A recurring criticism of private debt is that valuations don’t move daily, therefore reported volatility looks suspiciously low. The implication: marks smoothed over are masking the same risk that public credit prices in real time.
This note examines that critique directly. Using twenty-one years of data (2005–2025) on the Cliffwater Direct Lending Index, the Cliffwater BDC Index, and the Bloomberg US Corporate High Yield Bond Index, we strip public high yield down to its pure economic return, defined as coupon less realized credit losses, and compare public BDCs (the liquid wrapper for direct lending) against the underlying private loans. A different picture emerges upon review.
One of the biggest criticisms of private debt investing is that there is no daily price discovery and volatility looks suspiciously low as a result. The argument runs like this: If private loans were marked-to-market every day the way public bonds are, their volatility would look much closer to high yield, and the apparent risk-adjusted return advantage would shrink or disappear.
It’s a fair starting point, but it deserves a fair test.
Over the last twenty-one years (2005–2025), the Cliffwater Direct Lending Index (CDLI) has produced an average annual return of 9.6% with a standard deviation of 4.6%. Over the same period, the Bloomberg US Corporate High Yield Bond Index has produced an average annual return of 7.5% with a standard deviation of 15.3%.
*HY economic return = beginning-of-year coupon − realized credit losses (default rate × loss-given-default), measured year-by-year.
Sources: Cliffwater Direct Lending Index; Cliffwater BDC Index; Bloomberg US Corporate High Yield Bond Index; JP Morgan recovery data.
On the surface, the gap is enormous. Private credit appears to deliver more return with roughly one-third the volatility. The skeptic’s response: of course it does, one is marked daily, and the other isn’t.
If you want to compare public high yield to private credit on the same economic footing without the noise of daily mark-to-market, you can decompose the high yield return into its underlying components year by year:
This is exactly how private credit returns are produced and reported: contractual income, less realized losses. There is no price discovery, no spread movement, and no duration repricing leaving only the fundamental economics of lending.
Viewed through this lens, public high yield over the last twenty-one years has produced an average annual economic return of 5.7% with a standard deviation of just 2.0%. The same asset being measured the same way as private credit, looks remarkably similar to private credit displaying modestly lower return (which makes sense; recovery rates on senior secured direct loans are higher than on subordinated high yield bonds) and remarkably stable economics.
So, should we assume that if direct lending loans were public, they would trade with no volatility? Absolutely not and we can support this because they do trade as public BDCs and have for over two decades.
Over the last twenty-one years, the Cliffwater BDC Index (which can loosely be thought of as the liquid variant of direct lending) has produced an average annual return of 9.5% with a standard deviation of 21.1%. This is the same return as CDLI, more than four times the volatility. Yes, leverage at the BDC level is a factor, but it is not the primary reason. The primary reason lies in daily price discovery on illiquid underlying assets, facilitated by an equity market that adjusts valuations according to macroeconomic narratives, fund flows, and dividend visibility, rather than solely reflecting the contractual cash flows of the loans themselves.
Source: Cliffwater Direct Lending Index and Cliffwater BDC Index, calendar-year total returns 2005-2025.
Figure 3. The same kind of loans, in two different wrappers, produce nearly identical 21-year returns with vastly different reported volatility.
Sources: Cliffwater Direct Lending Index, Cliffwater BDC Index, Bloomberg US Corporate High Yield Bond Index, JP Morgan
recovery data. Calendar-year total returns; HY economic return = beginning-of-year coupon less realized credit losses.
The rules for private debt are not different than public debt. Lending is lending. You give your money to a corporation; they pay you back interest and principal along the way and at maturity. And if they don’t, you enforce your contractual rights to recover as much as possible. This is the same exercise in both markets.
The difference lies not in the economics, but in the wrapper and how it encourages the market to express its opinions.
This is not meant to provide an opinion that private credit is risk-free, or that today’s vintage looks like the average of the last twenty-one years. Spreads have compressed. Covenants are looser in parts of the market. PIK income and amend-and-extend activity warrant careful scrutiny. Manager selection, structure, and diversification matter more now than they did five years ago.
The critique of volatility, that private credit’s smooth returns are an accounting illusion hiding the same risk as public credit, does not survive the apples-to-apples test over an extended period. The economics of lending look like the economics of lending, in either market. The difference is what the market does in between.
For a long-term investor, that is exactly the question worth answering carefully: how much of your portfolio should be priced on the cash flows it will actually deliver, and how the market will value those cash flows tomorrow morning?
This material is for informational purposes only and does not constitute investment, tax, or legal advice. Index performance is gross of fees and not investable. Past performance is not indicative of future results. Cliffwater Direct Lending Index and Cliffwater BDC Index data are property of Cliffwater LLC. Bloomberg US Corporate High Yield Bond Index data are property of Bloomberg L.P. The high yield economic return is calculated as beginning-of-year coupon less realized credit losses (default rate × loss-given-default), measured year-by-year, using JP Morgan recovery data. References to specific indices are provided for comparison only and are not recommendations to invest. Risks of private credit include illiquidity, valuation uncertainty, manager dispersion, and credit loss. Risks of public credit include market volatility, interest rate risk, and credit loss. Period covered: 2005–2025.
Bobby serves as Chief Investment Officer at 1900 Wealth Management, where he manages a team of investment officers and oversees portfolio strategies for clients. He also develops new business relationships and contributes to firm growth.
A Chartered Financial Analyst (CFA), Bobby previously analyzed fixed-income investments for USAA and its related funds. His career spans capital management, private equity, and financial operations in multiple industries.
Bobby holds a Bachelor of Business Administration in Accounting and Finance from Texas Christian University.
