Direct Lending Returns Will Split by Manager, KKR's Sheldon Argues

What's New

Direct lending returns will diverge by manager because the market has no index and defaults are already elevated. Chris Sheldon, Co-Head of Credit and Capital Markets at KKR, argues this in a fireside chat at the Barclays 24th Annual Global Financial Services Conference. He puts annual defaults in direct lending and broadly syndicated loans at 4% to 5%. That rate has held for three years. Allocators should judge managers on vintage exposure, sector mix, and the type of software lending in their books.

Why It Matters

Most managers describe private credit defaults as historically low. Sheldon places direct lending closer to the syndicated loan market than to high-yield bonds. Without an index, he says, investors extrapolate from individual portfolios, and that misleads them. KKR puts its software exposure near 20%. He places the market near 25%, so a dispersion story favors KKR.

Between The Lines

The dispersion argument also sells KKR's broader credit business. Asset-based finance at KKR totals $91 billion, larger than its corporate private credit book. Sheldon calls ABF early innings and says the scale winners are already decided. His pitch for multi-asset credit partnerships asks allocators to hand KKR the relative value call across direct lending, ABF, and private IG.

The Other Side

The standard industry view holds that senior secured loans with high current income protect returns through the cycle. Sheldon himself does not expect a spike in defaults. Modest, stable defaults would narrow the gap between strong and weak managers.

Memorable Quotes

• "There's no index for the direct lending market." The missing benchmark is the starting point of his argument.

• "We've been sort of hovering around 4%-5% annual default rates for the last few years in both of those markets." The figure contradicts the low-default narrative.

• "Are we seeing massive flows come back in? No." Sheldon concedes retail demand for KKR's BDC has not recovered.

• "I think there's going to be a real dispersion in returns by manager as a result." This is the thesis stated plainly.

The Wrap

Dispersion becomes visible if defaults stay near current levels and cluster in the early-2020s vintages and recurring revenue software loans Sheldon flags. A software rebound that lifts weaker portfolios would blunt it. Either way, allocators need portfolio-level data, since no benchmark will make the comparison for them. The next few quarters of BDC and fund disclosures will show how wide the gap runs.