Executive Summary
Recent financial press coverage from Bloomberg, Barron’s and the Wall Street Journal has suggested that private credit may be overstating returns, masking valuation risk, or facing emerging systemic stress. We review these claims using data from Cliffwater, the leading independent index provider for U.S. direct lending.
The evidence does not support the alarmist narrative.
When measured using standard time-weighted returns, private credit has outperformed public credit by approximately 3–4% annually after fees over the past decade. Default losses have averaged roughly 1% per year and are reflected in periodic valuations. Recession modeling suggests that while short-term drawdowns are possible—particularly in levered vehicles—multi-year outcomes remain positive in baseline scenarios and have historically recovered even after severe stress events such as the Global Financial Crisis.
Private credit is not immune to economic cycles, but broad market data do not indicate systemic deterioration. The asset class continues to demonstrate a persistent illiquidity premium, structured downside characteristics, and income-driven return resilience.
Cliffwater maintains the Cliffwater Direct Lending Index (CDLI), constructed from SEC-filed data of Business Development Companies (BDCs), providing one of the most transparent, rules-based datasets available for U.S. middle-market direct lending.
1. Private vs. Public Credit: Measured Correctly
A recent academic paper cited in the press suggested private credit has not meaningfully outperformed public credit and may understate risk. Cliffwater’s October 2025 critique demonstrated that the study relied on an inappropriate metric (TVPI), which does not account for time and is not a proper credit performance measure.¹
Using standard time-weighted returns (the same methodology required for ETFs), Cliffwater calculated:
- Private Credit (Net of Fees): 7.23% annualized
- Public Loan Benchmark (BKLN equivalent): 3.31% annualized
- Incremental Return: ~3–4% per year after fees
After adjusting for leverage differences, private credit still outperformed public credit by approximately 2.83% annually.¹
The empirical evidence shows a persistent illiquidity premium — not parity.
2. Are Valuations Inflated? The “Mark-to-Myth” Claim
The same study suggested that high residual values near fund maturity may indicate overstated marks.
Cliffwater’s research notes:
- Residual value in credit funds largely represents loan principal expected to be repaid.
- Long-term data show average annual default losses of approximately ~1%, which are incorporated into periodic valuations.¹
- Private credit managers use independent valuation agents consistent with FASB fair value guidance.
If systemic overvaluation were present, we would expect to observe persistent unrealized markdowns followed by elevated realized losses across the market. That pattern has not emerged in the CDLI dataset.
3. Recession Sensitivity: Modeled Outcomes
Concerns about downturn exposure are legitimate. Cliffwater modeled a baseline recession scenario (2% GDP contraction for one year).²
Projected unlevered direct lending (CDLI):
- Year 1: –0.5%
- Year 2: +13.5%
- Year 3: +11.0%
- Three-Year Annualized: ~7.8%
Levered vehicles (BDCs/drawdown funds) would experience deeper initial drawdowns (~–9%), but multi-year returns remain positive under the modeled scenario.²
Importantly, even during the Global Financial Crisis — a far more severe contraction — unlevered direct lending experienced a maximum annual decline of approximately –8%, followed by recovery driven by income and valuation reversals.²
Private credit is cyclical. It is not historically structurally impaired by recessions.
4. The Structural Return Premium
From June 2013 through June 2024, Cliffwater’s unlevered, net-of-fee private credit index delivered:³
- 7.23% annualized
- Versus 3–4% for public loan benchmarks
- With lower observed volatility
This ~3–4% incremental return has historically compensated investors for reduced liquidity and structural complexity.
The illiquidity premium has been observable and persistent.
5. Liquidity Events vs. Credit Impairment
Recent press coverage has highlighted redemption activity and secondary transactions at certain private credit platforms.
It is essential to distinguish between:
- Liquidity management mechanics, and
- Credit deterioration
Where secondary sales occur near par and redemption terms function as designed, these reflect structural liquidity provisions — not necessarily widespread borrower distress.
Liquidity risk must be managed and sized appropriately. It should not be conflated with default risk.
6. A Real-Time Stress Test: The Blue Owl Secondary
Recent press coverage characterized Blue Owl’s OBDC II restructuring as a “warning sign.” However, Cliffwater’s February 2026 research concludes that the issue was structural, not credit-related.
An orderly $600 million secondary sale occurred at pricing close to par, returning approximately 30% of investor capital more quickly than required under redemption provisions.
Importantly:
- Redemption requests across major semi-liquid funds rose to ~5% (vs. 2–3% typical levels)
- All requests were honored
Additionally, OBDC II’s underlying loan portfolio returned 9.11% annualized since inception, nearly identical to the 9.19% return of the Cliffwater Direct Lending Index over the same period.
Rather than signaling systemic distress, the episode appears to demonstrate:
- Functional secondary markets
- Liquidity mechanisms operating as designed
- Institutional capital stepping in during retail-driven redemptions
Conclusion
Private credit is not risk-free. It is exposed to:
- Economic cycles
- Manager underwriting dispersion
- Leverage decisions
- Structural liquidity terms
However, the broad data compiled by Cliffwater — the leading independent index provider in the asset class — do not indicate systemic deterioration in U.S. middle-market direct lending.
Recent alarmist narratives appear to rely on:
- Misapplied performance metrics
- Anecdotal extrapolation
- Structural misunderstandings
- Event-driven framing
The long-term empirical evidence continues to support:
- A measurable illiquidity premium over public credit
- Manageable historical default loss experience
- Structured downside behavior during recessionary periods
For appropriately sized allocations, with disciplined manager selection and liquidity alignment, private credit remains a differentiated source of income and risk-adjusted return.
Footnotes
- Cliffwater LLC, “A Critique of ‘Residual Risk: Benchmarking the Boom in Private Credit’”, October 21, 2025.
- Cliffwater LLC, “Tariffs, Recession, and Downside in Private Debt”, April 14, 2025.
- Cliffwater LLC, “Go Private, Not Public Credit”, August 19, 2024.
APS Management Group, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
APS Management Group, Inc. does not provide tax or legal advice; consult your tax or legal professional regarding your particular situation.
Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information contained in this commentary has been obtained from sources that are reliable. This publication is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
Important Disclosure
This research note is for informational purposes only and does not constitute investment advice or an offer to buy or sell securities. Past performance is not indicative of future results. All investments involve risk, including loss of principal.