Why private credit
Private credit addresses many of today’s market challenges. The asset class is a useful tool in helping investors potentially achieve their goals and objectives of income generation, attractive risk-adjusted return, and diversification relative to traditional fixed income solutions.
The global credit market
Private credit has exploded as an asset class.
in 2008
in 2024
Source: As of 12/31/2024 Preqin.
Private credit investing: potential benefits
Private credit has potential to offer a premium yield compared to other fixed income sectors
Asset class yields (%) (As of 12/31/2025)
Source: Franklin Templeton, Cliffwater, Morningstar. As of December 31, 2025. The indices used are Cliffwater Direct Lending Index for Private Credit, Morningstar LSTA US LL TR USD Index for Leveraged Loans, Bloomberg Corporate High Yield Index for US High Yield, U.S, Bloomberg US Agg Bond TR USD Index for US Bonds. This information is provided for illustrative purposes only. Hypothetical portfolio results shown do not represent the performance of an actual investment. The results are rebalanced quarterly and assume reinvestment of ordinary income and distributions. The results do not reflect a deduction of fees, taxes, and other expenses, if any, which would reduce performance.
Private Credit Investment Risks: Private credit investments can be similarly impacted by interest rates as publicly offered fixed income securities. Additionally, privately offered credit investments including private debt and loans are suitable only for investors who can bear the risks associated with private market investments (such as private credit and private equity) with potential limited liquidity. Shares will not be listed on a public exchange, and no secondary market is expected to develop. Assessing the value of privately offered credit investments can be hindered by a lack of available information and depend on representations made by the borrower. There can be no assurance that such representations are accurate or complete, and any misrepresentation or omission may adversely affect the value of such investments.
Leveraged Loans Investment Risks: Leveraged Loans carry similar risks as private credit investments, but carry a higher degree of risk, since borrowers typically have high levels of debt and/or a low credit rating. Due to the higher risk associated with these loans they typically pay higher interest rates, but also carry a higher risk of default.
Real Estate Investment Risks: Risks of investing in real estate investments include but are not limited to fluctuations in lease occupancy rates and operating expenses, variations in rental schedules, which in turn may be adversely affected by local, state, national or international economic conditions. Such conditions may be impacted by the supply and demand for real estate properties, zoning laws, rent control laws, real property taxes, the availability and costs of financing, and environmental laws. Furthermore, investments in real estate are also impacted by market disruptions caused by regional concerns, political upheaval, sovereign debt crises, and uninsured losses (generally from catastrophic events such as earthquakes, floods and wars). Investments in real estate related securities, such as asset-backed or mortgage-backed securities are subject to prepayment and extension risks.
Private Real Estate Investments Risks: Private real estate bears the same risks as real estate in general, but additionally is suitable only for investors who can bear the risks associated with private market investments (such as private credit and private equity) with potential limited liquidity. Shares will not be listed on a public exchange, and no secondary market is expected to develop.
Fixed Income Investment Risks (including U.S. Government securities): Bond prices generally move in the opposite direction of interest rates. As the prices of bonds in the fund adjust to a rise in interest rates, the fund’s share price may decline. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value. High yield bonds are subject to greater price volatility, illiquidity, and possibility of default.
| Features | Private credit | Leverage loans | High yield | |
|---|---|---|---|---|
Enhanced yields | Attractive yield relative to traditional fixed income | |||
Floating rate | Natural hedge in a rising rate environment | |||
Senior secured | Risk/return profile at top of the capital structure | |||
Covenants | Stricter requirements on loan documentation and higher equity cushions (lower loan-to-value) | |||
Private negotiated | Directly negotiate fees, covenants, and investment terms with borrower |
Franklin BSP Lending Fund provides access to a portfolio anchored in direct lending and seeks to generate consistent income, provide diversification benefits, and lower volatility compared to public credit markets.
Commercial real estate debt
Investors in commercial real estate (CRE) debt serve as lenders to property owners to help purchase, renovate or repurpose a property. CRE lending and financing is of critical importance; however, traditional bank lenders may be hesitant to lend given the current challenging environment of steeply rising interest rates, falling property valuations, and severe issues in the office sector. This situation is exacerbated by a looming maturity wall of low-interest loans due to refinance in 2024 and 2025, potentially causing significant distress for highly leveraged lenders. However, this crisis also presents a unique investment opportunity, for experienced private credit managers with fresh capital to deploy.
The swift, steep rise of interest rates
As inflation reached 40-year highs in 2022, the U.S. Federal Reserve raised its benchmark rate from historically low, near-zero levels to more than 5% in 17 months. The pace and size of the increase, not seen since the early 1980s, has had an enormous impact on the CRE debt market.
Federal Funds Rate Rises at the Fastest Pace since the 1980s
Historical Federal Funds Rates
Source: Federal Reserve Bank of ST. Louis, Economic Research Division.
Connect with an expert
Your Franklin Templeton Private Markets Director can share insights about investing in private credit.
Knowledge Hub
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Benefit Street Partners believes investors and financial advisors can navigate the complexities of the CRE market and capitalize on emerging opportunities by staying informed about interest rate movements and market trends.
Earn CE credit while examining the merits of private credit and how they compare to public market equivalents. Distinguish between the different types of private credit options (direct lending, mezzanine, and distressed), and the related return, risk and income characteristics.
Index definitions
The CDLI is an asset-weighted index that is calculated on a quarterly basis using financial statements and other information contained in the U.S. Securities and Exchange Commission (“SEC”) filings of all eligible BDCs.
“Cliffwater,” “Cliffwater Direct Lending Index,” and “CDLI” are trademarks of Cliffwater LLC. The Cliffwater Direct Lending Indexes (the “Indexes”) and all information on the performance or characteristics thereof (“Index Data”) are owned exclusively by Cliffwater LLC, and are referenced herein under license. Neither Cliffwater nor any of its affiliates sponsor or endorse, or are affiliated with or otherwise connected to, Franklin Templeton Companies LLC, or any of its products or services. All Index Data is provided for informational purposes only, on an “as available” basis, without any warranty of any kind, whether express or implied. Cliffwater and its affiliates do not accept any liability whatsoever for any errors or omissions in the Indexes or Index Data or arising from any use of the Indexes or Index Data, and no third party may rely on any Indexes or Index Data referenced in this report. No further distribution of Index Data is permitted without the express written consent of Cliffwater. Any reference to or use of the Index or Index Data is subject to the further notices and disclaimers set forth from time to time on Cliffwater’s website at https://www.cliffwaterdirectlendingindex.com/disclosures.
The Morningstar LSTA US Leveraged Loan Index is designed to deliver comprehensive, precise coverage of the US leveraged loan market. Underpinned by PitchBook | LCD data, the index brings transparency to the performance, activity, and key characteristics of the market.
The Bloomberg USD High-Yield Corporate Bond Index is a rules-based, market-value-weighted index engineered to measure publicly issued non-investment grade USD fixed-rate, taxable and corporate bonds. To be included in the index, a security must have a minimum par amount of $250 million and have a minimum maturity of 1 year at rebalancing. Emerging market debt is excluded.
NAREIT Equity REIT Index is an index designed to provide the most comprehensive assessment of overall industry performance and includes all tax-qualified real estate investment trusts (REITs) that are listed on the New York Stock Exchange, the NYSE AMEX Equities or the NASDAQ National Market List.
The NFI-ODCE Index includes open-end commingled funds pursuing a core investment strategy, primarily investing in private equity real estate. This is a quarterly, capitalization-weighted, gross-of-fee, time-weighted return index with an inception date of December 31, 1977.
The Bloomberg Global Aggregate Index measures the performance of global investment grade fixed-rate debt markets, including the U.S. Aggregate, the Pan-European Aggregate, the Asian-Pacific Aggregate, Global Treasury, Eurodollar, Euro-Yen, Canadian, and Investment Grade 144A index-eligible securities.
The Bloomberg US Aggregate Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).
ICE BofA Current 10-Year US Treasury Total Return USD Index is market value weighted and is designed to measure the performance of U.S. dollar-denominated, fixed rate securities with minimum term to maturity greater than seven years and less than or equal to ten years. The ICE U.S. Treasury Bond Index SeriesTM has an inception date of December 31, 2015. Index history is available back to December 31, 2004.
Important Information
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Franklin Distributors, LLC. Member FINRA, SIPC. All entities mentioned are Franklin Templeton affiliates companies. Prior to July 7, 2021, Franklin Templeton Distributors, Inc., and Legg Mason Investor Services, LLC served as mutual fund distributors for Franklin Templeton. Investment Products: NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE. Reports and other information about the fund are available on the EDGAR Database on the SEC's Internet site at https://www.sec.gov/