Investors have discovered private debt. Precise numbers are hard to come by, but it is generally accepted that the private debt market cap stood at approximately $300 billion in 2008 and is now approaching $1.25 trillion at the end of 2022.

We can point to three prime reasons for this exponential growth: returns, diversification and being in the right place at the right time.

Upside and downside

The entire reason investors invest is for returns, and private debt in the past 10 years has proven a stable source of yields that are higher than fixed-income returns, but with less risk than private equity investments. The Cliffwater Direct Lending Index (CDLI), which contains more than 10,000 directly originated middle-market loans totaling $247 billion as of June 30, 2022, provides a good representation of private debt returns. In the 12 months ending June 30, 2022, middle-market loans had an average total return of 7.50 percent, while trailing five-