Private credit, one of the fastest-growing segments of global finance, is entering a new phase. For years, direct lending — senior-secured loans to middle-market borrowers — has been the dominant strategy, attracting hundreds of billions of dollars from institutional investors. But as capital has poured in, spreads have compressed, deal terms have loosened, and what was once a niche opportunity has become a commoditized baseline.
A recent RankiaPro report describes this shift in blunt terms. Widely accessible and crowded with capital, direct lending offers limited differentiation between managers. According to the report, the real opportunity lies in strategies that require deeper expertise, more specialized underwriting, and active management.
The report points to asset-based lending, residential and consumer loans, non-consumer credit secured by real assets, and real estate credit as the areas where active managers can generate superior risk-adjusted returns. These sub-strategies are less standardized, often require bespoke structuring, and demand hands-on engagement with borrowers.
“It’s a position I have argued for some time, that direct lending has become the “beta” of the private credit strategy,” says Arif Bhalwani, founder and CEO of Third Eye Capital Corporation, a Toronto-based private credit firm. “Alpha” is found in other sub-strategies like asset-based lending and special situations, which are places we excel as a firm.”
This transition plays to the strengths of experienced managers like Bhalwani and Third Eye Capital. Since 2005, the firm has deployed more than $5 billion in asset-based financing, focusing on companies often overlooked by traditional banks.
Unlike many funds that scaled aggressively into direct lending during the boom years, Third Eye Capital Corporation built its model around complex situations — financing borrowers in transition, restructuring, or growth phases where collateral and fundamentals matter as much as cash flow projections.
That experience is increasingly relevant in the current market. As investors move beyond commoditized direct lending, managers with proven track records in asset-based and specialty finance are likely to benefit from greater institutional interest.
The RankiaPro report emphasizes that in a higher-rate environment, managers can no longer rely on financial engineering or beta exposure to generate attractive returns. Instead, they must adopt a relative value approach, allocating capital across sectors and geographies where the risk/return trade-off is most favorable.
This requires rigorous underwriting to evaluate collateral, operations, and management quality. It requires ongoing engagement to monitor borrower performance and to renegotiate or restructure when conditions change. And it requires resilience, with structured loans that can withstand economic downturns and that are supported by tangible collateral.
Firms that operate this way, like Third Eye Capital, already have the infrastructure and expertise in place to adapt. Their lending model is built around negotiated terms and asset-backed security and aligns closely with the direction RankiaPro suggests investors should be looking.
Private credit remains an attractive asset class. Institutional appetite is strong, with pension funds, insurers, and sovereign wealth funds continuing to increase allocations. But the industry is maturing, and with that maturity comes greater scrutiny of managers’ strategies.
Investors will increasingly differentiate between “beta” exposure through direct lending and “alpha” strategies where experienced managers can apply skill, analysis, and active oversight.
For firms like Third Eye Capital, this validates an approach they have been refining for nearly two decades: focusing on complexity, structuring deals with resilience, and seeking returns in areas where passive strategies cannot compete.
As private credit evolves, the winners are likely to be those who treat it less as a yield product and more as an actively managed investment discipline.
