Investors might be well placed to ignore the headlines with private credit 

Private direct lending set itself a measurable test. Beat the liquid leveraged loan and high yield markets. Do it with fewer defaults over time. Recover more when defaults come.

Katie Fowler, principal at Blue Owl Capital, argues the asset class has passed that test. She also argues that most of the criticism arriving in the press is aimed at numbers that were never the point.

The record she cites starts with return. Across the five calendar years to the end of 2025, the annual total return was a little above 10.3 per cent. Over longer periods, she puts the premium over the same liquid credit markets at 300 to 400 basis points.

On defaults, the baseline expectation in private direct lending is 3 to 4 per cent in any given year. The past several quarters have run below 2 per cent. Among larger borrowers, they have run at 1 per cent or less.

Her test for whether that holds is both simple and clear. “Can they grow earnings? Can they outpace the interest they owe their lenders?”

On her reading of the larger end of the market, the answer is yes. She points to solid EBITDA growth, interest coverage ratios improving as a result, front-end rates modestly below 2022 and 2023 levels, and PIK income holding stable rather than climbing.

This matters because paying interest in more debt rather than cash is usually the first sign a borrower is under strain. Loan to enterprise value also sits at 40 per cent on average or less. A great deal of equity therefore has to erode before a senior lender’s principal comes under real threat.

Volatility and returns

Pull the asset class’s historical total return apart and the overwhelming majority of it is the income stream rather than price appreciation.

Over the past decade, the typical price return at the market level has been modestly negative each year. Fowler suspects that would surprise most people looking at the headline figures.

This year’s income has annualised at about 9 per cent. That sits a little below the long-run average, but still well ahead of what the liquid loan and high yield markets pay.

The marks themselves create confusion. The net effect of the concerns raised creates a fascinating contradiction. Critics of net asset value volatility, she says, want stability in pricing. At the same time, they question the validity of that same pricing. “You cannot have it both ways,” observes Fowler.

Modest moves happen, driven by the market environment and the occasional default. On her reading, that is evidence managers are scrutinising the marks rather than smoothing them.

Liquidity is also a core component of the direct lending journey. Behind the headlines about quarterly redemption caps and prorated tenders sits a mechanism she says is routinely missed. Some 6 to 8 per cent of the underlying loans in this market repay every quarter. That alone more than covers a 5 per cent tender. Credit lines, modest fund-level gearing, cash and liquid holdings sit behind that.

In Blue Owl’s flagship direct lending portfolio, those layers total US$12.5 billion. She frames that as three to four years of liquidity at a 5 per cent redemption rate.

Software in focus

Software is the concentration everyone wants to talk about, at roughly 20 per cent of the US corporate direct lending market. “Early in the year the concept of a SaaS apocalypse, and the threat of traditional software firms being disrupted by AI, was an overblown panic in our view,” Fowler says.

Her argument rests on timing as much as on business quality. AI is unlikely to displace large, mission-critical software companies inside the three to four year life of a typical loan in this market.

There is of course a counter argument to that logic. Lenders routinely refinance direct lending loans with the same borrower. A three-year maturity therefore describes the paper rather than the exposure. The disruption question does not reset each time the loan is rolled.

The default comparison deserves similar care. A market that has grown as quickly as this one has a young loan book. Corporate loans tend to fail in their third to fifth year. That flatters any ratio measured against today’s much larger denominator.

Amendments have the same effect. A loan that managers restructure before it trips is a loan that never enters the count. The repayment arithmetic behind the liquidity case also depends on repayments continuing. Refinancing and acquisition activity are precisely what slow in the markets where redemption requests rise.

None of which makes the numbers wrong. It makes them conditional. The conditions are the useful part for anyone allocating. Loan to value, borrower scale, and whether the liquidity layers hold when quarterly repayments halve are the questions that separate one manager in this market from the next.

For all the interest in the sector, the advisers that read the conditions and not the headlines are the ones best placed to serve their clients’ needs.