Private Credit Strategies: What Each One Actually Is

Ask what private credit is and most people describe one strategy. A fund lends directly to a company a private equity sponsor already owns, holds that loan on its own book rather than syndicating it out, and collects the coupon until repayment. That is direct lending, and it genuinely is the largest strategy inside the asset class. It is not the asset class itself, and confusing the two is the single most common mistake made about it.

By stock, direct lending is roughly 37% of private debt assets under management. By new money committed each year, it took roughly 50% of 2024's private credit allocations, down from 58% the year before. Two different measures, both real, and neither reconcilable into the other — but both consistent with the same fact: direct lending is large enough that writing about it can feel like writing about the whole market, and specific enough that doing so is wrong.

The most detailed candidate-facing guide to this asset class makes exactly that mistake. It lists direct lending, mezzanine, distressed and asset-based finance side by side, as though they were four equally weighted options, and never once says that one of them holds most of the assets and the rest sit around it.

Industry materials get the framing right without making a point of it: direct lending is routinely described as the largest segment of private credit — largest segment, not the whole of it.

37%

of private debt AUM

Direct lending's share by stock, not by strategy count

7

strategies, one label

Mezzanine, ABF, NAV lending, CLOs and more sit beside it

$1.75-3tn+

the range, not a figure

No single source agrees on total private credit AUM

The seven strategies, mapped

Same asset class, seven different jobs. Each strategy lends against something different, gets paid a different way, and tests a different instinct in an interview.

CLOs are not in that table because a CLO is not a strategy. It is a financing wrapper that can hold either broadly syndicated loans or direct loans, and it gets its own section below.

Direct lending: bilateral, senior, held to maturity

A direct loan is originated once, negotiated once, and usually sits senior secured on a single borrower's balance sheet, most often a company a private equity sponsor bought and controls. There is no syndicate to sell it down to. The lender that writes the cheque is the lender that holds the credit through a refinancing, a covenant test, or a bad year, which is most of why the underwriting culture in this strategy looks the way it does.

The return is unglamorous by design: a margin over the reference rate, an arrangement fee, sometimes an original issue discount, collected until the loan matures or refinances. The Cliffwater Direct Lending Index, the closest thing this strategy has to a public benchmark, returned 9.3% in 2025 and has averaged 9.5% a year over two decades with a single negative year, 2008.

That figure is loan-level and gross of fees, which is a different number from what any one fund actually pays an investor, and a candidate who conflates the two has not understood the number.

What it pays, and who runs the book

Pricing tells its own story. First-lien direct lending margins run around 500 basis points, against roughly 332 basis points for comparable broadly syndicated loans — a gap that exists because a bank desk syndicating a loan is optimising for distribution, and a direct lender holding the whole cheque is optimising for control. Fundraising has consolidated hard around the biggest platforms: the top 25 managers took roughly 72% of everything raised in closed-end direct lending funds in 2025.

The recognisable names here — Ares, Blackstone, Apollo, Blue Owl, HPS, Golub, Sixth Street — mostly built their reputations in this strategy first, even where it is now one book among several. The junior seat sits across underwriting, origination and portfolio monitoring, and the shape of that first year, along with the technicals interviewers actually probe, is covered in full in private credit interview questions and worked through end to end in the private credit case study.

Mezzanine: squeezed by unitranche, not dying

Mezzanine sits one layer below senior debt: subordinated, often lightly secured or unsecured, paid a coupon that is part cash and part payment-in-kind, and frequently sweetened with warrants. It exists because a company sometimes needs more leverage than a senior lender will provide and a sponsor does not want to write a bigger equity cheque to close the gap.

The strategy has spent years being squeezed by the rise of unitranche, which lets a single lender blend senior and junior risk into one instrument and capture the whole spread instead of splitting it with a mezzanine investor further down the stack. That squeeze is real.

What it is not is terminal: mezzanine fundraising rose roughly 26% in 2025, following an approximately 80% collapse the year before, which reads less like a dying strategy and more like one that gets used precisely when senior lenders stop stretching.

No benchmark index exists for mezzanine returns. The low-to-high-teens figure circulating in the market is convention among practitioners, not a measured, indexed fact.

"The sponsor could write a bigger equity cheque instead. Why take mezzanine capital at all?"

That is the question a mezzanine candidate should be ready for, and the honest answer is usually about control and dilution: mezzanine lets a sponsor add leverage without giving up more of the equity, at a price that is cheaper than issuing more common stock even though it is expensive against senior debt.

Special situations, opportunistic and distressed: three labels, one blurry boundary

These three terms get used almost interchangeably by candidates and almost never by the people who actually run the money, who argue about where one ends and the next begins. Both the CFA Institute and practitioner forums flag the same inconsistency. What is agreed is roughly this.

Distressed

The company is already in or near default. A distressed investor buys existing debt at a discount, or extends new rescue financing, aiming either at price recovery when the credit stabilises or at loan-to-own control through the fulcrum security — the tranche where enterprise value runs out and typically converts into the new equity. Oaktree closed the largest distressed fund in history in February 2025, at $16 billion, and distressed fundraising surged roughly 180% year over year into 2025.

A live nuance worth knowing: distressed managers increasingly buy loans that a seller needs to offload for liquidity reasons, not because the borrower has actually collapsed, which blurs the line with credit secondaries.

Opportunistic credit

A flexible mandate across performing and non-performing names, where the return comes from complexity and a structuring premium rather than from default risk itself. It sits between direct lending and distressed on most practitioners' mental map, without being a clean midpoint of either.

Special situations

The broadest of the three, event-driven, and spanning both debt and equity — frequently not distressed at all. Oaktree's own materials describe the strategy as flexible debt-and-equity investing in companies experiencing a special situation, which is a definition built around an event rather than around financial condition.

Asset-based finance: the strategy two different numbers describe

Asset-based finance lends against pools of identifiable assets — receivables, equipment leases, aircraft, royalties, insurance-linked cash flows — rather than against one company's enterprise cash flow. It is underwritten actuarially, across thousands of small exposures, closer in method to how an insurer prices a book of policies than to how a direct lender prices one borrower.

Direct lending

• One borrower, one credit story
• Underwritten name by name
• Recovery depends on this company's value
• The analyst reads the covenant package

Asset-based finance

• Thousands of receivables, leases or contracts
• Underwritten actuarially, like an insurance book
• Recovery depends on the pool's loss curve
• The analyst reads the servicer's collection data

Sizing this strategy is where the two-different-questions problem is sharpest. The total global ABF market, including bank balance sheets and securitised deals that never touch a private credit fund, is estimated at $6.1 trillion today and forecast to reach $9.2 trillion by 2029.

The slice sitting inside private credit funds is far smaller — roughly 24% of the five largest managers' credit assets under management as of the third quarter of 2025 — and it accounted for 16.4% of all 2025 closed-end private credit fundraising, about $27.1 billion.

Total global ABF market (incl. banks, securitised)

$6.1tn

ABF inside private credit funds (5 largest managers)

~$480bn

The left bar counts everything: banks, securitisation, the whole global market. The right bar is what actually sits inside private credit funds. Quoting the first as though it were the second is the single most common way this strategy gets misrepresented.

The risk in asset-based finance is bifurcated: the assets sitting in the pool, and the originator or servicer platform standing behind them. The First Brands collapse in 2025 was a platform failure, not a failure of the underlying pool's performance, and that distinction — asking which of the two actually broke — is most of what separates a prepared candidate from one reciting the definition.

NAV lending and fund finance: whose credit are you actually underwriting

NAV lending is secured against a private equity fund's portfolio value rather than against any single operating company, and the borrower is the fund vehicle itself, not a business inside it. Law firms classify this correctly as fund finance, grouped with subscription lines rather than with corporate credit. It gets marketed under the private credit umbrella mainly because the same managers run both books and the same limited partners allocate from the same sleeve.

Sizing here is genuinely weak. 17Capital, the specialist most associated with the strategy, projects the market at roughly $700 billion by 2030 — its own forecast, from a firm with an obvious interest in the number being large. A separate industry survey puts 2023 volumes above 2022's roughly $21 billion, and flags the market itself as opaque, which is a fair description of the state of the data rather than a criticism of any one source.

Two or three things are worth having ready for a NAV lending conversation:

• The borrower is a fund, not a company. That single fact changes what "credit risk" even means in this context.
• Diversification is the collateral. A single portfolio company defaulting barely moves the NAV; a broad valuation markdown across the book does.
• The sizing is contested, and saying so plainly is a stronger answer than repeating one forecaster's number as settled fact.

CLOs and syndicated loans: a wrapper, not a strategy

A collateralised loan obligation is a financing structure, not an investment strategy, and it can hold either broadly syndicated loans or privately originated ones. Broadly syndicated loans are bank-arranged, widely distributed, continuously priced, and now more than 85% covenant-lite. That scale gap is real: broadly syndicated CLO par outstanding runs around $626 billion against roughly $61 billion for SME and private-credit CLOs.

The two markets are converging in one specific way worth naming: covenant-lite structures inside direct lending itself rose from about 4% of deals in 2023 to roughly 21% in 2025, meaning the private, maintenance-covenant-heavy market is picking up a habit from the syndicated one it has spent years distinguishing itself from. A candidate who raises that trend unprompted is showing they read the market rather than a glossary.

• A CLO is a wrapper. Asking "what does the CLO hold" is a better question than asking "what is a CLO."
• Scale still separates the two markets by roughly ten times. SME and private-credit CLOs are growing, not dominant.
• Cov-lite creep inside direct lending is the story analysts should watch, because it runs against the strategy's own selling point to its investors.

Venture debt: credit for companies with no earnings yet

Venture debt is a term loan plus warrants, extended to venture-backed companies that have no EBITDA and are sized on runway and sponsor quality rather than on any cash flow statement a traditional credit analyst would recognise. It is a genuinely small corner of a large ecosystem: the US venture debt market hit a record $68.8 billion in 2025, against roughly $321.6 billion of US venture equity in the same period.

US venture equity, 2025

$321.6bn

US venture debt, 2025

$68.8bn

Venture debt is real and growing, but it remains a small fraction of the venture capital it rides alongside — which is exactly why the underwriting looks nothing like a normal credit book.

Since the collapse of Silicon Valley Bank, the field has consolidated around listed specialty business development companies rather than the bank-balance-sheet lenders that used to dominate it.

The underwriting question a venture debt candidate should expect is not about coverage ratios at all: a company with eighteen months of cash and no path to breakeven for three years has nothing resembling a normal debt-service metric. The credit view rests on runway, burn discipline, and whether the venture investors behind the company have the record and capital to fund another round.

What the market will not tell you

Private credit's total size has no single agreed figure. Primary estimates for the whole asset class run from roughly $1.75 trillion to more than $3 trillion, depending on scope and date, and most trace back to the same underlying data provider filtered differently. Printing one of those numbers as settled fact would sound more precise and be less true.

The honest gaps extend past sizing:

• No benchmark index exists outside direct lending. The Cliffwater index is real and public. Mezzanine, opportunistic, special situations, distressed, asset-based finance and NAV lending all circulate return ranges that are market convention, not measured performance.
• No strategy-by-strategy split of private credit AUM sums to 100% in any single published source. The figures in this piece are the specific, sourced ones that exist; there is no master breakdown behind them.
• Asset-based finance and NAV lending sizing both come from the leading specialist in each niche, publishing about its own market. That is not a reason to distrust the numbers, but it is a reason to hold them a little less tightly than one from an independent index.
• Almost nothing here has reliable Europe-only sizing except direct lending. A candidate applying to a European asset-based finance or NAV lending team is working from global figures because better ones do not yet exist.

Which strategy fits which candidate

Background predicts fit here more than most candidates expect, and naming the connection out loud in an interview reads as self-awareness rather than as a formula.

• Leveraged finance into direct lending. The most commonly cited route, because a leveraged finance desk arranges and distributes debt for a bank's clients, and the debt-schedule and credit-agreement literacy built there transfers almost unchanged to a desk that holds the loan instead.
• Restructuring into distressed and special situations. The natural feeder, since both live inside a capital structure that is already under pressure and both require reading a document rather than a forecast.
• Bank credit desks, DCM, corporate banking, fixed income research and rating agencies. A plausible-but-not-guaranteed tier for direct lending and asset-based finance roles.

Where to go from here

Naming the connection between background and strategy is covered in full in how to get into private credit. The firms actually hiring across these strategies, with what each one is known for, are covered firm by firm in the private credit firm guides.

What changes by strategy more than most candidates expect going in is the pay structure once you are in — covered separately in private credit compensation, since carry mechanics differ between a strategy paid on contracted income and one paid on recovery values.

The bottom line

Private credit is not one business wearing seven names. It is seven businesses that happen to share a label, a regulatory wrapper and, increasingly, the same handful of large managers running several of them at once. Direct lending is the biggest and the most written about, which is exactly why it gets mistaken for the whole story.

Learn the strategy you are actually interviewing for before you learn its neighbours. A direct lending analyst, a distressed analyst and an asset-based finance analyst spend their weeks doing recognisably different work, even when their business cards say the same three words. Knowing which of the seven you are walking into is most of the preparation the interview itself will test.