Private credit, especially direct lending, has grown tremendously over the past decade. Once seen as a niche corner of the market, it now rivals traditional high-yield bonds in market size.
Most private debts are structured as floating-rate debt—that is, the interest rate changes periodically based on the prevailing environment. If interest rates rise, the income from floating-rate debt increases, and vice versa. So the natural question is: can private credit still deliver strong returns if interest rates fall again?
The short answer is yes—and history gives us some compelling reasons to believe so.
Table of Contents
Private credit held up well during past low-rate periods
How private credit generates steady returns even when rates fall
Lower rates may improve borrower health and spur new opportunities
What to expect going forward if rates decline
Bottom line: still a strong contender in any rate environment
Private credit held up well during past low-rate periods
Looking back, private credit has done quite well in environments where interest rates were low. After the Global Financial Crisis (2009–2015), interest rates stayed near zero, yet private credit strategies still delivered attractive annual returns. The Cliffwater Direct Lending Index, for example, has shown average annual return of around 11% from 2009 to 2015.
Even more recently, during the COVID-19 era (2020–2021) when the Fed slashed rates to near-zero again, private credit proved remarkably resilient. While public markets were volatile, many private credit portfolios saw only minor markdowns and quickly rebounded. Some strategies even posted positive returns throughout the year.
In short, private credit has proven that it can perform in both high-rate and low-rate environments.
How private credit generates steady returns even when rates fall
So what drives this steady performance?
The secret lies in how direct loans are structured. These loans typically pay a floating rate (like SOFR) plus a fixed spread—and that spread can be substantial, often 500–600 basis points. Even if base rates fall, the fixed spread ensures that the lender still earns an attractive yield. Many deals also include a floor on the base rate (e.g., SOFR won’t go below 1%), which protects returns when benchmark rates are near zero.
On top of that, direct lenders often charge upfront fees and build in call protection, prepayment penalties, or other features that enhance yield. And because lenders in this space tend to work closely with borrowers, they can be selective and structure deals with strong covenants that help mitigate losses.
Put simply, private credit doesn’t rely on rising rates to deliver returns. It relies on smart deal structuring, credit selection, and a consistent income stream that holds up even in low-rate settings.
Lower rates may improve borrower health and spur new opportunities
Interestingly, lower interest rates can actually be a net positive for private credit in other ways. When rates fall, borrowers face lower interest costs—which improves their financial health and reduces the risk of default. This stability supports the performance of existing loans in a portfolio.
Lower rates can also boost new deal activity. A cheaper cost of capital can lead to more mergers, acquisitions, and private equity deals—all of which need financing. That means more opportunities for direct lenders to deploy capital and negotiate attractive terms.
In many cases, as base rates fall, credit spreads on new loans can widen to keep total yields appealing. This helps offset some of the lost yield from the rate cuts. Lenders maintain pricing power, especially when banks pull back from lending.
What to expect going forward if rates decline
Looking ahead, if interest rates move lower, private credit returns will likely moderate from the double-digit highs seen in 2022 and 2023. But they are still expected to remain attractive. Private direct loan current yields ended 2024 close to 11% p.a.. This high yield provides a good indicator of forward returns and also offers a buffer against credit losses or a decline in the floating-rate component.
With lower base rates, the floating-rate portion of yields will decrease, but the fixed spread and deal structuring features will continue to support income. Meanwhile, stronger borrower fundamentals and a potential uptick in deal activity can help preserve overall performance.
Investors should also remember that direct lending has historically provided positive returns across both tightening and easing cycles. That consistency is part of what makes it such a compelling income strategy.
Bottom line: still a strong contender in any rate environment
Private credit—and direct lending in particular—has proven to be a resilient asset class. Even when rates are lower, it offers attractive yields, strong risk-adjusted returns, and low volatility. For accredited investors seeking steady income and diversification beyond traditional bonds, direct lending remains a strong contender.
In a world where rates might fall again, that kind of resilience and consistency is hard to ignore. Explore the private credit funds with Syfe.
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