Tyler Gately and Stuart Mathieson of Barings argue that, despite increased scrutiny of direct lending, the fundamentals that first attracted investors to the buoyant asset class remain intact.

Private credit has attracted increasing attention in the past few years. As the market has grown in size and visibility, periods of uncertainty have drawn greater scrutiny to direct lending in particular, often fueled by headlines tied to isolated credit events, fundraising trends or shifts in capital flows.

The attention is understandable. Direct lending today is significantly larger and more broadly followed than it was a decade ago. But while the market has evolved, many of the characteristics that initially attracted investors to the asset class remain intact. Understanding what has changed – and what has not – provides useful context for evaluating the opportunity set ahead.

What hasn’t changed

At its core, traditional middle market direct lending remains anchored by the same principles that have long defined the strategy: senior secured lending, contractual cash flows and a focus on downside protection.

Most direct lending transactions continue to involve first lien loans to sponsor-backed middle market companies. Lenders typically benefit from negotiated protections, including maintenance covenants, reporting requirements and other structural features designed to preserve value when conditions deteriorate. While no credit strategy is immune to stress, these protections remain a defining characteristic of the direct lending model.

The relative value case also remains compelling. Direct lending continues to offer a meaningful spread premium relative to comparable public credit markets across North America, Europe and Asia Pacific. Lower leverage levels, tighter structures and greater lender control help support this premium, even as absolute spreads fluctuate throughout market cycles.

Equally important, direct lending’s performance continues to be influenced more by underlying credit fundamentals than by daily market sentiment. Unlike liquid credit markets, where technical factors and fund flows can drive short-term price movements, direct lending outcomes are generally tied more closely to underwriting discipline, portfolio construction and borrower performance.

These characteristics help explain why the strategy has remained attractive across a variety of market environments. Institutional investors continue to view direct lending as a source of contractual income, floating-rate exposure and historically attractive risk-adjusted returns. While the illiquidity premium available to investors may vary over time, it remains a key component of the long-term investment case.

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What has changed

One of the areas where direct lending has changed most significantly is in its structure. As the asset class has expanded, direct lending capital has become increasingly concentrated among a smaller group of large, established platforms. In North America, the top 10 managers completed 38 per cent 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 per cent of total deal activity.

This concentration has reinforced the 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 merger and acquisition cycles and can provide access to more proprietary opportunities during periods of volatility.

Another visible change has been the expansion of wealth-related capital. Evergreen and semi-liquid private credit vehicles have grown rapidly, attracting significant inflows from private wealth investors and increasing public awareness of the asset class. Yet it is important to keep that growth in perspective.

Despite the attention these vehicles receive, the majority of capital remains invested in closed‑end institutional funds that are not subject to redemption pressures. As a result, shifts in retail flows may influence pricing or fundraising at the margin, but they do not necessarily reflect the health of the broader direct lending market.

Growing dispersion

As the market matures, perhaps the most important change for investors to understand is the increasing dispersion of outcomes.

Direct lending has historically benefited from senior secured positioning, negotiated documentation and relatively conservative structures. However, asset class averages can obscure significant differences among managers. Underwriting decisions made years earlier, including leverage levels, covenant protection and sector selection, are increasingly being tested in a more normalised environment.

As a result, differences in sourcing, underwriting and portfolio management are likely to become more visible in performance results. More resilient portfolios tend to be concentrated in businesses with durable earnings profiles and defensive characteristics, while avoiding sectors more vulnerable to cyclical pressures or disruption. At the same time, documentation quality and lender control remain critical determinants of outcomes when conditions become more challenging.

Looking ahead

The direct lending market today is larger and more competitive than it was a decade ago. Capital is increasingly concentrated among established platforms, origination dynamics have evolved, and performance dispersion is becoming more pronounced.

But the foundations of the strategy remain remarkably consistent. Senior secured positioning, contractual income, lender protections and disciplined underwriting continue to underpin the asset class.

For investors, the key question is not whether volatility exists, it always will, but whether the fundamental characteristics that support direct lending have changed. In many respects, they have not. Looking beyond headlines and focusing on underlying fundamentals remains the most effective way to evaluate the role direct lending can play in long-term portfolios.

By Stuart Mathieson, head of European private finance, and Tyler Gately, head of North America direct lending, at Barings.

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. 26/5835536