Why Lending Is Beating Ownership Right Now

Hey Team,

As we settle into 2025, one thing is becoming clear: risk is creeping up, even if the markets don’t show it yet.

2023 and 2024 were incredible years for equities—back-to-back double-digit returns that defied most forecasts. And when that happens, psychology shifts. Investors forget the pain of drawdowns, optimism swells, and risk gets mispriced. That’s where we are right now.

This month I spent time reviewing some high-level institutional outlooks. One takeaway stuck with me: non-investment grade credit currently offers a better risk-adjusted return than the S&P 500. I couldn’t agree more.

I’m not saying equities are broken—but I do think it’s a mistake to assume that good returns will continue just because they have.

Here’s the current setup:

• An extended economic recovery (already long in the tooth)

• High valuations in public markets

• Low risk premiums across the board

• A dysfunctional fiscal environment

• Persistent geopolitical volatility

That’s not a doomsday list—it’s just a setup where defense should get a little more love than offense.

Why Lending Wins in Environments Like This

Lending—when done right—has three major advantages:

1. Predictability: Fixed returns, short durations, and hard collateral.

2. Positioning: You’re senior in the capital stack. If things go sideways, you’re not holding the bag.

3. Liquidity & Control: You dictate the terms. You control when and how capital is deployed. You’re not at the mercy of a fund manager or market volatility.

That’s why I continue to favor lending over ownership—especially at this point in the cycle.

What’s Happening Under the Surface

• Debt is getting more expensive. Companies that were thriving under cheap money are now feeling the pinch.

• Special situations are emerging. Good companies with bad balance sheets are being forced to sell or recapitalize.

• Private equity still has $2.5 trillion to deploy, but senior leverage is harder to come by. That’s pushing more sponsors toward mezzanine debt and creative structures to get deals done.

All of that creates tailwinds for well-structured lending strategies, both senior and junior.

The Big Idea: You Can’t Rely on Cheap Leverage Anymore

From 2009 to 2021, many investors made money by simply buying assets and letting low interest rates do the work. That’s over.

Now, real value has to come from improving the underlying business or structuring a better deal—not just hoping for multiple expansion. Credit investors who can underwrite risk, step into tight situations, and improve the structure of a deal are going to win.

Where I Stand

• Lending continues to offer a better risk/reward profile than most equity opportunities.

• This isn’t a “run for the hills” moment—it’s a time to sharpen your game.

• Smart, nimble capital will thrive over the next 18–36 months—but it won’t look like what worked in 2021.

There’s no perfect roadmap for 2025. But if you understand capital structure, read signals instead of headlines, and stay true to a long-term framework, I think this is one of the best markets in years—for the disciplined.

—

DK