And Why Kayne Anderson Private Credit (“KAPC”) Is Positioned for Differentiation in a Dislocating Market.
EXECUTIVE SUMMARY
Private credit is seemingly in the early innings of what might be considered the first prolonged test of the asset class since the Great Financial Crisis, a time when it was more of an esoteric product as opposed to a $1.7+ trillion1 mainstream asset class.
Before diving in, a quick reminder on why this asset class has become so popular in the first place. Private credit, at its best, is a straightforward value proposition: senior secured loans to established businesses, structured with conservative loan-to-values, generating attractive unlevered returns with quarterly cash income and covenant protections that can provide early warning before problems become crises.
Years of aggressive capital gathering in the upper middle market (generally targeting businesses with more than $100 million of EBITDA) through previously untapped investor channels, somewhat relaxed underwriting standards in pockets of the market (certain managers driven by a focus on pace of deployment over diligent capital allocation) and outsized exposure to high-multiple software businesses, have left portions of the private credit industry wrestling with redemption pressure, decreased total yields and growing credit uncertainty.
We believe that this post-GFC period of explosive growth in private credit combined with generally resilient economic and credit conditions led many investors to view private credit investing as something of a “beta” strategy, with the largest firms gathering AUM and chasing the same transactions. This then created the perception of little differentiation between markets, managers, strategies and philosophies. We believe a new phase is beginning, marked by a wider dispersion in outcomes between managers and the end of “beta” investing in this space.
KAPC, by contrast, was built on principles that seem (to us) self-evident because they support a consistent lending strategy regardless of market conditions. For 30+ years2, we have been a lender to core middle market companies ($10–$75 million of EBITDA) in traditional, durable industries; we have emphasized conservative leverage, rigorous covenant protection and downside preservation, even when the downstream effect of such a strategy meant leaving potential AUM growth on the table. The result is a portfolio and a platform that both look very different from much of the industry right now.
This paper attempts to explain what is happening in private credit today, why we believe the noise is obscuring some important distinctions across the private credit market (which is quite clearly not the monolith that financial papers make it out to be) and why we think KAPC is well-positioned to continue to deliver on the promise of the asset class at its best: stable, durable income with a significant yield premium to the liquid fixed income market and meaningful downside protection.
WHAT IS HAPPENING IN PRIVATE CREDIT
The private credit market has attracted an excessive amount of negative press in recent months. Terms like "shadow default rate," "dividend cuts," "NAV erosion" and "redemption gates" have become regular features of a financial media that largely ignored growth in the asset class and the many reasons for its attractiveness over the last decade-plus.
Suffice it to say that we are now receiving detailed technical questions regarding the reasonableness of projected private credit default rates from family and friends who a decade ago might have described our careers as mysterious enough to infer that we are simply “working at a bank, I think?”. The reality is more nuanced and benign, though many of the issues described were foreseeable.
Our perspective is that much of the recent alarm is conflating different problems across different markets. Issues faced by lenders (i) serving the upper middle market, (ii) with substantial capital raised from redemption-eligible vehicles and / or (iii) with large exposures to software and technology businesses are different (in both kind and degree) than issues faced by lenders without any such exposures. In other words, a deeper dive into lender strategy is now critical in order to properly assess risk.
Is Someone Eating Cockroaches? Separating Fact from Fear Factor
On Default Rates: The so-called "shadow default rate" (a catch-all term that lumps together many different types of credit management mechanisms that are being positioned as “leading indicators”) has been widely cited as evidence of a coming wave of credit losses. We think this framing is misleading, as these are all tools used by lenders actively managing credit situations before they deteriorate into realized losses, albeit excessive use of these programs is itself a stress indicator.
Actual payment defaults and bankruptcies remain in-line with historical levels and are best understood as a normalization from the historically suppressed post-COVID period. Moreover, several of the most widely publicized recent defaults (First Brands, TriColor, others) involved large-cap borrowers in the bank or broadly syndicated loan market, non-sponsored transactions and / or likely fraud. Not exactly hallmarks of core middle market private credit.
On Losses: Even if there were a sharp uptick in “real” payment defaults, historical recovery rates for senior debt have typically been ~70%3 which further implies loss rates (and implied returns for the sector) that do not justify the breathless concern. The math is straightforward:
On Dividend Cuts: Roughly 40% of publicly traded BDCs have cut their base dividends since the Federal Reserve began reducing rates in September 2025, with average cuts of approximately 20%. These cuts have been widely reported as a sign of credit quality issues, but we believe they are an almost entirely mechanical consequence of floating-rate portfolios in a declining rate environment. The same managers who benefited from rising dividends during the 2022-2023 rate hike cycle are now experiencing the reverse. The yield premium over the liquid fixed income markets remains relevant and substantial.
On Valuations: Some commentators have suggested that NAV for private credit portfolios are artificially inflated and slow to reflect deteriorating credit. The historical evidence does not support this assertion. During prior periods of financial stress, cumulative markdowns in direct lending portfolios have typically exceeded realized losses by a meaningful margin, suggesting that the industry's valuation practices have, on balance, been conservative rather than optimistic4. Where significant NAV events have occurred recently, they have generally traced to a small number of idiosyncratic borrower situations, not broad-based credit deterioration.
On Relative Value: The relative value argument for private credit is largely absent from most of the current commentary. We see a downside scenario (as illustrated above) for private credit returns north of 8% after an elevated loss assumption (granting that single year results may fluctuate further). Most institutional investors we talk to underwrite median buyout portfolios with mid-teens returns. Those targets have proven difficult to achieve in the environment of the last few years (high interest rates, compressed multiples, slowed exit activity and disappointing DPI metrics) and would be doubly so in what our downside scenarios imply. On a go-forward basis, we expect near-term private equity vintages to face similar issues with a few added potential twists: (i) energy-related inflationary pressures, (ii) slower-than-expected rate cutting cycle related thereto and (iii) little in the way of clear-cut AI-related upside offsetting some of the downside risks for what is a software and technology heavy investment industry. We are not suggesting private credit replaces private equity in a portfolio, as private equity can take advantage of significant upside that can come from equity exposure. We are suggesting that the relative value case for senior secured private credit looks considerably more interesting than the current narrative would have you believe.
On Systemic Risk: We have also seen increasing hints at the potential for systemic risks to the broader economy related to a potential “fallout” from private credit (we clearly disagree with this assertion). Some say that history does not repeat itself but tends to rhyme; we think that relative to the mortgage lending practices precipitating the GFC, the background music of today’s lending environment is of a wholly different genre. As it stands today, most private credit investments are structured at ~45% loan-to-value as private equity seeks less leverage given the elevated rate environment coupled with significant levels of dry powder they need to deploy; to experience a loss on that investment, the underlying business’s value would need to decline by more than half. And yes, private credit portfolios are generally levered by banks, which would, theoretically, be a point of entry for “systemic” risk. But those bank-led facilities are typically structured at ~50% of the value of the private credit portfolio, implying a 50% loss on the entire portfolio (not just an individual investment) before the bank loses a dollar. Even draconian does not quite meet the moment as a descriptor.
The Real Problem: A Structural Design Failure
The more interesting issue to us is structural. Perpetual non-traded BDCs and interval funds facilitated an explosion of retail capital formation into private credit, creating vehicles that were structured to deploy capital as soon as capital was received.
Managers facing the prospect of decreased ROEs stemming from undeployed capital are more likely to chase deployment and AUM because that is the point of the vehicle: getting the money deployed quickly. This pressure has been the driver of much of the erosion in terms we have seen across most market segments and was felt particularly acutely in the upper middle market and software sector, where competition from syndicated markets had already undercut terms prior to rates falling.
Redemptions are a challenging problem and likely one that represents a disconnect in the education of investors. Managers investing in this space are almost always buy-and-hold lenders and investors seeking increased liquidity means selling assets at likely inopportune times, degrading the value proposition of the illiquidity premium that makes the assets attractive in the first place.
Limited liquidity is a nice option to have, except that investors generally tend to desire liquidity at similar times, defeating the purpose.
The chickens are coming home to roost: (i) declining total yields as rates fall, (ii) rising redemption requests from retail investors who may not have fully understood the liquidity mismatch inherent in these vehicles and (iii) potential portfolio stress concentrated in software and technology businesses that are facing genuine uncertainty about their long-term value proposition.
We believe that private credit does have a place in portfolios for retail investors, but that the inherent limitations of the asset class (e.g. relative lack of liquidity) must be communicated just as clearly as its merits.
Some growing pains, as it were.
THE SOFTWARE PROBLEM AND WHY / HOW KAPC HAS AVOIDED IT
How The Industry Got Here
Private credit's embrace of software and technology lending was not irrational at the time. Software businesses are "lending 101": recurring revenue, high gross margins, large installed user bases and relatively low capital intensity.
Today, many private credit platforms carry software and technology exposure representing 20% or more of their portfolios (at least as publicly reported; equity research estimates more like 27% for much of the public BDC space).
But the supposed attractiveness of lending in that space led to a substantial degradation in terms perhaps best described as “deep and cheap” as firms jostled for market share (and to deploy the nonstop flow of subscriptions into perpetual vehicles). Software investments, particularly in the upper middle market, were routinely structured around loan-to-value metrics rather than cash flow coverage.
“Your software business can’t afford to manage its debt burden? We have a solution – here’s incremental debt to pay us our own interest”. Just one example.
The risk for software-heavy lenders is not simply that enterprise values have fallen. A well-structured loan with a conservative LTV can absorb meaningful EV compression and keep the lender whole. However, when revenue growth slows or customer churn accelerates, those cushions can evaporate further, and quickly. Compound that with very deep leverage levels in software investments and covenant-lite documentation that gives lenders no intervention rights until a borrower is already in or near default and you have a slow-moving, high-stakes test of durability in the face of potentially transformational technologies.
Our Exposure: Approximately 2%
KAPC carries near-zero direct exposure to software and technology companies5. That reflects a longstanding view that the terms and structures required to deploy capital in that space did not meet our standards.
Our portfolio companies are more likely to adopt AI as a productivity tool. We lend to businesses in industrial services, distribution, food products and business services (to name a few): companies with physical assets, long customer relationships and operations that are not going to be replaced by a large language model, regardless of how well or cheaply it writes code.
While the exact impact is uncertain, we would wager that every person reading this paper is actively considering AI use cases throughout their professional and personal lives and, further, that AI’s most celebrated skill is writing code.
THE KAPC VALUE LENDING APPROACH
30+ Years of Doing the Same Thing (Seriously!)
KAPC has been executing the same core investment strategy for 30+ years. We describe that strategy as a “Value Lending Philosophy.” While we could spend the next five white papers expounding on the central tenets of this philosophy (they have been built over decades, after all), we will stop ourselves at a few sentences on each of the core pillars underpinning our strategy:
Pillar One: Focused Market Positioning
We operate in the core middle market ($10-$75 million EBITDA). We view this as the best of both worlds where these companies (i) have meaningful scale and defensible reasons to exist, but (ii) are below the size threshold where competition from asset aggregators and the syndicated loan market begin to compress terms and erode documentation. In other words, these businesses are large enough to matter but small enough to allow for adequate compensation for the risk we take.
One underappreciated aspect of this market is the sheer scale of the core middle market6. The United States economy includes ~60k businesses with revenues of $50-$500 million (our target market, generically) versus only ~6k businesses with revenues of $500-$2,500 million (the upper middle market and broadly syndicated market, generically). However, total debt investment in these two segments is more-or-less identical7, implying a much larger potential universe of transactions relative to the upper middle market.
This dynamic allows for increased selectivity in the core middle market for disciplined investors. Because we have structured our business to avoid being pressed to deploy capital regardless of market conditions, we act more like a differentiated risk-assessment and risk mitigation platform as opposed to a “private credit index fund”.
Pillar Two: Consistent Application of Credit Selection Principles
KAPC utilizes a credit selection framework that explicitly spells out characteristics present in each potential investment and categorizes these as “Intrinsic” or “Diversified” business attributes. It’s fair to say that our credit selection philosophy permeates our conversations internally and that straying from this framework is the fastest way to get laughed out of investment committee (metaphorically, of course).
Ignoring the specifics, employing a well-defined set of criteria ensures no style drift and avoids situations where we talk ourselves into something outside the bounds of our stated strategy. We stick to what we know.
Pillar Three: Conservative Leverage at Origination
As of December 31, 2025, our average borrower generates north of $50 million of EBITDA and has been in existence for more than two decades; these are not small or unseasoned businesses. During our time at KAPC, average borrower leverage at closing has ranged from 3.8x-4.2x net senior debt to EBITDA, reflecting a consistent conviction that credit losses in leveraged lending trace overwhelmingly to over-leveraged capital structures. A very boring thesis, but we believe very durable results.
Our current portfolio companies across our platform, as of December 31, 2025, reflect this discipline: opening leverage of approximately 4.0x, interest coverage north of 2.0x and LTV of approximately 43%.
Part of the way that we structure these investments conservatively is that we lend to businesses in stable and staple industries: industrial and business services, distribution, food products and healthcare. These are usually lower total enterprise value (“EV”) businesses (allowing for lower leverage levels) but where we believe that EV is more durable precisely because nobody is threatening to displace an industrial cleaning business with a large language model (for a relevant example in today’s climate).
We explicitly avoid investing in “growthy” industries or businesses, as we believe that those markets tend to attract new competitors and capital formation, creating increased risk of changes in competitive dynamics. We like to invest in segments where we believe we know who the winners (and conversely, the losers) are.
Pillar Four: Documentation Control and Covenant Protection
Financial covenants are present in all our core first lien private middle market investments. This is not the industry norm, as covenant-lite structures have become ubiquitous in the upper middle market. Financial covenants generally act as an early warning trigger to get all interested parties to the table before a business has a genuine crisis on its hands. Covenant-lite structures are a fine arrangement if you enjoy finding out the depths of a borrower’s distress only when you get a call saying that payroll is going to be tight this week.
Not to be overlooked, we are the agent or co-agent on more than 75% of our investments and do not participate in large syndicates, allowing us a better opportunity to control our own destiny and to do firsthand diligence on these borrowers while building relationships directly with management teams.
The proof is in the pudding. Since KAPC's establishment in 2011, we have: (i) invested more than $14 billion in these markets8, (ii) generated average asset-level gross returns on realized investments of ~10.6% and (iii) incurred an average annual realized loss ratio of only approximately 0.2%9. This successful execution reflects dogged adherence to our Value Lending Philosophy across multiple market environments. The team managing KAPC has worked together through several prior cycles dating back well before KAPC’s founding and we believe that collective experience will prove invaluable as we continue to navigate ever-changing markets.
WHY NOW IS THE RIGHT MOMENT TO BE INVESTED WITH US
The Opportunity in Manager Dispersion
The private credit industry is entering a period of manager dispersion that may ultimately be among the most pronounced in the asset class's history. This dispersion creates opportunity for investors willing to allocate to managers whose portfolios do not carry the problems driving the negative narrative.
Several dynamics support this view:
- Spreads should widen. As investors grow more cautious about software-heavy portfolios and upper middle market underwriting standards, risk premiums should increase (something we're already seeing in the CLO market). Simple supply and demand should also support this as capital formation in retail-heavy platforms likely slows.
- Competition will ease. Platforms managing redemption pressure and problem credits have a finite amount of management attention. For disciplined lenders with liquidity, capacity, and no legacy problems to distract them, the competitive environment for attractive new originations should improve meaningfully over the next 12-24 months.
- Our reputation is a competitive advantage. The private equity community knows which lenders are distracted, which are under pressure and which are open for business. We believe our portfolio is well-positioned to weather any near-to-medium term turbulence and we are open for business.
- Opportunistic plays. Dislocations create motivated sellers. We expect that a combination of retail redemption pressure and tightening fund-level bank financing at software-heavy platforms will produce secondary purchase opportunities. These are assets that may be sold because of structural pressure on the seller as opposed to fundamental performance issues. Identifying and acting on those situations requires available capital, well-performing existing assets and the ability to move quickly. We have all three.
A note of honest calibration on M&A: count us skeptical of any hockey stick in deal flow in 2026 although we do expect origination to be stable to growing. Private equity firms face pressure to return capital, but we believe that pressure has further to build before general partners start willingly unwinding portfolios at sub-optimal valuations. Over the last five years, KAPC has consistently deployed ~$2.0-$2.5 billion per year in what has been a mostly middling M&A market; attractive investments are available for experienced managers regardless of market conditions.
CONCLUSION
Private credit's current period of turbulence is real, though significantly overstated (less severe than click-driven reporting might suggest) and not uniform. We believe the fundamental case for the asset class remains intact: elevated all-in yields, floating rate income, strong structural protections and a macroeconomic backdrop that does not signal the onset of a deep credit cycle.
KAPC has built exactly the kind of business required to capitalize on today’s environment. Our conservative borrower leverage, strong covenant protections, agent positioning, low software exposure and patient capital base are foundational to how we have always operated. Too conservative on leverage, too insistent on covenants, too boring in our sector selection. We have consistently prioritized building portfolios with attractive risk-adjusted return profiles over growing AUM by chasing the latest flavor-of-the-day. We were comfortable with that trade-off then and are even more comfortable with it now.
We believe that the next 12-24 months will create a real dispersion in manager performance, making it clear that this is an asset class that is not (and never should have been) a “beta” play.
We believe we are well positioned to manage through what we view as an opportunity for us, not a crisis.
Past performance is not a guarantee of future results.
1 Preqin.
2 Includes periods of time when the Managing Partners of Kayne Anderson managed investments at different middle market private credit platforms dating back to 1986. Kayne Anderson Private Credit was established in 2011.
3 Moody’s; ultimate recovery rates for first lien senior secured debt.
4 Stepstone Group’s “Cutting through the noise in direct lending headlines.” February 2026.
5 KAPC's indirect exposure to software investments is through KBDC’s investment in SG Credit, a conservative asset-oriented lender in the lower middle market which has ~1/3rd of its portfolio invested in software and technology businesses.
6 Source: Census.gov. 2022 County Business Patterns and Economic Census. As of December 31, 2022.
7 Wells Fargo Corporate and Investment Banking with data from Wells’ portfolio-level lending activities.
8 Investments and commitments through December 31, 2025.
9 Annualized loss rate calculated as total dollar value of realized losses since inception, divided by average amounts outstanding for each year since KAPC inception, divided by the number of years at KAPC (14 years).
This document is intended for informational purposes only and does not constitute an offer or solicitation to buy or sell any security. Past performance is not indicative of future results. All data as of December 31, 2025 unless otherwise noted.
DISCLOSURES
- The statements expressed herein may be the opinion of third parties and may not encompass all views on the sector. Projections in this document are no guarantee of future outcomes. Not a recommendation to buy or sell a specific security.
- United Kingdom: All marketing materials are distributed in the United Kingdom to professional investors by Kayne Anderson Capital Advisors UK Limited (FRN: 993191), an Appointed Representative of Sturgeon Ventures LLP (FRN: 452811) who is authorized and regulated by the Financial Conduct Authority (FCA).
- Australia: Kayne Anderson Capital Advisers, L.P. holds an Australian financial services license (no. 527485) under the Corporations Act 2001 (Cth) (Act) covering the provision of certain financial services to wholesale clients (as defined in the Act) in Australia. This document is provided on the condition that a recipient is a wholesale client, and a recipient may be required to provide evidence of status as a wholesale client.
- Waystone Investment Management (IE) Limited is the European investment distributor for Kayne Anderson and is authorized in Ireland as an investment firm under the Markets in Financial Instruments Directive. Waystone Investment Management (IE) Limited is regulated by the Central Bank of Ireland and acts as a distributor in the European Union under reference number C1011. Waystone Investment Management (IE) Limited does not provide investment advice on an independent basis.
- Hypothetical performance has been provided for illustrative purposes only, and is not necessarily, and does not purport to be, indicative, or a guarantee, of future results. Hypothetical performance includes any performance targets, projections, pro forma returns adjustments or other similar presentations, and represents performance results that no individual fund, portfolio or investor has achieved. Actual results may vary substantially. The targeted net returns set forth herein are provided as indicators as to how particular funds will be managed and are not intended to be viewed as indicators of likely performance returns to investors. Although Kayne believes the hypothetical performance calculations described herein are based on reasonable assumptions (i.e., historical performance of the investment strategy at Kayne and management’s analysis of the current market opportunity), the use of different assumptions would produce different results, and because it does not represent the actual performance of any fund, portfolio or investor, it is subject to various risks and inherent limitations that are not applicable to non-hypothetical performance presentations. Additionally, the criteria and assumptions upon which the hypothetical performance target returns were based may not materialize, which could also produce different results. For the foregoing and other similar reasons, the comparability of hypothetical performance to the prior (or future) actual performance of a fund is limited, and prospective investors should not unduly rely on any such information in making an investment decision. The hypothetical performance does not represent actual performance, was not achieved by any investor, and actual results may vary substantially. Future performance is subject to taxation which depends on the personal situation of each investor, and which may change in the future.
- Past performance is no guarantee of future results.
KAYNE ANDERSON PRIVATE CREDIT
150 N. Riverside Plaza, Suite 2010 Chicago, IL 60606
investorrelations@kayneanderson.com
ABOUT KAYNE ANDERSON
Kayne Anderson, founded in 1984, is a leading alternative investment management firm focused on real estate, credit, infrastructure, and energy. With a team defined by an entrepreneurial and resilient culture, Kayne Anderson’s investment philosophy is to pursue cash flow-oriented niche strategies where knowledge and sourcing advantages enable us to deliver above average, risk-adjusted investment returns. Kayne manages $40 billion in assets (as of 12/31/2025) for institutional investors, family offices, high net worth and retail clients and employs 350 professionals.