Cost of Capital & Relative Attractiveness

We anticipate that declining base rates, including SOFR and Prime, will directly reduce borrower coupons in floating-rate middle-market direct lending, placing downward pressure on portfolio yields. In a sustained Treasury bull market, gross yields in the asset class could compress meaningfully, with returns potentially trending toward the 7–8% range.

As yields compress, relative value considerations become increasingly important. Public credit markets, including investment grade credit, structured credit, and mortgage-backed securities, may appear more attractive as their yields converge with those of middle-market direct lending, but without the same illiquidity trade-off. This dynamic underscores the growing relevance of relative value as credit markets adjust to a lower-rate environment.