The 5% default rate in private credit, compared to 3% in syndicated loans, is a function of its target market: smaller companies. Just as the Russell 2000 is more volatile than the Dow Jones, smaller businesses are inherently riskier. Applying leverage to a more volatile asset pool naturally results in more defaults.

Contrary to marketing narratives, Acadian Asset Management's analysis finds no evidence that private credit generates higher risk-adjusted returns than public credit. Analysis of private issuers within public indices shows they are simply riskier firms with higher yields to compensate, not a source of alpha.

Post-crisis stigma has faded, making Collateralized Loan Obligation (CLO) tranches a top relative value pick in credit markets. The structure allows investors to precisely select risk exposure, from safe AAA tranches with attractive spreads to high-return equity positions, outperforming other credit assets.

While the US private credit market is saturated, Europe's middle-market offers higher spreads (north of 600 basis points) and lower leverage. This opportunity is most pronounced in non-sponsor deals, a segment where large banks and public markets are less active, creating a lucrative niche.

A major segment of private credit isn't for LBOs, but large-scale financing for investment-grade companies against hard assets like data centers, pipelines, and aircraft. These customized, multi-billion dollar deals are often too complex or bespoke for public bond markets, creating a niche for direct lenders.

The private Investment Grade (IG) market is widely misunderstood. It primarily consists of asset-backed or project finance deals for specific CapEx projects, often structured in separate SPVs. This makes it more akin to secured financing than a direct private alternative to public corporate bonds.

Public markets favor asset-light models, creating a void for capital-intensive businesses. Private credit fills this gap with an "asset capture" model where they either receive high returns or seize valuable underlying assets upon default, securing a win either way.

The high demand for safe, private investment-grade assets from insurers creates a "muffin top." The leftover, riskier junior tranche—the "stump"—is often sold into special situations and interval funds, concentrating risk in places investors might not expect.

While leverage multiples are similar across the market, Neuberger targets companies acquired at high purchase price multiples (avg. 17x). This strategy results in a significantly lower loan-to-value ratio, providing a larger equity cushion and reducing the lender's ultimate risk.