Global direct lending AUM has surged past $1.5tn (£1.1tn) as firms rapidly scale to meet the demand for private capital. Supporting this rapid expansion is a corresponding push towards technology modernisation. But amidst conversations and investments in deal sourcing platforms, portfolio monitoring systems, and AI-powered capabilities, there’s a glaring omission in the conversation – leverage management. Debt capital commitments can often exceed half the size of a fund’s AUM. Kanav Kalia, managing director at Oxane Partners, talks about the overlooked leverage management piece of direct lending’s operating stack.
Direct lending is witnessing remarkable growth. Over the past decade, assets under management have grown nearly tenfold, and now exceed $1.5tn. Today, direct lending firms are scaling rapidly – raising larger funds, forging new partnerships, and attracting an increasingly diverse investor base. While this growth was initially spurred by bank retrenchment from direct lending after the global financial crisis, more than a decade on, the story has significantly evolved.
Sizing up the leverage piece
The banks may have had to step back, but they have by no means stayed on the sidelines. Banks and private credit firms have become increasingly linked, with the former’s leverage playing a critical role in the growth of the latter.
Direct lending AUM currently stands at over $1.5tn. A typical direct lending firm will deploy portfolio-level leverage, often with loan-to-value ratios around 60 per cent. So, the leverage a firm has to manage is a sizeable operational challenge alongside the assets under management. While firms pour resources into sophisticated deal origination and portfolio monitoring systems, they’re often managing this equally significant leverage exposure through manual processes, spreadsheets, and ad hoc workflows that have not evolved to be integrated into the overall core operational and technology infrastructure.
The operational reality
We work with both sides of the industry – the banks and the private credit firms – and we are seeing firsthand the complexities within these arrangements. Lenders typically have exhaustive risk compliance requirements in terms of the underlying collateral that funds can borrow against and to what extent – eligibility criteria, concentration limits, different advance rates for different types of underlying collateral, etc. Banks may have stepped away from direct lending after the crisis and have moved up the capital structure by lending to private credit firms, but they are still keen to have the full picture of their risk exposure. They seek underlying loan-level and obligor-level transparency across every facility to fully understand their risk exposure. This level of oversight introduces a significant operational burden, especially for firms managing multiple lines of credit with bespoke terms. Supporting these expectations requires systems that span the full spectrum of teams, from origination and portfolio management to treasury, risk, operations, and investor relations.
Integrating leverage management into the op-stack
It’s crucial to ensure that as your business grows, your infrastructure keeps pace. This sentiment is true in all businesses but is especially valid in this market. Many firms sometimes make the mistake of assuming that operational infrastructure is a consideration that merits thought once they have reached a certain scale, or they focus on limited aspects like managing deal flow and portfolio risk that feel most pressing. Building scalable infrastructure early on is a strategic investment that benefits every function within the firm. For example, monitoring and managing risk is an exhaustive process – tracking obligor reporting, financial spreading, covenant, calculation, and servicing of these loans for even relatively modest books of business. This data is equally critical for risk management, investor reporting, and sharing with leverage providers. Firms need to think holistically about how they manage data and operations to remove redundancies, eliminate duplicated effort, and ensure seamless information flow with a single source of truth. Every team and workflow is interlinked.
Speaking from our own experience of managing over $800bn and having worked with over 100 clients, we’ve seen that the most successful firms take a unified approach. When every deal is onboarded into a single system, every team has a single source of truth, the firm gains a holistic view of exposure, concentrations, and performance in one place.
Fortunately, a lot of private credit firms and banks are becoming increasingly mindful of where they are on their technology journey, but many are still unaware of how rapidly they can be caught out unprepared. The momentum we are seeing in the industry is fantastic, and exciting to see, but every organisation has to be prepared, or they risk losing out to their competition. As firms scale portfolios, they simultaneously scale leverage on their investments, and having a solution that works across all teams and workflows, will give them an operational edge.
Lessons from the coalface
In writing this piece, I wanted to share some insights from over a decade in the market, working with banks and private credit firms. As the space expands, so too does regulatory scrutiny. Regulators are paying closer attention to the growing bank leverage extended to non-bank financial institutions (NBFIs), and how those exposures are managed. With concerns around systemic risk, liquidity, and transparency, firms should prepare for rising expectations around data quality, risk oversight, and reporting.
The time to get ready is now, before the pressure arrives. I have worked with firms that started with small books and have grown several times over in a few years. When the opportunity comes, it can arrive suddenly, making it crucial to be ready before this moment and not to scramble to accommodate scale after the fact. Those who invest early in scalable, integrated systems are the ones best positioned to seize the next phase of growth, with confidence, clarity, and control.
