Direct lending, mezzanine, opportunistic. The fastest-growing alt category in the wealth channel.
Direct lending funds originate first-lien senior secured loans to private companies (typically $50M–$1B EBITDA), bypassing the syndicated loan market. Sponsor-driven (PE-backed deals) and non-sponsor flows.
GP credit team underwrites each loan — covenants, collateral, LTV, debt service coverage. Conservative lenders run 40–50% LTV with 2–3x interest coverage.
Loans pay floating-rate interest (typically SOFR + 500–700 bps). Income flows quarterly to the fund and to investors as distributions.
When loans go bad (rare in current cycle, <1% non-accrual), the fund works the credit through restructuring or recovery. Senior secured position protects principal.
First-lien senior secured loans to PE-sponsored middle-market companies. The workhorse strategy. Stable, floating-rate, conservative.
Subordinated, mezzanine, structured positions. Higher yield, higher risk. Counter-cyclical positioning.
Receivables, inventory, equipment finance. Different risk profile from sponsor-driven direct lending.
Stressed and defaulted credit. Counter-cyclical. Best vintages are right after recessions.
High floating-rate yields (~9% distribution) + low correlation to public bonds + simple income story. Plus the BDC structure issues 1099s, not K-1s — easier tax workflow.
Private credit is senior secured (HY is often unsecured). PC has stronger covenants. Yields are similar but with materially better recovery in default. Trade-off: less liquidity.
Floating-rate yields compress. If SOFR drops from 5% to 3%, expect PC yields to fall from ~9% to ~7%. Still well above HY bonds, but the absolute return profile shifts.
Generally yes — lower volatility, capped downside via collateral + covenants, predictable income. But it's not "fixed income" in the traditional sense — credit cycle losses can be meaningful.