A Crescendo in Private Credit?

Returns that seem too good to be true

October 2023. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • The AUM in private credit funds is expected to double to $2.7 trillion
  • However, the performance of the industry’s benchmark index can be challenged
  • The returns of private credit funds seem smoothened compared to public funds


Some asset classes are currently more sexy than others. Most real estate assets have not recovered from the COVID-19 crisis and are now being hit by rising interest rates. Same for venture capital, where valuations crashed in 2022. Private equity is still popular with investors, primarily as these funds have not started marking down the value of their investments aggressively, hoping for these to recover and everything to smoothen out (read Private Equity: Fooling Some People All the Time?).

However, the current star amongst asset classes is private credit, where the assets under management are expected to rise from $1.2 trillion in 2021 to a whopping $2.7 trillion in 2026, according to the 2022 Preqin Global Private Debt Report, which would make it the second largest private asset class after private equity.

What are private debt funds? These funds primarily lend money to mid-sized companies with risky profiles that are typically private equity-backed businesses. These loans feature higher interest rates than bank loans or bonds and usually mature in three to five years. Default rates have been low and it is all about creating diversified portfolios of loans to minimize idiosyncratic risks. 

In this research note, we will review the performance of private credit funds.


We will be using the Cliffwater Direct Lending Index (CDLI), which is the primary benchmark for evaluating the performance of private debt funds. CDLI is an asset-weighted index comprised of more than 13,000 loans valued at close to $300 billion.

The index was launched in 2004 and its performance can be differentiated between returns from income versus capital. It seems that some loans have defaulted as less capital was returned than loaned out, resulting in a loss of 1.3% per annum on the return of capital. However, the income generated was 10.8% pe