Breaking Into Private Debt and Direct Lending (2026): The Ultimate Interview and Career Guide
Master private debt interviews for 2026. Covers credit analysis, covenants, unitranche, debt metrics, case studies, and credit memo writing.
Private debt (often called private credit or direct lending) has become one of the fastest-growing buy-side career paths because it sits right where deals happen: you underwrite companies, negotiate terms, protect downside, and manage risk through cycles. If you like the deal pace of PE but prefer downside-first thinking, private debt can be a perfect fit.
This guide is built for 2026 interviews: what roles look like, what interviewers actually test, how to think like a lender, and how to crush the case study and credit memo.
Why private debt matters in 2026 (and why interviews feel different)
A few structural tailwinds explain why funds keep hiring:
- Borrowers like certainty and speed. Private credit is typically negotiated with a small lender group, which can move faster and with more certainty than broadly syndicated markets
- Loans are often floating-rate and senior-secured. This shapes underwriting and risk management (and interview questions)
- The market has grown rapidly, but estimates differ based on definitions. For example, BIS notes private credit manages more than $2.2T globally (2025)
- Regulators are paying attention to opacity, leverage, and interconnectedness with banks and other non-banks, so "risk thinking" is more central than ever
What This Means For You
Private debt interviews are less about "tell me the 3 valuation methods" and more about "prove you can protect downside and structure a loan so it survives a bad year."
Private debt in plain English (what you're actually investing in)
Private debt / private credit is non-bank lending where funds provide loans that are not broadly traded like public bonds or syndicated loans.
Common strategies
- Direct lending (core private credit)
Loans to middle-market companies, often PE sponsor-backed, usually senior secured - Unitranche
A single loan to the borrower, but lenders may split economics into first-out / last-out via an Agreement Among Lenders - Mezzanine / junior capital
Subordinated risk, higher return, often includes PIK features - Special situations / opportunistic credit
Complexity: rescue financings, stressed, structured solutions - Asset-based finance (ABF) and specialty finance
Lending against pools of assets (receivables, consumer, etc.). This area has been expanding
Career map: the roles you can actually land (and what you do all day)
Common entry points
- Investment Banking (LevFin, M&A, Sponsors): strong deal reps, modeling, docs exposure
- Credit / Leveraged Finance at a bank: cleaner "lender brain," covenants, ratings style
- Big 4 / TAS / restructuring: useful for downside + liquidity thinking (less direct)
- Private credit analyst programs / graduate roles (esp. Europe): more common than people think
What the job actually is
A junior private debt professional spends most time on:
- Underwriting: business risk + financial risk + structure
- Modeling: base and downside cases, leverage/coverage, covenant headroom
- Documentation: covenants, baskets, restricted payments, EBITDA definitions (and addbacks)
- Portfolio work: monitoring, amendments/waivers, "early warning" detection
The private debt mindset (this is the core interview signal)
PE vs PD
Private equity asks: How big can this win be?
Private debt asks: How do we avoid losing money?
The 5 C's of Credit (quick mental checklist)
5 C's of Credit
| Term | Definition |
|---|---|
| Character | Management quality, sponsor behavior, governance |
| Capacity | Cash flow and ability to service debt |
| Capital | Equity cushion, leverage, skin in the game |
| Collateral | Asset coverage, security package |
| Conditions / Covenants | Terms that protect you + macro/industry |
A lender's #1 priority is usually:
The technical foundation you must own (or you'll get filtered out)
1) The 6 metrics that show up everywhere
Private Debt Core Metrics
| Term | Definition |
|---|---|
| Leverage | Total Debt / EBITDA (and Net Debt / EBITDA) |
| Interest coverage | EBITDA / Cash Interest |
| Fixed charge coverage | (EBITDA - Capex) / (Interest + amortization + leases) |
| FCF conversion | Free Cash Flow / EBITDA |
| Liquidity | Cash + revolver availability (and near-term uses) |
| Covenant headroom | Distance to breach under base + downside |
EBITDA Definitions Matter
A key point: your EBITDA definition matters a lot (addbacks, run-rate synergies, cost saves). In real deals, the debate is often "what is EBITDA actually?" not "how do I calculate a ratio."
2) Maintenance vs incurrence covenants (and why this changed)
- Maintenance covenants: tested regularly (quarterly). Classic private credit protection
- Incurrence covenants: tested only when taking an action (issue more debt, pay dividends, etc.)
Competition has pushed markets toward "covenant-lite" structures in parts of leveraged credit, and some of that pressure has shown up in private credit too.
Interview Angle
They'll test whether you understand how fewer maintenance covenants changes monitoring and downside risk.
Which statement is most accurate?
Deal anatomy: how a private credit loan is structured
You should be fluent in these terms:
Pricing and economics
- Base rate + spread (SOFR/EURIBOR plus margin)
- OID (original issue discount) and upfront fees
- Call protection (soft call, make-whole style features vary)
- PIK / PIK-toggle (sometimes used, raises refinancing risk)
Security and priority
- First lien / second lien
- Super senior RCF (often sits on top for liquidity)
- Guarantees and collateral package
Unitranche (what it is, and what it is not)
Unitranche is "one facility" to the borrower, but lenders may allocate risk via first-out / last-out mechanics and an AAL (Agreement Among Lenders).
Market Context
One practical data point that's useful in interviews: Reuters reported unitranche issuance reached $210B in middle-market issuance in 2024, highlighting how mainstream the product has become.
In a bifurcated unitranche, the borrower usually:
Want debt metrics and covenant analysis to be automatic? Practice with instant feedback in Drill mode.
The private debt interview process (what to expect in 2026)
Most funds run some version of:
- Screening (fit + basic technicals)
"Why credit?" "Walk me through a deal." "How do you get comfortable with downside?" - Technical rounds
Ratios, covenants, debt docs intuition, downside case - Case study (the gatekeeper)
Often 2 to 4 hours (sometimes take-home), then a discussion - Credit memo / IC discussion
You summarize the deal, structure, risks, mitigants, and recommendation
This is consistent with common prep guides and what candidates report: private credit interviews weight fit + technical + case study heavily.
The case study: the exact outputs interviewers want
Think of the case study as "can you do the job on day 1?"
Your deliverables (typical)
- A simple model (base + downside)
- Key credit stats and covenant headroom
- A 1 to 2 page credit memo
- A clear recommendation: do we lend, on what terms, and why
A good memo is structured and easy to skim. Many investors use standardized memo processes and templates internally.
A full credit memo structure you can copy (and use in interviews)
Credit Memo Template (Interview-Optimized)
| Term | Definition |
|---|---|
| 1) Recommendation | Approve/Decline, proposed structure, key terms |
| 2) Business overview | What they do, customers, pricing power, cyclicality |
| 3) Investment thesis | Why this is a good risk, not just a good story |
| 4) Key risks | Top 3 to 5 risks, each with mitigants |
| 5) Financial profile | Revenue/EBITDA trend, leverage, coverage, FCF |
| 6) Downside & recovery | How you lose money, asset value, sponsor support |
| 7) Covenants & docs | Maintenance tests, baskets, EBITDA definitions |
| 8) Monitoring plan | KPIs, reporting cadence, triggers |
Worked example (numbers): how to talk through a direct lending deal
Scenario (hypothetical): Sponsor-backed services company
- Revenue: €220m
- EBITDA: €40m (18% margin)
- Capex: €6m
- Cash taxes: €4m
- Working capital: neutral
- Proposed unitranche: €200m
- Cash interest (all-in): 10%
- Equity: €120m
Step 1: leverage
Total leverage = 200 / 40 = 5.0x
Step 2: interest coverage
Cash interest = 200 * 10% = €20m
Interest coverage = 40 / 20 = 2.0x
Step 3: simple free cash flow (FCF) to debt service
- EBITDA 40
- less capex 6
- less cash taxes 4
- approx FCF pre-interest = 30
- less interest 20
- FCF after interest = 10
Interpretation (how you should speak)
- 5.0x at 2.0x coverage is "fine" in a stable sector, but you must underwrite downside
- If EBITDA drops 20% to 32, coverage falls to 1.6x, and the story changes quickly
- You want covenants and/or structural protections to catch deterioration early
A loan has a max Total Leverage covenant of 6.0x. At close, EBITDA is 40 and Debt is 200. If EBITDA falls 20% and debt stays flat, what happens?
What separates great candidates: downside and recovery thinking
Private credit interviewers want to hear:
1) Your downside thesis (not generic risk lists)
Bad answer
"Risk is macro."
Good answer
"In a mild recession, volume drops 10%, EBITDA margin compresses 200 bps due to operating leverage, resulting in 25% EBITDA decline."
2) Your "how do we lose money" pathway
You typically lose money via:
- EBITDA collapse and liquidity crunch
- Covenant breach followed by amendment fatigue
- Refinancing wall, especially if PIK builds or maturities stack
- Value breaks below debt in a restructuring
3) Your recovery logic
Even without deep restructuring knowledge, you should be able to say:
- What is the likely enterprise value in stress?
- What is the debt stack above/below us?
- What collateral do we actually have?
Regulators and researchers have highlighted that private credit can face unexpected losses in downturns and that data opacity makes risk harder to assess, so a disciplined recovery mindset matters.
Documentation topics that come up (and how to sound credible fast)
You do not need to be a lawyer. You do need to know the "big levers":
- EBITDA definitions and addbacks (aggressive addbacks reduce covenant protection)
- Restricted payments and leakage
- Debt incurrence baskets (how much additional debt can they take)
- Asset sales / investments / acquisitions baskets
- Reporting + information rights
- Amend-and-extend dynamics
If you can explain why documentation matters for outcomes, you'll stand out.
Going from maintenance covenants to a covenant-lite structure generally:
Your 30-day plan to break into private debt (2026 recruiting)
Days 1-7: Build lender fundamentals
Master ratios (leverage, coverage, FCF conversion), debt schedule basics, covenants (maintenance vs incurrence), and what drives defaults and recovery.
Days 8-14: Do 2 full case studies
Model base + downside cases, write a 1-2 page credit memo for each, and present your recommendation out loud.
Days 15-21: Build a deal talk track
Pick one sponsor-backed deal: understand the business, identify key risks, explain the structure, and articulate why it works (or doesn't).
Days 22-30: Drill interview questions daily
Mix quick technicals (ratios, covenant mechanics) with deep questions (downside thinking, recovery analysis). Track weak areas and redo until automatic.
25 private debt interview questions (with what they're testing)
A. Fit and motivation
- Why private debt and not private equity?
- Why direct lending vs special situations?
- What type of risk do you enjoy analyzing?
B. Credit fundamentals
- Walk me through the 5 C's of credit.
- What makes a business "lender-friendly"?
- What's the difference between business risk and financial risk?
C. Metrics and modeling
- What's the difference between leverage and coverage?
- How do you build a downside case quickly?
- What are red flags in working capital?
D. Structure and docs
- First lien vs second lien: what changes?
- What is unitranche, practically?
- Maintenance vs incurrence: why does it matter?
- What are EBITDA addbacks and why do lenders care?
E. Judgment and decision-making
- Would you lend more leverage at higher spread, or less leverage at tighter docs? Why?
- What covenants would you require for a cyclical borrower?
- What would make you decline a deal even if ratios look fine?
F. Portfolio and workout intuition
- If a covenant is breached, what happens next?
- When do amendments help, and when do they just delay the inevitable?
- What are early warning signals you'd monitor monthly?
G. Case study prompts
- Summarize this deal in 90 seconds.
- Give me your top 3 risks and mitigants.
- What covenant package do you propose and why?
- What downside breaks the deal?
- What would you ask for in diligence?
- Approve or decline?
Common mistakes (and how to avoid them)
Avoid These
- Mistake 1: Treating private debt like "PE but safer."
Fix: speak in downside language: default probability, covenant headroom, recovery - Mistake 2: Memorizing definitions without making decisions.
Fix: always end with a view: "Given X, I'd structure Y and require covenant Z" - Mistake 3: Ignoring documentation.
Fix: learn 8 to 10 core doc concepts and tie each to a downside outcome - Mistake 4: No clear credit memo structure.
Fix: use the template above and practice presenting it in 3 minutes
Key takeaways (if you remember only 10 lines)
Key Takeaway
- Private debt interviews are downside-first: structure + covenants + recovery
- Master leverage, coverage, FCF conversion, and covenant headroom
- Be fluent in unitranche and how first-out/last-out works
- Case study success = clear model + crisp memo + decisive recommendation
- Sound senior by pairing every risk with a mitigant you can negotiate
Related Resources
Continue your private debt interview prep with these guides:
- How the 3 Financial Statements Link Together — Build the accounting foundation for credit analysis
- LBO Interview Questions: Ultimate Guide — Understand sponsor context and leverage dynamics
- Walk Me Through a DCF — Valuation skills for recovery analysis and sanity checks
- Breaking into Investment Banking (2026) — Understand the IB pathway into private credit