CONTRIBUTORS
Anant Kumar
Managing Director, Head of US Research
Benefit Street Partners
Volatility is creating attractive opportunities in direct lending
The current deterioration in investor sentiment toward direct lending echoes the backdrop of 2022, when rising interest rates, persistent inflation, and mounting recession concerns drove a broad rotation out of risk assets. Today, a similar unease has taken hold — compounded by growing angst around software exposure in private credit and escalating geopolitical tensions that have disrupted commodity markets and clouded the macroeconomic outlook.
While growth expectations have not fully reset to recessionary levels, confidence has weakened materially and the forward outlook remains uncertain. Interest rates stay elevated as central banks maintain a cautious stance, and the rapid evolution of artificial intelligence presents a difficult-to-quantify source of disruption. The result is a familiar pattern: a flight to liquidity and elevated redemptions across evergreen direct lending structures — now surpassing the 2022 highs and continuing to accelerate into 2026.
Critically, this wave of redemptions appears driven more by sentiment than by fundamentals. Capital is retrenching on perception, not evidence of broad-based credit deterioration. Historically, these are precisely the conditions that have produced the most compelling deployment opportunities.
Exhibit 1: Redemption rates have exceeded 2022 highs as investor sentiment weakened
BDC Redemption Rate as % of NAV
Source: Cliffwater. CDLI-Perpetual (“CDLI-P”) is comprised primarily of loans held in perpetually structured, non-exchange traded BDCs. Data as of December 31, 2025.
In 2022, banks pulled back from lending, creating a financing gap that direct lenders were well positioned to address. With fewer capital providers in the market, direct lenders gained negotiating leverage, resulting in wider spreads, tighter structures, and improved economic terms. We are now seeing an incremental shift in deal financing toward direct lending, which may create additional opportunities.
Exhibit 2: Direct lending outpaced BSL in sponsor-backed deal count in 2026, similar to the trend in 2022 and 2023
Sponsor-backed deals financed in BSL vs direct lending
Source: Pitchbook. Count of sponsor-backed deals financed in BSL vs direct lending market. Deal count is based on transactions covered by LCD News. Data as of March 31, 2026.
The prior dislocation created a compelling entry point and laid the groundwork for strong subsequent performance. As such, 2022 stands out as a period in which disciplined deployment during market stress translated into meaningful opportunity.
Exhibit 3: Wider new issue spreads during the 2022 dislocation drove double-digit gross returns in the months that followed
Direct Lending New Issue Spread
Source: The Cliffwater Direct Lending Index (the “CDLI”). Spread data is as of March 31, 2026. Annual performance data is as of December 31, 2025
In 2022, BDC price-to-book ratios compressed to roughly 0.8x as total returns fell to -8.9%. What followed was a +26% rebound in 2023—a pattern where valuation troughs have historically preceded sharp recoveries. Today's setup looks remarkably similar: price-to-book ratios are sliding back toward those same 2022 levels, with the current drawdowns approaching -19%.
Exhibit 4: Current BDC drawdown mirrors prior dislocations that preceded strong recoveries
S&P BDC Index Price to Book Ratio
Source: Bloomberg. Represents the S&P BDC Index. Data as of April 9th, 2026. Drawdown is from July 17, 2025 to April 9th, 2026.
Current market dynamics suggest a similar setup may be emerging. Single-B yields – over which direct lending has typically captured a 150–200 bps illiquidity premium – compressed to multi-year lows and have since widened in 2026. Early indications point to a corresponding repricing in direct lending, with improving spreads and more attractive risk-adjusted returns on new originations.
Exhibit 5: Single-B loan yields tightened to multi-year lows before widening in 2026
For investors maintaining a rigorous, fundamentals-driven approach, disciplined credit selection is critical in this environment. Periods of market turbulence create a window to deploy capital on more conservative, better-priced terms. As in prior dislocations, volatility can constrain traditional lenders and reduce competitive intensity, allowing direct lenders to be more selective and dictate terms.
This dynamic supports deployment into higher-quality credits with wider spreads, stronger structures, and enhanced downside mitigation. In that context, periods of uncertainty are not simply to be navigated – they are to be capitalized on. For investors with the discipline to underwrite rigorously and the conviction to deploy, today’s environment represents a compelling opportunity to put capital to work.
RISKS
Investment strategies involving Private Markets (such as Private Credit, Private Equity and Real Estate) are complex and speculative, entail significant risk and should not be considered a complete investment program. Such investments should be viewed as illiquid and may require a long-term commitment with no certainty of return. Depending on the product invested in, such investments and strategies may provide for only limited liquidity and are suitable only for persons who can afford to lose the entire amount of their investment. Private investments present certain challenges and involve incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity. There also can be no assurance that companies will list their securities on a securities exchange, as such, the lack of an established, liquid secondary market for some investments may have an adverse effect on the market value of those investments and on an investor's ability to dispose of them at a favorable time or price.
WF: 10129860