Direct Lending: Attractive Economics in a Shifting Environment (HPS Investment Partners)

Summary

• Credit spreads have widened as lenders have become more selective amid elevated market uncertainty.p.1
• Direct lending drawdown funds raised a record $72 billion in the second quarter of 2026, according to Preqin.p.3
• Repurchase requests across ten of the largest non-traded BDCs reached an average of 9.9% of shares in the second quarter.p.3
• Floating-rate private credit strategies are well-positioned to benefit from a prolonged higher-for-longer rate environment.p.1

Key insights

1. Underwriting standards have tightened and lenders are demanding greater compensation for risk.p.1
2. Newly originated transactions offer higher yields alongside tighter covenant packages and greater downside protection.p.2
3. Larger, well-established companies benefit from diversified business models and strong free cash flow generation.p.2
4. Institutional investors are focused on fundamentals while parts of the wealth channel are driven by short-term headlines.p.3
5. Borrowers value the speed, certainty and flexibility of private capital that is often unavailable in public markets.p.2