Essentials of Private Credit
Private credit funds issue corporate loans and other credit instruments that do not involve a traditional bank and are not publicly traded.
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introduction to Private Credit
Growing Demand
As a growing and increasingly diverse set of borrowers seek flexible, tailored financing solutions beyond traditional bank lending, private credit has expanded across direct lending, asset-based finance, real estate debt, and other specialty strategies to meet a widening range of capital needs.
Defensive Income
Private credit investments are directly negotiated, allowing lenders to structure bespoke terms, access greater borrower information, and maintain ongoing engagement through the life of the investment. These features help support principal preservation, alongside historically attractive income premiums in private credit. [ 1 ]
Core Allocation
When added to a traditional balanced portfolio of stocks and bonds, private credit can offer meaningful diversification and improve risk-return potential. [ 2 ]
Private Corporate Credit
Privately originated and negotiated debt financing across the capital structure (includes direct lending).
Asset Based & Real Estate Credit
Loans and other credit instruments generally secured by physical and financial assets as collateral.
Structured Credit
Diversified pool of income-producing assets structured to provide excess and customized risk and return.
What is Direct Lending?
Direct lending can provide companies with a simpler, more efficient way to access capital. Direct lending managers raise funds directly from investors and lend to borrowers in transactions that often involve a private equity firm. This “farm-to-table” model of bringing the borrower up directly to the lender — with no bank in the middle — can deliver greater efficiency, confidentiality, certainty in execution, and flexibility in terms of structure. For the investor, it can offer high income potential, better
protection, and the opportunity to potentially capture enhanced returns when compared to public fixed income.
Direct Lending Overview
Direct lending offers the opportunity for high income potential, driven by three key components.
Base Rate: The benchmark interest rate tied to a reference rate, such as the Secured Overnight Financing Rate (SOFR).
Spread: Additional interest charged above the base rate, determined by factors like the borrower’s credit worthiness, market conditions, and the specific loan terms.
Deal Fees: Fees associated with structuring and executing the loan, which contribute to income.
Direct lending has historically generated a ~200bps premium over leveraged loans. [ 3 ] The “farm‑to‑table” model brings investors right
up to borrowers, eliminating potential return leakage from intermediaries taking fees and delivering a customized solution — factors
that justify the premium. The impact is tangible over time: an investor who allocated $10,000 to direct lending ten years ago would have earned ~1.4x as much income as the same $10,000 invested in leveraged loans. That consistent ~200bps of excess spread compounds year after year, resulting in a meaningful long-term performance advantage.
Direct Lending Has Delivered ~1.4x the Income Return vs. Leveraged Loans Over the Past Decade
Income Value Growth of $10,000 [ 4 ]
Downside Mitigation
As is true of other segments of the sub-investment grade credit market, direct lending carries default risk — how lenders manage it
is key to delivering strong risk-adjusted returns. Since direct lending managers own loans and the corresponding default risk directly (versus risk being traded in public markets), direct lending managers typically adopt a highly defensive investment approach. Much like a mortgage with repayment priority, direct lending managers are paid before junior debt and equity holders.
Similarities Between Home Mortgages and Senior Secured Loans Income
Direct lending managers typically focus on being senior secured lenders to scaled businesses that are in sectors with strong secular tailwinds, while structuring deals to maximize investor protection.
In direct lending, average loan to values are much lower than prior periods, providing a larger equity buffer that would need to be wiped out before our debt is impacted. By originating senior secured loans that are first in line for repayment to high‑quality businesses backed by strong institutional sponsors, managers can help mitigate risk — particularly when those loans are held in low‑leverage vehicles with matched assets and liabilities.
Why Investors Allocate
Direct lending has delivered strong performance on both an absolute and relative basis consistently outperforming leveraged loans, high yield bonds, and investment grade bonds across different market environments.
Structurally, direct lending is typically composed of floating rate loans, which help mitigate interest rate risk. Direct lending maintains defensive features such as seniority in the capital structure, ensuring repayment priority over junior debt and equity holders, and enhancing principal preservation. [ 6 ]
Direct Lending’s Strong Historical Performance
Annual Returns of Fixed Income Key Indices Ranked in Order of Performance (2016-2025)
Source: Morningstar, Cliffwater. As of December 31, 2025. Represents the annual returns for the respective calendar year, ranked in order of performance. The asset classes presented are based on the following indices: Cliffwater Direct Lending Index for Direct Lending, Bloomberg US Corporate High Yield for US High Yield, Bloomberg US Aggregate Bond Index for US Investment Grade Bonds, Morningstar LSTA US Leveraged Loan Index for US Leveraged Loans, Bloomberg U.S. Intermediate Treasury Index for Treasuries, Bloomberg U.S. Treasury Bill 1-3 Month Index for 1-3 Month T-Bill. Past performance does not predict future returns.
There can be no assurance than any alternative asset classes will achieve their objectives or avoid significant losses. Past events and trends do not imply, predict or guarantee, and are not necessarily indicative of, future events or results. The volatility and risk profile of the indices is likely materially different from that of a fund. The indices employ different investment guidelines / criteria than a fund and do not employ leverage; a fund’s holdings and the liquidity of such holdings may differ significantly from securities comprising the indices. The indices aren’t subject to fees / expenses, and it may not be possible to invest in the indices. The indices’ performance has not been selected to represent an appropriate benchmark to compare to a fund’s performance, but rather is disclosed to allow for comparison to that of well-known and widely recognized indices. A summary of the investment guidelines for the indices are available upon request. The indices are not necessarily the top performing indices in the given asset class and recipients should consider this when comparing the performance of any fund or investment to that of the indices. Total return is calculated over the period January 1, 2016 to December 31, 2025.
Direct lending’s long-term track record underscores its stability during periods of market uncertainty. Over the past 20 years, the S&P 500 has posted negative returns in three years — 2008, 2018, and 2022 — and in each of those periods, direct lending
outperformed both equities and leveraged loans.
Notably, direct lending generated positive returns in two of those years, while equities or leveraged loans were either flat or experienced meaningful drawdowns. In our view, this reflects the strength of a strategy centered on senior secured, floating‑rate loans — offering downside mitigation while continuing to deliver attractive yield. [ 7 ]
Historically, direct lending has helped to enhance returns, reduce volatility, and improve the income potential of traditional investment portfolios. For investors seeking defensive positioning with return potential in the face of interest rate volatility, inflation, and uncertainty in public markets, these characteristics may be attractive.
Reshaping the Risks and Returns of Traditional Portfolios with Direct Lending (10 Years) [ 8 ]
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Source: Bloomberg, Morningstar, Cliffwater, as of December 31, 2025. As commonly used in the industry, the 60/40 portfolio is 60% allocated to the S&P 500 index and 40% is allocated to the Bloomberg US Aggregate Bond index. Direct Lending is represented by the Cliffwater Direct Lending Index. These indices have been selected as generally well -known and widely recognized indices and not as a benchmark for any specific fund. Past events and trends to not imply, predict or guarantee, and are not necessarily indicative of future events or results. There are substantial risks and limitations to relying on hypothetical returns because market conditions, including macroeconomic factors, and counterparty performance beyond Blackstone’s control may change and adversely impact the value of portfolio assets, thereby negatively impacting returns to investors. Past performance does not predict future returns. The information provided herein is presented for educational purposes only, is solely an indication of the historical experience of certain asset classes based on publicly available indices and benchmarks during a fixed period, and does not reflect the experience or return to any Blackstone client, fund, or portfolio, the return of any investment by a Blackstone fund or other client, or the return to any investor in any Blackstone fund.
There can be no assurance that any Blackstone fund, other investment, or any asset allocation will achieve its objectives or avoid substantial losses, or that alternative investments will generate higher returns than other investments. The information presented should not be construed as financial or investment advice, or relied on when making an investment decision. Investors should consult their financial advisor to determine what private markets allocation, if any, is most appropriate for them in light of their financial profile. Actual returns achieved by a fund or product investing in any asset class presented herein may be materially lower. The indices and benchmarks reflected herein are not representative of all investments in the applicable asset classes, the performance of such indices and benchmarks in periods other than that the period from January 2016 to December 2025 shown herein may differ materially, and it should not be assumed that any trends shown will continue. October 2015 is the inception date of the Cliffwater Direct Lending Index. Annualized returns and volatility are calculated based on the quarterly returns over the period from January 2016 to December 2025. The annualized returns shown do not necessarily consider fees and expenses, which are typically borne by the investor and may materially reduce returns. The yield on the portfolio with a private market alternative allocation was calculated using the annualized S&P 500 Dividend Yield, the annualized Bloomberg US Aggregate Bond Yield, and the annualized Cliffwater Direct Lending Index quarterly income.
Full Year Total Return [ 9 ]
Private Credit Case Study
Park Place Technologies: Why Borrowers Go Private
In 2024, BXCI led a $2 billion financing for Park Place, a leading third-party maintenance services provider for data centers, followed by another large senior secured financing which BXCI co-led to support the company’s acquisition in 2025.
Blackstone leveraged its industry expertise and strong relationship with the private equity sponsor to deliver a tailored capital solution.
The ability of Blackstone to commit quickly at scale highlights some of the main features driving borrowers to seek private financing: speed, simplicity, and flexibility. As an existing portfolio company, Park Place is an active participant in
Blackstone’s Value Creation Program, where Blackstone takes on the role of more than just a provider of capital. Through this program, Park Place has benefited from numerous introductions that created value from synergies. We believe all these components coming together illustrate why large, high-quality companies are increasingly seeking private capital for their financing needs.
Considerations Before Allocating
Manager selection can be important when allocating to private credit. Investors should be aware of considerations such as credit selection and the acumen of the managers conducting borrower due diligence.
Liquidity and time horizons can also be key considerations. The compounding power of private credit returns typically requires a medium- to long-term investment horizon. [ 10 ] Investors should carefully consider their liquidity needs within the context of their overall portfolio to determine whether and how much to commit to private credit.
Read the complete Essentials of Private Credit: Direct Lending
Read the complete Essentials of Private Credit: Direct Lending
