Key takeaways:

• Direct Lending is by far the single largest strategy within private credit today, having grown from 18% to 52% of total assets under management over the last 15 years.¹
• This growth has been fueled by borrower need and investor demand. Middle market companies have flocked to direct lenders as the number of banks has fallen by 75%,² and investors have seen Sharpe ratios enhanced by allocating more of their portfolios to Direct Lending.
• Direct Lending’s main target market, the middle market borrower, has demonstrated lower default rates and loss ratios when compared to the large corporate market for syndicated loans.³

Direct Lending is a type of Private Credit strategy that makes direct, illiquid loans to middle market companies outside of the traditional banking system. Direct Lending usually refers to first lien loans as well as unitranche loans that combine different debt classes or liens into a single loan.

The middle market represents a significant cross-section of the US economy, accounting for one-third of private sector GDP, $15 trillion in revenue and 50 million workers employed.⁴ Despite this, banks have largely withdrawn from the middle market as they have grown larger via consolidation and more constrained with their lending due to the flood of regulations post the Great Financial Crisis.

Other growth drivers for the industry include the $1.8 trillion of dry powder that the Private Equity industry has amassed while awaiting a better dealmaking environment.⁵ In addition, nearly $1 trillion in middle market loans are scheduled to come due by 2030, which can drive significant refinancing activity for direct lenders.⁶

Investor demand for Direct Lending funds remains strong, underpinned by a higher-for-longer interest rate environment. Direct Lending funds have generated superior performance relative to both high-yield bonds and syndicated loans during seven periods of rising rates since 2009.⁷ This has not been lost on investors. Surveyed investors have cited Private Debt most frequently as the private asset class they intend to allocate more to.

Learn more about the rise of direct lending from its small, early origins to its present role as a mainstay of the private credit industry.

¹ Source: PitchBook, LSEG, Morgan Stanley Investment Management. Gross invested assets inclusive of leverage applied. Excludes uncalled capital in drawdown funds. As of September 30, 2025.
² Source: FDIC, as of March 31, 2025. Data from 1984 to 2025, measured by number of FDIC insured banks.  
³ Source: PitchBook LCD, Cliffwater, Moody's, S&P Global, Morgan Stanley Investment Management. Leveraged loan and high yield loss rates are calculated from annualized data between 2017 and 2025 and use the following formula: LTM default rate * (1 minus – average recovery rate).  Default rates for leveraged loans are based on PitchBook LCD data and include distressed exchanges.  Recovery rates for leveraged loans are based on S&P Credit Pro data. Default and recovery rates for high yield bonds are based on Moody’s data and include distressed exchanges. Credit losses for senior direct lending are based on annualized data between 2017 and 2025 from the Cliffwater Direct Lending Index – Senior (CDLI-S) using reported net losses (realized) adjusted for estimated imbedded gains. The broader Cliffwater Direct Lending Index (CDLI), which is representative of both senior and non-senior loans originated for middle market borrowers, would produce an estimated annualized loss of 1.47%. Note: 2025 data is annualized as of September 30, 2025.
⁴ Source: National Center for the Middle Market, Mid-Year 2025 Report and the 2024 Indicators Report. US Bureau of Economic Analysis and US Census Dynamics Statistics.
⁵ Source: PitchBook, as of September 30, 2025.
⁶ Source: LSEG, PitchBook LCD, Morgan Stanley Investment Management. As of September 30, 2025. US only.
⁷ Source: Morningstar, PitchBook. Private Asset performance reflects fund returns net of fees, and desmoothed to remove artificial effects of late reporting of fluctuations in underlying fair values. As of September 30, 2025.