outsourcing partners. Together, they are reengineering operating models to improve efficiency, manage and drive asset growth, and introduce new products and services.
Fullam: According to Carne’s Supermodel report, more than half of firms with proprietary management companies plan to outsource additional functions through a managed services model during the next two years. This includes regulatory reporting, sustainable investment support functions, and distribution.
Additionally, 29 per cent of surveyed firms indicated they might fully outsource management company responsibilities to support new products.
What specific functions are being outsourced?
Mac Eochaidh: The breadth of outsourced solutions is extensive — from fund and loan administration to fund financing, transfer agent services, banking and payments, and business consulting. Asset managers are tapping these solutions to improve functions like aggregating investments, creating dynamic subscription forms, automating KYC/AML processes, improving documentation, and delivering fund valuations efficiently.
Fullam: For smaller specialist firms, trusted partners can provide strong teams and battle-tested platforms that deliver economies of scale, helping level the playing field when competing against larger managers. Partners can also provide access to new market aggregators like iCapital and CAIS.
Regulatory challenges
What regulatory challenges are direct lenders facing?
Fullam: Globally, regulators are very aware of the growth of this multi-trillion-dollar asset class that’s playing a dominant role in financing large transactions. They are demanding more clarity, greater reporting precision, and a better understanding of ramifications by adopting new rules and frameworks.
Mac Eochaidh: European regulators have already implemented the Alternative Investment Fund Managers Directive (AIFMD) Annex 4 reporting, which requires managers to provide information in more than 300 data fields. Amendments to the EU’s AIFMD II focus on revisions to investor disclosure, liquidity management, and marketing requirements, among other areas, and must be enacted by EU member states by April 2026.
How are managers responding to these challenges?
Fullam: Rather than building their own systems, asset managers are increasingly using common data platforms built by outsourcing partners that standardise reporting fields, collect and process data, and translate information into standard syntax. These systems create golden sources of data held in secure data lakes to help harmonise investor reporting and meet multi-jurisdictional disclosure requirements.
Mac Eochaidh: We are seeing managers use partner-developed platforms to meet reporting deadlines for Form PF rules and AIFMD Annex 4 filings. For instance, one asset manager marketing in 11 European jurisdictions — each with varied requirements — is using a platform to extract and verify data, format each report, and submit those filings simultaneously, resulting in significant time and cost savings.
The future outlook
How might the recent interest rate cuts affect the direct lending market?
Mac Eochaidh: The Fed’s decision to lower interest rates in September 2024 has spurred activity in the asset class. Since most current loans are floating-rate instruments based on percentage points above the Fed rate, the floating-rate spread will remain, but absolute returns will likely go down from current levels.
Fullam: Lower rates will also be welcomed by borrowers as an impetus to refinance existing facilities or assist funds that want to exit investments and repay capital to investors. During the higher rate environment, many borrowers implemented ‘extend and amend’ approaches with their lenders, adjusting agreements with slightly different conditions to cycle out of some positions.
What new opportunities do you see emerging in direct lending?
Mac Eochaidh: We are closely monitoring opportunities to use direct lending to finance government infrastructure, climate, and energy initiatives around the world. Private, asset-backed financing is a growing trend because these transactions include collateral that lenders can target if borrowers have difficulty repaying loans.
Fullam: Opportunities are also arising in significant risk transfer (SRT) transactions, as banks optimise their capital efficiency and share risk with private credit funds that want more exposure. As the amount of capital being invested in private credit increases, so does the universe of investable assets.
Concluding thoughts
As we wrap up, what would you say is the most significant impact of direct lending’s rise?
Fullam: Perhaps the growth of private credit is best explained by the fact that when direct lending transactions are successful, there are multiple winners. Investors benefit because companies borrow money efficiently, resulting in higher profits for shareholders.
Stronger returns for pension funds and insurance companies should flow down to individuals who will receive higher retirement payouts or potentially lower insurance premiums.
Mac Eochaidh: And from a systemic perspective, risk is reduced as lending is primarily carried out by closed-ended funds with significantly lower leverage than banks.
The growth of direct lending represents a fundamental shift in how capital flows through the global economy, and we’re only beginning to see the transformative effects this will have across industries and markets.
As traditional banks retreated from certain lending markets following the Global Financial Crisis, direct lending emerged as a powerful force, reshaping how businesses access capital and finance multi-billion-dollar transactions, as well as how investors seek returns.
To gain deeper insights into this evolving sector, Asset Servicing Times sat down with two industry experts who recently collaborated on a white paper, ‘A Market Matures: Navigating the Rise of Direct Lending’.
The explosive growth of private credit
Your white paper highlights remarkable growth in the private credit market. Can you put this growth into perspective?
Treabhor Mac Eochaidh: The numbers are truly staggering. Depending on methodology, current estimates of private credit assets under management (AUM) vary but it is clear that the numbers continue to increase.
For example, private credit assets under management topped US$3 trillion globally in 2024, according to research from the Alternative Credit Council.
To put that in context, industry stakeholders observed that private credit AUM were roughly 10 times larger at the end of 2023 than it was in 2009. Even more impressively, private debt assets doubled from US$818 billion in 2019 to US$1.6 trillion by September 2023.
Des Fullam: What is particularly interesting is where this growth is projected to go. Preqin forecasts that total private debt AUM will grow at a compound annual growth rate of 9.88 per cent from the end of 2023 to 2029, reaching US$2.64 trillion. Within that, direct lending specifically is showing the strongest growth trajectory, with projections suggesting it will reach US$1.33 trillion by 2029.
What is driving this explosive growth?
Fullam: Several factors are at play. After the Global Financial Crisis, new regulations forced banks to hold more capital and reduce their risk exposure. This created a void in lending markets that direct lenders stepped in to fill. Initially, direct lenders focused on middle-market companies that were too small for public markets or had specialised needs.
Mac Eochaidh: Then, as interest rates rose and equity markets stalled, investors increasingly turned to direct lending as a way to increase returns. The floating-rate nature of most direct lending provides protection against inflation, typically offering returns ranging from 5 to 9 per cent.
Additionally, the resilient structure of closed-ended funds proved attractive during periods of economic uncertainty.
Transforming transaction dynamics
Your report highlights some massive direct lending deals. How is this changing the financial landscape?
Mac Eochaidh: One of the most attractive features about tapping the direct lending space, particularly for large transactions, is that speed of execution is typically much faster than in public markets.
Companies raising capital through public markets must disclose extensive financial information to numerous counterparties and conduct road shows with lenders. In contrast, direct lending transactions can be completed much more rapidly, often with fewer counterparties involved.
Fullam: We are seeing this play out in transformative deals across industries. For instance, in the past year, transactions by Apollo Global Management, BlackRock, Ares Management, Blackstone, and others are examples of how direct lending funds are providing financing that would have traditionally been managed by public financing and syndications.
We see these deals as part of a ‘virtuous circle’ — investors pour capital into direct lending funds, which grow significantly, and then those asset managers become lenders of choice to finance transactions throughout many industries.
How are smaller players competing in this space?
Fullam: While large firms dominate fundraising, smaller and mid-sized firms are competing effectively by specialising in specific, niche industries like technology, healthcare, and infrastructure. They are leveraging their agility and deep industry knowledge to target up-and-coming firms in places like Silicon Valley and other technology corridors.
Mac Eochaidh: These smaller funds often have a distinct advantage in terms of speed. With less internal bureaucracy, they can move quickly to provide capital to innovative companies. This is particularly valuable in fast-moving sectors where timing can be everything.
The retail investor influx
Your report mentions retail investors are increasingly entering the private credit market. What challenges does this present?
Mac Eochaidh: Traditionally, private credit funds raised money from a handful of sophisticated institutional investors subscribing with tens or hundreds of millions of dollars.
The emergence of retail investors means fund managers may end up working with hundreds or thousands of new investors with varying amounts of capital, making it more challenging to manage capital calls and drawdowns. And it is critical to ensure retail investors fully understand the distinctions and suitability of private markets.
Fullam: There is also a fundamental difference in expectations. While institutional investors like insurance companies or pension funds have been comfortable trading access to their capital for illiquidity premiums, retail investors typically want some liquidity with their investments.
Fund managers are exploring approaches to provide that liquidity, such as placing some money in liquid assets for redemptions while deploying larger amounts into less liquid investments.
How significant is this retail influx?
Fullam: It is substantial. By some estimates, retail investors may bring as much as US$1.3 trillion into the global private markets. When you add that to another US$3.9 trillion in asset managers’ uninvested capital — known as ‘dry powder’ — plus the shift from the traditional 60/40 capital allocation mix toward alternatives, we are looking at significant global opportunities and challenges for private markets.
The outsourcing imperative
Your report suggests a significant trend toward outsourcing. Why is this happening?
Mac Eochaidh: To better manage the influx of capital coming into private debt, managers are developing deeper partnerships with trusted outsourcing partners. Together, they are reengineering operating models to improve efficiency, manage and drive asset growth, and introduce new products and services.
Fullam: According to Carne’s Supermodel report, more than half of firms with proprietary management companies plan to outsource additional functions through a managed services model during the next two years. This includes regulatory reporting, sustainable investment support functions, and distribution.
Additionally, 29 per cent of surveyed firms indicated they might fully outsource management company responsibilities to support new products.
What specific functions are being outsourced?
Mac Eochaidh: The breadth of outsourced solutions is extensive — from fund and loan administration to fund financing, transfer agent services, banking and payments, and business consulting. Asset managers are tapping these solutions to improve functions like aggregating investments, creating dynamic subscription forms, automating KYC/AML processes, improving documentation, and delivering fund valuations efficiently.
Fullam: For smaller specialist firms, trusted partners can provide strong teams and battle-tested platforms that deliver economies of scale, helping level the playing field when competing against larger managers. Partners can also provide access to new market aggregators like iCapital and CAIS.
Regulatory challenges
What regulatory challenges are direct lenders facing?
Fullam: Globally, regulators are very aware of the growth of this multi-trillion-dollar asset class that’s playing a dominant role in financing large transactions. They are demanding more clarity, greater reporting precision, and a better understanding of ramifications by adopting new rules and frameworks.
Mac Eochaidh: European regulators have already implemented the Alternative Investment Fund Managers Directive (AIFMD) Annex 4 reporting, which requires managers to provide information in more than 300 data fields. Amendments to the EU’s AIFMD II focus on revisions to investor disclosure, liquidity management, and marketing requirements, among other areas, and must be enacted by EU member states by April 2026.
How are managers responding to these challenges?
Fullam: Rather than building their own systems, asset managers are increasingly using common data platforms built by outsourcing partners that standardise reporting fields, collect and process data, and translate information into standard syntax. These systems create golden sources of data held in secure data lakes to help harmonise investor reporting and meet multi-jurisdictional disclosure requirements.
Mac Eochaidh: We are seeing managers use partner-developed platforms to meet reporting deadlines for Form PF rules and AIFMD Annex 4 filings. For instance, one asset manager marketing in 11 European jurisdictions — each with varied requirements — is using a platform to extract and verify data, format each report, and submit those filings simultaneously, resulting in significant time and cost savings.
The future outlook
How might the recent interest rate cuts affect the direct lending market?
Mac Eochaidh: The Fed’s decision to lower interest rates in September 2024 has spurred activity in the asset class. Since most current loans are floating-rate instruments based on percentage points above the Fed rate, the floating-rate spread will remain, but absolute returns will likely go down from current levels.
Fullam: Lower rates will also be welcomed by borrowers as an impetus to refinance existing facilities or assist funds that want to exit investments and repay capital to investors. During the higher rate environment, many borrowers implemented ‘extend and amend’ approaches with their lenders, adjusting agreements with slightly different conditions to cycle out of some positions.
What new opportunities do you see emerging in direct lending?
Mac Eochaidh: We are closely monitoring opportunities to use direct lending to finance government infrastructure, climate, and energy initiatives around the world. Private, asset-backed financing is a growing trend because these transactions include collateral that lenders can target if borrowers have difficulty repaying loans.
Fullam: Opportunities are also arising in significant risk transfer (SRT) transactions, as banks optimise their capital efficiency and share risk with private credit funds that want more exposure. As the amount of capital being invested in private credit increases, so does the universe of investable assets.
Concluding thoughts
As we wrap up, what would you say is the most significant impact of direct lending’s rise?
Fullam: Perhaps the growth of private credit is best explained by the fact that when direct lending transactions are successful, there are multiple winners. Investors benefit because companies borrow money efficiently, resulting in higher profits for shareholders.
Stronger returns for pension funds and insurance companies should flow down to individuals who will receive higher retirement payouts or potentially lower insurance premiums.
Mac Eochaidh: And from a systemic perspective, risk is reduced as lending is primarily carried out by closed-ended funds with significantly lower leverage than banks.
The growth of direct lending represents a fundamental shift in how capital flows through the global economy, and we’re only beginning to see the transformative effects this will have across industries and markets.
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