You Think 5% Is Good? Try 20-40% - The Real High End of Private Credit Returns

Steadfast Equity
Jun 20
13 min read

Updated: Jun 21

Private credit investments can deliver returns of 20–40%, far exceeding the typical 5% from traditional bonds. Why? Borrowers often pay a premium for the speed, flexibility, and tailored terms private credit offers, creating opportunities for higher yields. Here's how:

Direct Lending: Loans to mid-market companies (revenues $10M–$1B) often yield 2–4% more than leveraged loans, with protections like first-lien debt and covenants.
Distressed Credit: Investing in companies facing financial trouble can yield high returns but requires expertise and timing.
Asset-Based Lending (ABL): Loans backed by assets like real estate or equipment offer steady returns and lower default risks.

Quick Comparison

Private Credit Type	Target Returns	Risk Level	Liquidity	Key Feature
Direct Lending	10–15%	Moderate	Limited	Floating-rate, secured loans
Distressed Credit	20–40%	High	Very Limited	Turnaround potential, cyclical
Asset-Based Lending (ABL)	15–20%	Low to Moderate	Limited	Backed by tangible assets

Private credit also offers diversification, resilience in market downturns, and less correlation with public markets, making it a strong choice for high-yield-seeking investors. However, risks like illiquidity and default require careful management, including selecting experienced fund managers and conducting thorough due diligence.

Private Credit: The #1 Investment of the Ultra-Wealthy

High-Return Private Credit Strategies

If you're looking to achieve 20–40% yields, three specific private credit strategies stand out. These approaches aren't about chance - they're about targeting areas where borrowers have limited financing options and are willing to pay a premium for access to capital.

Direct Lending to Mid-Market Companies

Mid-market companies, with annual revenues ranging from $10 million to $1 billion, often find themselves in a financing gap. They're too large for traditional bank loans but too small to access public bond markets. This creates a prime opportunity for private lenders to step in and secure premium rates. Over the past decade, direct lending has consistently delivered returns 2–4% higher than syndicated leveraged loans.

One of the key advantages of direct lending is its use of floating rate loans, which shield investors from rising interest rates while maintaining strong yields. These loans are typically structured as first-lien senior-secured loans, offering a layer of protection for investors. Financial maintenance covenants act as early warning systems, enabling lenders to intervene proactively if a borrower faces challenges. Historically, first-lien debt has achieved recovery values of 70%, compared to just 47% for unsecured bonds. Additionally, private lenders are increasingly collaborating through "club deals", sharing credit risk while maintaining favorable terms.

Distressed Credit Opportunities

Distressed debt investing focuses on securities from companies in default or facing severe operational issues. This strategy offers a chance for skilled investors to achieve high returns by identifying assets with recovery potential. However, it demands expertise and careful management. Success often hinges on attaining major creditor status during restructurings, which allows investors to influence the company's capital structure and recovery plans.

The numbers highlight the potential: U.S. distressed commercial real estate hit $85.8 billion by the end of 2023, and median growth equity valuations dropped 63% from their 2021 peak. These dislocations create opportunities for investors who can identify fixable problems and clear paths to value creation. But timing and execution are critical - distressed opportunities are cyclical and often short-lived. Comprehensive due diligence and clearly defined exit strategies are essential to success.

Asset-Based and Specialty Finance

Asset-based lending (ABL) and specialty finance focus on loans backed by tangible or financial assets, providing robust returns through specialized underwriting. As banks pull back from certain transactions, private credit managers have stepped in, driving growth in this space.

Hybrid ABL-private credit facilities are particularly noteworthy, offering strong performance metrics:

15% annual growth between 2020 and 2023
24% higher average advance rates while maintaining traditional ABL risk parameters
31% faster revenue growth for private equity-backed companies using hybrid facilities
15–20% greater operational flexibility

"Hybrid ABL-private credit facilities achieve 24% higher average advance rates while maintaining traditional ABL risk parameters, fundamentally expanding liquidity options for middle market borrowers." – Secured Research

The diversity of asset types in ABL is another advantage. This strategy spans residential loans, commercial real estate, healthcare financing, aircraft leases, heavy equipment, and consumer loans. This variety allows managers to shift allocations tactically across asset classes, creating programs that are resilient to market cycles.

The momentum behind ABL continues to grow. A recent Preqin survey found that 58% of private credit managers plan to prioritize ABL strategies by 2025. Additionally, five of the top 30 private debt managers in the U.S. launched their first ABL-focused funds in 2024. Specialty finance allocations also rose, increasing from 10% of mandates in 2023 to 18% in 2024, with specialty finance and opportunistic credit now accounting for over one-third of all new funds in development. ABL loans often carry structural advantages, such as self-amortizing features and lower default risk compared to traditional direct lending. They also offer attractive returns with minimal correlation to broader market trends.

How to Find and Evaluate Private Credit Deals

Efficient deal sourcing and thorough evaluation are the backbone of achieving strong returns in private credit investments. These strategies help investors tap into the higher yields that set private credit apart from traditional fixed-income options. With the private credit market now exceeding $1.5 trillion globally, many of the best opportunities lie in overlooked or underserved areas.

Choosing Experienced Fund Managers

Selecting the right fund managers is a critical step in high-yield investing. Take BlackRock’s US Direct Lending team as an example - they reviewed 440 potential portfolio companies in the past year but chose to invest in only 18. That’s a tiny 4% selection rate, highlighting the discipline and precision required in this space.

When evaluating fund managers, focus on their performance across different market conditions. Teams that have successfully navigated both economic booms and credit stress periods are often better equipped to deliver consistent returns. Strong underwriting practices should include detailed financial analysis, risk identification, compliance checks, and collateral evaluation.

The best managers often blend sponsor-backed and non-sponsor-backed deal flows to create a robust and diverse pipeline. During due diligence, assess their investment process, interest alignment, and their ability to monitor portfolios effectively over time.

Once you’ve identified capable managers, the next step is to explore where inefficiencies in the market create the most lucrative opportunities.

Targeting Market Gaps

Beyond picking the right managers, spotting gaps in the market is essential for securing higher returns. Non-sponsor-backed loans, for instance, often feature higher pricing, lower leverage, and more lender-friendly terms, making them particularly attractive.

Mid- and lower-middle-market segments also tend to offer better pricing. Additionally, emerging managers who focus on niche sectors or less competitive markets can sometimes outperform larger, more established players by targeting overlooked opportunities.

Geographic diversification can enhance returns as well. Regional markets with fewer lenders may offer better terms, especially in areas experiencing temporary economic challenges while maintaining strong long-term fundamentals.

Flexible Allocation Strategies

After identifying promising market segments, strategic allocation and timing can further boost returns. For instance, by Q3 2023, global private debt funds reached a record high of 1,080 - a 19% jump from 2022. This rapid growth presents both opportunities and challenges for investors aiming to time their allocations effectively.

Adjusting allocations based on economic conditions can also improve outcomes. During uncertain times, distressed debt opportunities may become more plentiful, while stable periods might favor direct lending to growing companies, offering steady returns with lower risk.

When building a portfolio, it’s important to diversify across sectors, regions, and credit structures to reduce concentration risk. However, over-diversification can dilute the impact of your strongest investment ideas, so finding the right balance is key. The goal is to minimize risk while maximizing returns.

Environmental, social, and governance (ESG) factors are becoming increasingly important in private credit. Incorporating ESG criteria into investment strategies not only supports long-term sustainability but can also attract deals from borrowers who prioritize responsible financing.

Due Diligence Focus Area	Key Evaluation Criteria	Risk Mitigation
Financial Health	Cash flow stability, leverage ratios, profit margins	Declining margins could signal operational problems
Management Quality	Track record, industry expertise, alignment of interests	Weak management raises default risks
Market Position	Competitive advantages, market share, growth potential	Poor positioning limits recovery options

Using automated tools to monitor key performance indicators can help protect capital by identifying issues early. This proactive approach ensures timely interventions, preserving value and enhancing recovery potential when challenges arise.

Managing Risks in High-Yield Private Credit

High-yield private credit offers the potential for impressive returns, with some investments yielding 20–40%. But with these opportunities comes a level of risk that requires thoughtful and precise management. The private credit market, now valued at $1.5 trillion and expected to grow to $2.8 trillion by 2028, presents challenges that set it apart from public markets. For instance, only 20% of issuers in this space are rated, making transparency a significant hurdle for investors. As S&P Global Market Intelligence analysts explain:

"As the private credit market expands, the complexity and potential volatility of the sector present significant challenges for investors. While conditions in the global credit markets have been relatively supportive – with declining interest rates and soft landings in many developed economies – the lack of transparency, market data and regulatory oversight inherent in private credit introduces unique risks that demand careful management."

Credit Risk and Default Protection

Credit risk stands out as the most pressing concern in private credit investments. Most issuers in this market are rated "b+" or "b", corresponding to a one-year default risk of 255 to 650 basis points. Recovery rates after default are another challenge, with private credit loans averaging just 33% compared to 52% for syndicated loans.

To mitigate these risks, strong collateral and well-structured covenants are essential. First-lien loans, which hold priority in repayment, tend to achieve better recovery rates than unsecured loans. Meanwhile, covenants act as safeguards, requiring borrowers to meet specific financial and operational benchmarks throughout the loan term. However, crafting effective covenants takes expertise and careful documentation to ensure they are enforceable.

Active monitoring is equally important. Keeping a close eye on covenant performance and credit scores allows managers to identify potential issues early. Proactive engagement with borrowers can help address small problems before they escalate into defaults.

Diversification is another key strategy. Spreading investments across different sectors, borrower types, and loan structures can reduce exposure to economic downturns. Sectors with steady, predictable cash flows often provide more resilience during periods of stress.

Due Diligence for Operations and Compliance

Operational diligence is critical in private credit, where standardized reporting is rare. Each investment requires a tailored evaluation process to ensure smooth operations and accurate risk management.

Operational frameworks: These should include robust systems for tracking cash flows, monitoring covenant compliance, and maintaining portfolio transparency. Poor recordkeeping can lead to operational risks that affect valuations and investor confidence.
Regulatory compliance: As oversight in the private credit market grows, staying ahead of regulatory changes is vital. For example, the International Monetary Fund, in its April 2024 Global Financial Stability Report, called for increased regulation in this space. This means compliance frameworks need to be both thorough and adaptable.
Documentation review: Special attention should be paid to loan structures, like payment-in-kind (PIK) arrangements, which are becoming more common. Understanding these structures is crucial for accurate risk evaluation.

Ethical Investment Practices

Incorporating ESG (Environmental, Social, and Governance) factors into risk management can further strengthen investment strategies. ESG considerations are increasingly influencing private credit performance and risk profiles. Companies with strong ESG practices tend to demonstrate better operational discipline, which can translate into more reliable debt repayments.

ESG integration: This should be a core part of credit analysis, not an afterthought. Evaluating a company's environmental impact, governance quality, and social responsibility can highlight potential risks and opportunities.
Transparency standards: Clear and defensible credit scores not only build investor confidence but also help meet regulatory requirements.
Conflict management: Policies and independent oversight are essential for identifying and addressing conflicts of interest, especially as banks and capital providers form partnerships.

The importance of consistent valuation practices was underscored in 2023 when lenders valued the same loans for Pluralsight at vastly different levels - one at 83 cents on the dollar and another as high as 97 cents. Such discrepancies highlight the need for standardized valuation methods.

Risk Management Component	Key Focus Areas	Implementation Strategy
Credit Assessment	Borrower quality, collateral position, covenant structure	Blend quantitative metrics with qualitative insights
Operational Review	Cash flow tracking, compliance monitoring, documentation	Develop systematic monitoring protocols
ESG Integration	Environmental impact, governance quality, social responsibility	Embed ESG factors into credit evaluation

To keep risk assessments reliable, regular model recalibration is essential. Adjusting models annually can help account for shifts in market conditions and borrower performance.

Steadfast Equity: High-Yield Investment Solutions

The private credit market is known for its potential to deliver impressive returns, often ranging from 20% to 40%. However, navigating its complexities requires a level of expertise that not every investor possesses. That’s where Steadfast Equity steps in, offering structured investment options designed to provide high, fixed returns with the stability and clarity that experienced investors value.

Private Credit Returns and Risk Comparison

Comparing private credit strategies is key to making informed investment choices. Steadfast Equity stands out by focusing on defined outcomes rather than relying on projected or estimated returns. Here’s a side-by-side comparison to illustrate how their offerings differ from more traditional private credit options:

Investment Type	Target Returns	Risk Level	Liquidity	Minimum Investment	Structure
Steadfast Equity Bonds	10.0% – 18.5% APY	Moderate	Limited (Early repayment option)	Varies by offering	Fixed-return, first-position
Distressed Credit	20% – 40%	Very High	Very Limited	$5M+	Highly variable, recovery-dependent

Steadfast Equity emphasizes their commitment to transparency and reliability with this statement:

"When we issue a bond at 12%, you earn 12% - contractually. It's fixed. It doesn't matter if markets crash or the headlines turn red - you get paid what we said you'd get paid. No hedging, no disclaimers, no guesswork".

This focus on fixed, contractual returns sets their offerings apart from traditional private credit funds, which often provide only estimated returns. By leveraging proven strategies, Steadfast Equity identifies niche market opportunities and delivers consistent results.

Steadfast Equity's Investment Approach

Steadfast Equity showcases how specialized expertise can transform market inefficiencies into dependable, high-yield investments. Their approach combines financial strength, strategic focus, and innovative solutions to deliver strong returns while managing risk. With over $800 million in assets and less than $200 million in liabilities, the firm demonstrates a solid financial foundation.

The company taps into unique private credit opportunities, such as royalty streams, secured advances, and specialty receivables, to achieve superior yields. One area of focus is artificial intelligence, a sector expected to grow at a compound annual growth rate (CAGR) of 35.9% between 2025 and 2030. However, Steadfast Equity is selective in its investments:

"We invest in AI not to replace people - but to augment productivity, drive economic growth, and future-proof our portfolio against structural shifts already underway".

Their DualYield™ Bonds are a prime example of this innovative approach. These bonds offer a total annual yield of 19.7% through a hybrid structure that combines monthly income with compounded growth. With a minimum investment of $200,000, these bonds are exclusively available to accredited investors.

Tax efficiency is another cornerstone of their strategy. By operating through offshore incorporation, Steadfast Equity legally optimizes tax savings to maximize net returns:

"We operate internationally to legally optimize tax efficiency and preserve more of each dollar we earn - maximizing net returns for investors".

Ethics also play a pivotal role in their investment philosophy. The firm enforces strict character screening and avoids deploying capital in ways that could lead to harm, criminal activity, or exploitation. This aligns with the growing emphasis on ESG (Environmental, Social, and Governance) principles, as global sustainable investments now exceed $30 trillion.

Steadfast Equity’s risk management framework is another standout feature. They ensure transparency through regulatory filings, have a spotless history of 100% on-time payments, and carefully assess the financial strength of each issuer. With over 20 years of experience, the firm has demonstrated long-term stability and credibility.

Each bond offering is carefully aligned with specific investment opportunities, ensuring that promised yields are achievable while maintaining the overall health of their portfolio. Additionally, Steadfast Equity reserves the right to repay bonds early to protect long-term stability and safeguard investor interests.

Their approach is guided by adaptability and experience:

"As a private holding company with a deep understanding of financial markets, we deploy capital based on a dynamic strategy informed by real-time market data, risk management, and years of expertise".

This strategic framework allows Steadfast Equity to offer exclusive, high-yield opportunities while delivering the predictable and transparent results that investors seek.

Conclusion: Maximizing High-Yield Private Credit Returns

The private credit market has grown to an impressive $1.7 trillion, offering returns that often surpass those of traditional bonds. While conventional bonds frequently struggle to deliver yields above 5%, private credit opens doors to higher returns through strategies like direct lending, distressed credit, and asset-based finance.

Achieving success in this space relies heavily on a solid foundation of structure, clear documentation, and meticulous risk management. Dan Pietrzak, Global Head of Private Credit at KKR, highlights this approach:

"Structure, documentation, and fundamental risk are our north stars. Spreads have compressed, but we've generally seen covenants and security packages hold up. We're leaning into that discipline".

A critical factor in private credit investing is selecting the right managers. Those with extensive experience navigating various credit cycles and adhering to disciplined underwriting practices are better positioned to deliver strong returns. This is especially vital since only about 20% of private credit issuers are rated, making independent analysis indispensable.

Asset-based finance, currently valued at over $6 trillion and expected to exceed $9 trillion, offers consistent and diversified opportunities for returns.

Investing successfully in private credit requires thorough due diligence, active monitoring, and diligent covenant management. The illiquid nature of these investments makes careful portfolio construction and liquidity planning essential to meet short-, medium-, and long-term goals.

FAQs

What are the key risks of private credit investing, and how can they be managed effectively?

Investing in private credit involves some notable risks, such as illiquidity, the possibility of borrower default, and inadequate collateral, all of which could lead to financial setbacks.

To navigate these risks, it's essential to conduct detailed due diligence. This means carefully evaluating the borrower's creditworthiness and ensuring the collateral is sufficient and reliable. Spreading investments across various borrowers, industries, and sectors can also help minimize the impact of any single risk. On top of that, having well-structured loan agreements and consistently tracking loan performance are key measures for safeguarding your investment.

A strong risk management plan is equally important. Keeping cash reserves on hand for unforeseen situations can add an extra layer of protection, ensuring a more stable and resilient approach to private credit investing.

What makes private credit different from traditional bonds in terms of returns and investment approach?

Private credit sets itself apart from traditional bonds by offering much higher return potential - often in the range of 20-40%, compared to the modest 5% yields typically associated with bonds. These elevated returns are driven by the distinct nature of private credit, which includes factors like illiquidity, customized deal structures, and a higher risk profile. These elements create investment opportunities that simply don't exist in public markets.

While bonds are usually traded on public exchanges and follow a more passive investment strategy, private credit takes a more hands-on approach. It focuses on strategies such as direct lending, distressed debt, and niche market opportunities. This flexibility allows investors to actively manage risks while seeking high-yield returns in a less crowded and competitive environment.

What should I look for in a fund manager when investing in private credit?

When selecting a fund manager for private credit investments, it's essential to look at their track record of producing steady, risk-adjusted returns and their expertise in the private credit sector. Pay close attention to their investment strategy, how they handle risk management, and the level of transparency they provide regarding their portfolio and decision-making processes.

You should also assess their ability to handle market downturns, their alignment with investor interests, and the scope of their operations. A reliable fund manager will prioritize protecting capital while seeking out high-yield opportunities in the private credit market.