The Yield Fortress: Private Credit & Direct Lending
The Yield Fortress: Private Credit & Direct Lending
Filling the banking void: How to capture double-digit yields from senior secured loans while banks retreat.
Executive Summary
- The Banking Retreat: Post-2008 (and 2023 SVB crisis) regulations forced banks to reduce lending to mid-sized firms. Private Credit funds stepped in to fill this gap.
- Senior Secured Safety: Unlike junk bonds, Direct Lending is typically 1st Lien Senior Secured. If the company fails, you are first in line to get paid, often recovering 70-80% of assets.
- Floating Rate Hedge: Most private loans are floating rate (SOFR + Spread). This means your yield increases if inflation or interest rates rise, acting as a natural hedge.
The “Tax Drag” Warning
Private Credit generates Ordinary Income (taxed at 37%+), not Capital Gains. It is extremely tax-inefficient. This asset class MUST be held inside a tax-advantaged wrapper like PPLI (Article 651) or an IRA.
Mechanic: The Lender’s Advantage
10-12%
Target Yield
1st Lien
Seniority
Floating
Rate Type
Tax Heavy
Structure Risk
Simulation: Yield Profile (Public Bond vs. Private Credit)
Annual Yield Comparison (Risk-Adjusted)
| Feature | Traditional Bonds | Private Credit |
|---|---|---|
| Interest Rate | Fixed (Hurts if Rates Rise) | Floating (SOFR + ~6%) |
| Security | Unsecured / General | Asset-Backed / Secured |
| Liquidity | Daily (Liquid) | Quarterly (Illiquid) |
“Be the bank, don’t just deposit in one. In a high-rate world, the lender holds the cards, and the borrower pays the premium.”
Essential Resources
INTERNAL
BMT Playbooks