In the ever-evolving landscape of finance, private debt has emerged as a critical alternative investment avenue for investors seeking attractive risk-adjusted returns. Within the realm of private debt, direct lending has gained significant traction and is widely regarded as the most popular form of private debt. In fact, a recent report by Pitchbook found that direct lending accounts for 32% of the overall mix of private debt. This popularity is attributed to several compelling factors that distinguish direct lending from other private debt strategies, such as mezzanine financing or distressed debt. In this blog, we will explore the reasons why direct lending has become a preferred choice for both borrowers and investors. Plus, we’ll give some insight into how AXIS by AIO Logic can help lenders automate and optimize the direct lending process.

Control and Flexibility for Borrowers

Direct lending offers borrowers a higher degree of control and flexibility compared to traditional bank loans or other forms of private debt. Unlike conventional lenders, direct lenders are often more willing to tailor loan structures to suit the specific needs and circumstances of the borrowing company. This allows borrowers to negotiate terms, covenants, and repayment schedules that align with their business models and growth plans.

Once the terms have been negotiated between lender and borrower, AXIS makes the loan origination process quick and easy, by automating several origination tasks such as term-sheet creation, approval memo creation, and deal stages creation. Furthermore, AXIS allows lenders to customize the loan structure as needed, including terms, covenants, repayment schedules, and interest rates. This flexibility is crucial in attracting borrowers who may otherwise turn to banks for their funding.

Risk-Adjusted Returns for Investors

Investors are increasingly attracted to direct lending due to the potential for attractive risk-adjusted returns. Direct lending typically involves lending to middle-market companies or small businesses that may be overlooked by traditional banks. The interest rates charged for these loans are often higher than those offered by traditional financial institutions. This allows investors to earn a competitive yield on their investments while diversifying their portfolios and mitigating risks through a pool of carefully selected loans.

Achieving this risk-adjusted return is made easier for investors using AXIS by AIO Logic, thanks to the ability to easily customize interest rate structures. Investors can choose from interest rate structures such as Current, PIK, Fixed, and Variable. Additionally, AXIS has native handling for changing interest rate structures, where users can enter date ranges and the applicable interest rate for each date range. AXIS will then automatically apply the applicable interest rate at the proper time frames over the life of the loan.

Diversification and Portfolio Management

Direct lending offers investors the opportunity to diversify their investment portfolios effectively. By investing in a variety of loans across different sectors and industries, investors can spread risk and reduce the impact of defaults or underperformance in any single investment. Diversification is a fundamental principle of investment management, and direct lending provides a platform for achieving it while participating in the private debt market.

While an additional investment class has the potential to substantially increase expenditures and staffing, AXIS by AIO Logic allows investors to participate in the private debt market without substantially increasing expenditures or staffing. Thanks to the automation features across the entire loan lifecycle, AXIS can help lenders save up to 50% compared to costs associated with other platforms. In addition to the cost savings, AXIS helps investors achieve up to 5x improvements in operational efficiency by automating many tasks that would otherwise require human intervention.

Favorable Regulatory Environment

The regulatory environment has played a pivotal role in bolstering the popularity of direct lending. Regulatory changes, particularly after the 2008 financial crisis, have imposed stringent capital requirements on traditional banks. Consequently, many banks have become more risk-averse and selective in their lending practices, especially to small and medium-sized enterprises. This regulatory backdrop has created a void in the market that direct lending firms have been able to fill, catering to the funding needs of these underserved segments.

While private lenders may not face the same level of regulation as banks, that doesn’t mean they are free from compliance regulations. Without effective compliance management, the task of meeting all compliance requirements could be a heavy lift. However, with AXIS by AIO Logic, the time and effort spent on compliance can be dramatically reduced, thanks to compliance features such as automated compliance calendars, automated compliance certificate submission, and automated compliance monitoring.

Relationship-Driven Approach

Direct lending is often built on strong, relationship-driven models. Lenders establish close relationships with borrowers, gaining a deep understanding of their businesses and operations. This relationship-centric approach fosters trust and confidence between the parties involved. Borrowers value the accessibility and responsiveness of direct lenders, creating a symbiotic relationship that often extends beyond a single transaction.

With that in mind, AXIS has features that help foster effective relationships between lender and borrower. A few examples of these features include contact management, location management, call and email integration, and automated follow-up calendars. Features such as these helps ensure that both parties are able to effectively communicate regarding their loans.


Direct lending’s rise to prominence in the private debt market is the result of its ability to offer tailored financing solutions, enhanced control and flexibility for borrowers, attractive risk-adjusted returns for investors, effective portfolio diversification, and a favorable regulatory environment. These factors have combined to make direct lending the preferred choice for both borrowers and investors seeking opportunities in the private debt landscape. As the financial landscape continues to evolve, direct lending is poised to maintain its position as a dominant force in the private debt market. If your firm is ready to enter the private debt market, or simply wants to automate and optimize your private debt operations, please feel free to contact us today to schedule a free demo!