Quick Take: Most investors evaluate private credit funds by yield and manager reputation. Almost none ask the more important question: what happens to my principal if the borrower defaults? The answer is determined entirely by collateral — and the difference between a loan backed by a physical apartment building and one backed by a software company’s enterprise value is not a matter of degree. It is a structural distinction that determines how much of your capital you recover when things go wrong.
The private credit market has grown to more than $2 trillion in assets under management.1 High-net-worth individuals and their advisors now have access to a wide range of vehicles — business development companies (BDCs), interval funds, direct lending funds, and real estate credit funds — each offering elevated yields relative to traditional fixed income.
The conversation usually starts and ends with yield. One fund offers 9%. Another offers 11%. A BDC is yielding 12%. The natural question becomes: why accept less? It is the wrong question. The right question is: what is securing that yield, and what happens to my principal if the borrower defaults?
Collateral is the whole game. Everything else — yield, manager pedigree, fund structure, covenant package — is secondary to what is actually behind the loan. Understanding the difference between hard asset collateral and enterprise value collateral is one of the most useful things a sophisticated investor can do before allocating to any private credit strategy.
Two Loans, Two Very Different Recoveries
Consider two loans, both first-lien, both senior secured, both floating-rate.
The first is a corporate direct loan to a private equity-backed software company. The loan is secured by a pledge over the company’s assets — receivables, intellectual property, customer contracts, and goodwill. The lender’s recovery in a default scenario depends on the company’s enterprise value: what a buyer would pay for the business, or what its assets would fetch in a liquidation.
The second is a senior real estate loan to a multifamily property owner. The loan is secured by a first mortgage lien on a physical apartment building. The lender’s recovery depends on the property’s market value: what the physical assets would generate in a liquidation, or what a buyer would pay for the property’s stabilized rental income — an income stream drawn from individual households paying rent, a non-discretionary expense that does not depend on corporate earnings cycles or M&A markets.
Both loans are described as “senior secured.” Both appear in fund fact sheets under the same category. But in a stress scenario, they behave very differently, because the thing behind the loan is fundamentally different.
Enterprise Value Is Not a Hard Asset
Corporate direct lending — the dominant private credit strategy of the past decade — makes loans to operating businesses. The collateral is typically a pledge over company assets: accounts receivable, inventory, equipment, intellectual property, and goodwill.
The critical point: most of that collateral has no independent value. Its worth is derived entirely from the company’s ability to generate cash flow. A software company’s intellectual property is worth something if the company is a going concern. In liquidation, it may be worth very little. Customer contracts evaporate. Goodwill disappears. What remains is often a fraction of the loan balance.
This structural reality is increasingly visible in the data. Moody’s research shows that distressed exchanges, where lenders accept restructured terms rather than face outright liquidation, accounted for 64% of all corporate defaults in the first half of 2025, the highest annual share on record.2 These are not technical defaults where lenders emerge whole. They are negotiated haircuts on collateral that proved worth less than the loan balance.
The math is straightforward. If a corporate direct lending portfolio experiences a 10% default rate with a 41–55% recovery rate — the historical range cited by Moody’s and Lord Abbett3 — the net loss per $100 invested runs from approximately $4.50 to $5.90. That is before considering fund-level leverage, which amplifies those losses before they reach investors.
A Physical Building Generates Rent Whether Markets Are Open or Not
In multifamily real estate credit, the collateral is different in kind, not just in degree. A first-mortgage loan secured by an apartment building is backed by a physical asset that is intended to generate income from individual households paying rent. When a borrower defaults, the lender has recourse to a physical asset. The building continues to generate rent. The lender can foreclose, take control of the asset, and either operate it or sell it — recovering value from something that exists and produces income, not from a projection of what a company might be worth to a future acquirer.
The historical record reflects this structural difference. Freddie Mac’s multifamily loan program has recorded aggregate credit losses averaging just five basis points per year dating back to 1994. Even the worst vintage on record, originated in 2006 at the height of the housing bubble, experienced credit losses of only 44 basis points.4 That is the structural consequence of lending against hard assets with quantifiable equity cushions.
| Corporate Direct Lending | Senior Multifamily Credit | |
|---|---|---|
| Collateral type | Enterprise value: IP, goodwill, receivables | First mortgage lien on physical property |
| Income source | Corporate cash flow / EBITDA | Tenant rental payments |
| Demand driver | Discretionary (business revenue) | Non-discretionary (shelter) |
| Valuation basis | EBITDA multiple — cycle-dependent | Independent appraisal + rental income |
| Key underwriting metric | Interest coverage (~1.5–2.0x) | DSCR + LTV at origination |
| Recovery rate (historical) | 41–55% (Moody’s / Lord Abbett)3 | 65–70%+ (Real Capital Analytics)5 |
| Historical loss rate | ~2–4% annual default rate (S&P / Moody’s)6 | ~5 bps/yr credit loss rate (Freddie Mac, 1994–present)4 |
| Exit dependency | M&A, IPO, or refinancing | Property sale or refinance |
The Equity Cushion Is What Protects the Lender
In real estate credit, the lender’s protection is structural and quantifiable from the moment the loan is originated. Every loan is made at a loan-to-value (LTV) ratio — typically 60–75% for senior multifamily loans — meaning the borrower’s equity absorbs the first loss in any adverse scenario. On a 65% LTV loan, property values must decline more than 35% before the lender’s principal is at risk at all.
This is precisely what happened during the 2022–2024 multifamily correction. U.S. multifamily property values declined approximately 15–20% from their 2022 peak7 — a significant correction by any measure. But that loss was borne entirely by equity investors, not lenders. A first-lien lender holding a 65% LTV loan on a property that declined 20% in value is still protected by a meaningful equity cushion.
In corporate direct lending, there is no equivalent structural protection. Enterprise value can collapse rapidly and without warning — a technology shift, a management failure, or a broader sector repricing can destroy the value of a company’s assets in ways that have no analog in the physical real estate market.
Why BDC Yields Are Higher — and What That Tells You
BDCs are the most visible and accessible form of corporate direct lending for individual investors. Public BDCs are listed on a stock exchange, offer daily liquidity, and have historically delivered yields in the range of 9–12% — well above what most real estate credit funds target.
That yield premium exists for a reason. BDCs typically lend to smaller, less-established companies that command higher credit spreads as compensation for increased credit risk. The higher yield is not alpha — it is compensation for accepting a fundamentally different risk profile.
There are additional structural risks that do not appear in the yield figure. BDCs can employ up to 2:1 debt-to-equity leverage at the fund level — meaning that portfolio losses are amplified before they reach investors. Payment-in-kind (PIK) income, where borrowers defer cash interest by issuing additional debt, can mask deteriorating credit quality while maintaining reported yields.
None of this means BDCs are poor investments in all circumstances. The point is that a 12% yield from a BDC and a 9% yield from a senior multifamily credit fund are not the same income stream at different prices. They represent different collateral structures, different recovery profiles, and different risk exposures — and the yield spread between them is the market’s estimate of that difference.
The Questions Investors Should Be Asking First
When evaluating any private credit fund, the first question is not: what is the yield? It is: what happens to my principal if the borrower defaults?
That question leads directly to collateral. And collateral leads to a set of follow-on questions that most fund marketing materials do not answer clearly:
- Is the collateral a hard asset with an independently appraised market value, or is it enterprise value derived from the borrower’s earnings power?
- What is the loan-to-value ratio at origination, and what does that cushion look like today given current market conditions?
- Does the asset generate income independent of what happens to financial markets or corporate earnings cycles?
- What is the historical recovery rate for this type of collateral in a default scenario?
- How much fund-level leverage is applied on top of the asset-level leverage, and how does that amplify losses in a stress scenario?
These are not exotic questions. They are the questions any bank credit officer would ask before approving a loan. They are the questions institutional investors have always asked before allocating to private credit. And they are the questions that individual investors and their advisors should be asking now that private credit has become a mainstream allocation in high-net-worth portfolios.
The private credit market offers genuine opportunity across multiple strategies. But not all private credit is the same, and yield alone is a poor guide to risk. A 12% yield backed by enterprise value and a 9% yield backed by a physical apartment building with a 35% equity cushion are not the same instrument. Start with collateral. The rest of the analysis follows from there.
Origin Investments offers multifamily-focused real estate credit strategies that lend against institutional apartment assets at conservative LTV ratios. For investors asking the right question — what is behind the loan? — the answer is a physical apartment building, not an enterprise value multiple.
There is a private real estate investment strategy for virtually every investor.
FAQ
What is collateral in private credit, and why does it matter?
Collateral in private credit is the asset that secures a loan and determines how much principal a lender recovers if the borrower defaults. The type of collateral — whether a physical asset or enterprise value — is the most important factor in evaluating any private credit investment, more so than yield or manager reputation.
What is the difference between hard asset collateral and enterprise value collateral?
Hard asset collateral, such as a first mortgage lien on an apartment building, is backed by a physical property that generates rental income independent of financial markets. Enterprise value collateral — common in corporate direct lending — is derived from a company’s earnings power and can collapse rapidly in a default, leaving lenders with a fraction of the loan balance.
How does loan-to-value (LTV) ratio protect lenders in real estate credit?
In senior multifamily lending, loans are typically originated at 60–75% loan-to-value, meaning the borrower’s equity absorbs the first loss in any adverse scenario. On a 65% LTV loan, property values must decline more than 35% before the lender’s principal is at risk — a structural protection that has no equivalent in corporate direct lending.
Why do Business Development Companies (BDCs) offer higher yields than real estate credit funds?
BDCs typically lend to smaller, less-established companies that command higher credit spreads as compensation for increased credit risk. The higher yield is not alpha — it reflects a fundamentally different collateral structure, higher default risk, and fund-level leverage that amplifies losses before they reach investors.
What questions should investors ask before allocating to a private credit fund?
Investors should ask: Is the collateral a hard asset with an independently appraised market value, or is it enterprise value derived from the borrower’s earnings power? What is the loan-to-value ratio at origination? Does the asset generate income independent of financial markets? What is the historical recovery rate for this collateral type? And how much fund-level leverage amplifies losses in a stress scenario?
Sources
1. Federal Reserve. “Bank Lending to Private Credit: Size, Characteristics, and Financial Stability Implications.” May 23, 2025. Private credit market size approximately $2 trillion in assets under management. federalreserve.gov.
2. Moody’s Ratings. “Credit Strategy: US Credit Review & Outlook” (July 2025). Distressed exchanges as share of all corporate default events. moodys.com.
3. Moody’s / Lord Abbett. Corporate bank loan recovery rate: approximately 41–55%. As cited in Origin internal research.
4. Freddie Mac / DWS Research. “An Introduction to Freddie K Agency CMBS.” Aggregate multifamily credit losses averaging ~5 basis points per year since 1994; peak vintage loss rate of 44 bps (2006). dws.com
5. Real Capital Analytics / Wealth Management. Post-2003 CRE mortgage average recovery rate: 65–70%. As cited in Origin internal research.
6. Moody’s Ratings. “US Corporate Default Risk in 2026.” Private credit default rate range: approximately 1.6–4.7% depending on inclusion of distressed exchanges; article rounds to ~2–4%.
7. Green Street Commercial Property Price Index. U.S. multifamily values approximately 19% below 2022 peak. As cited in Origin internal research.
