Investors interested in senior secured floating-rate debt have two options: broadly syndicated loans, or BSLs, via funds like Invesco Senior Loan ETF BKLN and SPDR Blackstone Senior Loan ETF SRLN, and private credit via a fund such as Cliffwater Corporate Lending CCLFX. Invesco Senior Loan ETF and SPDR Blackstone Senior Loan ETF have the advantage of being daily liquid, while Cliffwater Corporate Lending (which can be purchased daily) only provides liquidity redemptions that can be capped at a 5% maximum. The other major difference between the BSL funds and Cliffwater Corporate Lending is that the loans the BSL funds invest in are typically very large syndicated loans made to large companies, while the Cliffwater fund typically invests in loans made to midsize companies (typically with at least $50 million in earnings before interest, taxes, depreciation, and amortization).

The risk involved with Cliffwater Corporate Lending’s reduced liquidity should result in a higher yield as compensation, and that is exactly what happened. Over the five years from 2020 through 2024, Invesco Senior Loan ETF returned 4.2% annualized, SPDR Blackstone Senior Loan ETF returned 4.3%, and Cliffwater Corporate Lending returned 10.2%. That seems like an exceptionally large premium for Cliffwater’s reduced liquidity, indicating there is another risk involved for which investors are demanding compensation. In this case, it is credit risk. Is the credit risk of Cliffwater Corporate Lending’s direct private-loan investments greater than the risk of the broadly syndicated loans that Invesco Senior Loan ETF and SPDR Blackstone Senior Loan ETF invest in?

The conventional wisdom is that loans to larger companies are generally considered less risky than loans to smaller companies for a variety of reasons, such as more diversified revenue streams, a more established market presence, more diversified sources of capital, economies of scale, more experienced and deeper management teams, and stronger financial controls. However, that assumes all else is equal—which is not the case in private lending.

Private direct lenders recognize the greater risks of lending to smaller companies. Thus, to compensate for the greater risk, they not only demand higher credit spreads but also lower debt/EBITDA ratios, more collateral, and stronger covenants (including stronger monitoring rights). For example, loan covenants can be affirmative (positive), requiring a borrower to fulfill a specific obligation. They can also be restrictive (negative), which is intended to prevent a borrower from taking specific action without the lender’s approval. They can also be financial, requiring the borrower to maintain specified financial performance on an ongoing basis (a maintenance covenant). And they can ensure certain thresholds are met if an action is taken, such as issuing debt (an incurrence covenant). These covenants, in addition to proactive monitoring of a borrower’s financial performance, allow lenders to identify potential issues early and to work with management teams to address those issues before they hinder the company’s ability to pay off its interest and debt obligations. In addition, due diligence is likely to be more extensive.

With the knowledge that all else is not equal, we can examine the historical evidence to see if loans to larger companies have been less risky.

Are Loans to Larger Companies Less Risky?

The following charts are from a June 2024 report from DunPort Capital Management. The first chart shows that over the 24-year period from 1995 through 2018, S&P found that smaller loans had much lower default rates than larger loans.

A 2012 Moody’s study covering a 25-year sample found that leverage is over 4 times more relevant to default risk than company size. As noted above, private direct middle-market loans typically offer less leverage than do the BSLs made to larger companies.

The next chart shows that the average annual loss rate on middle-market loans was much lower than on broadly syndicated loans and high-yield loans from 1995 through the first quarter of 2022.

The next chart shows that the average annual recovery rate on middle-market loans was significantly higher than on broadly syndicated loans and high-yield loans from 1995 through the first quarter of 2022.

And the following table from Cliffwater’s 2024 Q3 report on US direct lending shows that the private, middle-market loans in the Cliffwater Direct Lending Index, or CDLI, experienced virtually the same net credit losses as did broadly syndicated loans (the leveraged loans in the table) from 2005 through 2023.

It is important to note that the loans in the CDLI are riskier than Cliffwater Corporate Lending’s loans, which are typically senior, secured, and backed by private equity. With that in mind, Cliffwater also produces the CDLI-S, an index that includes only senior and secured loans. From 2010 through 2023, the CDLI-S lost 0.26%, while the CDLI declined 1.08%.

Summarizing the historical evidence, while private credit‘s floating-rate structure insulates lenders from duration risk, rising interest rates and high inflation environments can prove challenging to borrowers who face potentially slowing or even contracting growth and reduced cash flow as economic activity softens, potentially leading to higher defaults. However, historical data suggest that private-credit downside protections and access to greater lender information have helped to mitigate this risk. In other words, the conventional wisdom that loans to larger companies are safer is not supported by the evidence.

Investor Takeaway

Investors willing to accept the potential limited liquidity of an interval fund like Cliffwater Corporate Lending have earned excess returns relative to daily liquid funds with similar credit risks. Those excess returns should be more than sufficient to compensate investors who don‘t need liquidity for their entire portfolio (which is almost all investors, certainly almost all high-net-worth investors). For example, as of May 16, 2025, Invesco Senior Loan ETF had an effective yield to maturity of 8.03%; the effective yield on Cliffwater Corporate Lending was 10.30%. Note that Cliffwater Corporate Lending’s yield was 2 percentage points higher than that of Invesco Senior Loan ETF despite its higher expense ratio (1.58% versus 0.65%).