In traditional finance, yield-to-maturity (YTM) is a fixed-income staple — a measure of expected return that assumes full repayment and reinvestment until maturity. In private credit, it takes on even more strategic weight.
Unlike equity, where returns are back-ended and exit-dependent, private credit is contractual. Lenders are repaid in cash, on a schedule, under predefined terms. That makes YTM a practical and predictive tool in a way it simply isn’t in private equity.
Given today’s environment —with SOFR elevated, syndicated loans spreads compressed, and lending norms evolving — YTM has become a key differentiator. In the hands of sophisticated allocators, it’s not just a rate; it’s a map of return composition, credit risk, and structural edge.
The formula for YTM in its textbook form is:
YTM = [Annual Coupon + (Face Value – Price) ÷ n] ÷ [(Face Value + Price) ÷ 2]
This assumes:
The instrument is held to maturity.
All cash flows are received on time.
Coupons are reinvested at the same rate.
In public bond markets, this framework helps price interest rate risk. In private credit, the assumptions still hold — but the instruments are structured very differently. That’s because private loans are often bespoke. So, you’ll need to factor in call protection, SOFR resets, upfront fees, covenants, and sometimes payment-in-kind (PIK) structures.
YTM has no place in classic private equity because equity returns are not contractual. PE investors rely on internal rate of return (IRR), multiple expansion, and optionality — all back-weighted and scenario-driven.
Source: FsInvestments
Private credit flips that equation. Debt sits higher in the capital structure and generates consistent income through interest payments. Direct lending loans often float over SOFR, providing a cushion against rate risk and increasing cash yield as base rates rise.
In short: YTM applies to private credit because the return profile is deterministic — not probabilistic.
The YTM in a private credit instrument reflects both market base rates and a complex risk premium.
Here’s how the pieces break down:
Base rate: Typically SOFR (3-month or term), currently ~4.3%
Spread over base:
First-lien: +500 to 600 bps
Second-lien: +800 to 900 bps
Mezzanine: +1,000 bps or more
Upfront/OID fees: Boost headline yield if amortized
Covenant protections: Tighter terms = lower risk = lower spread
Borrower size, leverage, and LTV: Smaller, more leveraged borrowers command a premium
As of early 2025, average direct lending yields sit around 10.15%, a level that reflects both elevated base rates and structurally higher spreads relative to syndicated public credit.
Unlike public loans, direct lending terms are privately negotiated. That creates three layers of structural advantage for lenders:
Bilateral Terms: Tailored covenants, financial ratios, and collateral backing
Speed and Access: Lenders get better access to borrowers with fewer intermediaries
Downside Protection: Higher-ranking positions, sponsor support, and stricter enforcement mechanisms
These differences help explain why yields are consistently higher than in public markets. On average, private credit yields sit 226 basis points above similarly rated public credit — nearly double the historical premium of 121 bps.
StepStone’s 2023 study broke down private credit yields using regression analysis. The biggest drivers?
Loan-to-value ratios: Higher LTV → higher yield
Leverage multiples: More debt → more risk premium
EBITDA size: Larger EBITDA → lower risk premium
Ownership: Sponsor-backed loans price tighter than non-sponsored
Covenant count: More covenants = better risk control = lower spread
A strong loan — say, first-lien, sponsor-backed, with low LTV and $75M+ EBITDA — will sit on the lower end of the yield curve. Weaker profiles push yields higher, sometimes well past 700 bps.
Private credit’s recent yield surge is not just a function of higher SOFR. It’s also a reflection of a reshaped lending market:
Banks have pulled back: Regulatory pressures have sidelined traditional lenders, especially in the mid-market.
Private credit has stepped in: With dry powder and flexible mandates, private lenders can dictate better terms.
Buyout volume is down, credit appetite is up: A funding gap exists — more capital is chasing fewer loans.
This demand/supply imbalance supports both yield stability and lender discipline. According to FS Investments, private credit continues to benefit from sustained premiums without loosening terms.
Using Cliffwater’s Direct Lending Index, private direct lending has delivered:
9.3% annually from 2005–2022
Versus 4.4% for the S&P/LSTA Leveraged Loan Index
That spread is meaningful — especially when viewed through a volatility lens. Private credit’s unsmoothed volatility comes in at 4.5%, about half that of blended public credit benchmarks.
Dispersion is also tighter:
Net IRR dispersion: 5.6% across funds
Standard deviation: 9.6%
Median net IRR: 8.4%
These stats reflect the asset class’s core strength: stable, yield-driven returns with relatively low downside tails — especially compared to venture, real estate, or distressed debt.
YTM isn’t just a headline stat — it’s a filter for deal quality and risk calibration.
When evaluating a private credit opportunity, investors should ask:
Does the spread reflect structural risk or a market gap?
How does the YTM compare to similar deals in the same tier?
Are reinvestment assumptions realistic given liquidity?
Does the pricing compensate for lack of secondary market exit?
The smartest credit investors model YTM both forward (based on current coupons and base rates) and backward (stress-tested against potential underperformance).
Private credit’s appeal lies in its contractual, income-oriented profile. Yield-to-maturity serves as both a performance metric and a strategic input — helping investors understand what’s driving return, how risk is priced, and whether compensation aligns with exposure.
In today’s market, where floating-rate mechanics and structural yield premiums intersect, YTM is more than a math exercise. It’s a lens into where value is being created — or overestimated.
For allocators seeking durable yield in uncertain conditions, it’s one of the few metrics that speaks to both opportunity and discipline. But only if you know how to read it properly.
P.S. – Explore our Premium Resources for more valuable content and tools to help you break into the industry.
