Author: Benas Poderis, Founder of ROIX

A couple of years ago, Stephen Schwarzman remarked at a conference: “If you can earn 12%, maybe 13% on a good day, from a first-lien asset-backed loan, what else do you want to do with your life?”

That was in 2023. At the time, a 12% return in the private debt market was still something of a rule of thumb. Between 2019 and the end of 2025, while managing — or serving as part of the management team of — a private debt fund, only two out of more than 50 investments we completed generated returns below 12%.

Sometimes all it took was being faster than other market participants. Sometimes it meant having the ability to quickly finance a €5 million transaction. Other times it required understanding complex acquisitions or being willing to finance asset-light businesses. The circumstances varied, but for a long time, earning 12% in alternative debt was more the rule than the exception.

Our logic was fairly straightforward: we wanted around 12% for senior debt and around 15% for junior debt. After all, subordinated debt should command a higher return than first-ranking secured debt. For years, the entire market more or less operated within this 12–15% range. As institutional investors investing directly rather than through platforms or intermediaries, we justified our somewhat higher pricing with a simple argument: “If you go to the market seeking financing at 8–10%, you’ll still pay 3% to an intermediary, and for short-term borrowing the difference won’t be significant. So why deal with a hundred investors when one can provide the entire amount?”

Still, we always knew there was one inconsistency in our strategy that would eventually become apparent. There was never a shortage of junior debt opportunities yielding 12–15%, but high-quality senior debt at 12% is simply too expensive to be a sustainable market norm. Special situations will always exist, but over time it became clear that such opportunities would become less frequent.

The market evolved. Turbulent years marked by war, the pandemic, and the inflation shock extended the golden age of debt financing for a while longer. At the same time, however, something inevitable happened: enough capital entered the market that investors began competing not only for returns, but for the opportunity to deploy capital at all.

As a result, only a few alternatives remained: invest more heavily in deal-sourcing infrastructure, combine 14% and 10% or 15% and 9% yielding transactions to maintain an attractive portfolio average, or remain committed to the 12–15% range and gradually lose the senior debt portion of the portfolio.

We started 2026 with our first senior debt transaction below 12% after a three-year hiatus. During an investment committee meeting, we joked nostalgically about how interesting it would be if the world turned upside down and senior debt started costing more than junior debt.

As the saying goes, be careful what you joke about.

When Risk Starts Costing Almost the Same

The public bond market has indeed begun turning upside down. Not because senior debt has become more expensive and reached 12%, but because some junior debt instruments have fallen to yields of around 8%.

If a first-mortgage loan with a 50% loan-to-value (LTV) ratio can be priced at 7–8%, while a holding-company loan secured by pledged shares and occupying a subordinated position offers 8–9%, a natural question arises: does the market still differentiate risk adequately?

To answer that question, one only needs to look at bank financing for a comparable project. If bank financing for real estate development currently costs approximately 3.5–5% plus Euribor—or roughly 6.5–8% all-in—it becomes clear that spreads between different risk levels are compressing. Alternatively, the market may be developing inefficiencies due to limited knowledge, insufficient supply, or other factors worth understanding.

One distinction is particularly important and is increasingly being blurred in the market.

Loans with 60%, 70%, or 80% LTV ratios may have perfectly rational pricing relative to one another—the higher the leverage, the higher the risk and expected return. However, there is a fundamental difference between:

• A first-ranking lender financing, say, 80% LTV; and

• A subordinated lender providing an additional 20% when another creditor already has priority over the collateral.

Formally, the total LTV may be the same—80%—but the risk profile is dramatically different. If the value of the asset declines by 40%, one investor may still recover roughly 75% of the invested capital, while the other could lose everything. If the downside risk differs so substantially, shouldn’t the return differ more meaningfully as well?

Beauty Contests

I’m not sure whether the reason lies in insufficient understanding of the terminology jungle — junior debt, mezzanine, senior debt, unitranche, and so on — or simply in growing competition among lenders.

The increasing number of platforms, bond arrangers, and alternative financing providers has created another interesting phenomenon: not a beauty contest among borrowers, but among lenders.

Borrowers speak with credit union syndicates, crowdfunding platforms, public and private bond arrangers, and private debt funds, often comparing all available alternatives simultaneously. Investors do not always see this, but financing arrangers understand very well how significant the difference can be between the terms they originally offered and the way a competitor has packaged the same investment opportunity — sometimes materially weakening the underlying risk protections.

One side effect of this beauty contest is that maintaining an informational advantage in fixed-income markets is becoming increasingly difficult. As a result, deal sourcing is becoming an ever more important differentiator.

A Compass for Investors

If you are wondering whether the pricing of second-lien loans—or situations where assets are already pledged to another creditor in first position—is appropriate, four simple principles can help assess most situations.

• The 1.5x Rule

Junior debt secured by the same asset should be at least one and a half times more expensive than senior debt. If senior debt costs 6%, junior debt should cost at least 9%. If senior debt costs 10%, junior debt should yield at least 15%.

Sometimes the answer is obvious — you only need to look at the terms offered by the primary lender.

• The Primary Lender’s Exposure Matters

If the primary lender finances 50% of the project and junior debt contributes another 20%, an 8–9% return may appear reasonable.

However, if the primary lender already finances 75% and bonds are used to raise an additional 15%, accepting such risk without a double-digit return becomes difficult to justify.

• Understand What You Are Financing

If you are financing a holding company, you need to determine whether it is a diversified business group with multiple cash-flow sources and projects, or merely a structure used to move debt one corporate level above a bank-financed operating company because the bank no longer permits additional borrowing.

The “Compromise Premium” Rule

Every deviation from what would be acceptable to a bank or a senior lender should command an additional return premium. A second-lien security position warrants an additional premium. The absence of a construction permit warrants an additional premium. A shareholder equity contribution below 30% warrants an additional premium. If a company is expected to achieve profitability only in the future, that should command yet another premium.

To conclude, I am an enthusiastic supporter of mezzanine financing and am pleased to see an increasing variety of financing solutions emerge in the market. At the same time, we should not forget one simple principle: almost anything can be an investment opportunity, provided we understand why we are investing, what risks we are assuming, and whether we are being adequately compensated for those risks through additional return.