The Case for Private Debt
Private debt plays a crucial role in the impact investing landscape: facilitating access to capital across a range of companies, enabling tailored financing solutions, and driving impact through measurement, accountability, and improved oversight.
Direct lending is its largest and most institutionalised segment, representing 46% of AUM in impact private debt. Impact Direct Lending applies the same mechanics as traditional direct lending but introduces one explicit requirement: the borrower must contribute to solving a social or environmental challenge, either directly through its products and services, or by enabling others to do so. This article examines how the strategy works, the forms it takes, and what investors should consider when allocating to it.
Impact Investing & Direct Lending
- Impact private debt comes in many forms, with different loans following investment structures from the traditional world, but often introducing new, innovative solutions. Each has its own impact merits and risk/return profile, offering something different to the investor.
- Impact investing in private debt has historically been dominated by microfinance and DFI-adjacent strategies (trade finance, SME lending in emerging markets).
- As a distinct strategy, Impact Direct Lending, lending to mid-market companies that provide impactful services or products or have an environmental sector focus is nascent but growing rapidly.
Direct Lending within impact private debt1
- Direct Lending, 46%
- Microfinance, 22%
- Infrastructure Debt, 14%
- Other, 8%
- Asset-Based Lending, 7%
- Project Finance, 2%
Within Impact Direct Lending, managers typically pursue one of two approaches to borrower selection, distinguished by how directly the borrower’s business contributes to impact objectives.
Investment Types
1. Direct Impact
Provide financing to companies which provide products or services that make a substantial and credible contribution to at least one of the impact objectives
2. Enabling Impact
Provide financing to companies that provide enabling services or products that are more transitionary in nature.
Allocation tendencies between the two investment types varies across strategies, often dictated by:
The intentionality of the manager
The thematic focus of the strategy
Tendency towards sponsored/sponsorless2 deals
Deal flow
Understanding these drivers helps investors assess whether a manager’s portfolio composition matches its stated impact thesis. If would like to hear more about incorporating private debt into your impact private markets portfolio, get in touch.
[1]Source: Phenix Capital – Private Debt Impact Report 2025
[2]Sponsored deals are loans to companies backed by a private equity sponsor; sponsorless deals are made directly to companies without private equity ownership.