Asymmetric By Design

This piece examines the structural dilemma in the private credit market and presents Bootstrap Europe, a specialist European technology growth lender, as the opposite to a broken model.

Apollo Global Management has recently been in talks to sell its $3 billion publicly listed business development company. Defaults inside that fund doubled in a single quarter, to 5.3%. The firm's direct origination gross returns have collapsed from 2.6% a year ago to 0.5%. Its private BDC was faced with redemption requests for 11% of its shares.

From the onset, the recent headwinds in the private credit space may just be temporary. I believe, however, that they are structural issues with the business development company model. Understanding what a BDC is, and how it generates returns, is a starting point for understanding why the market reacted so heavily.

BDC: Making loans to private companies

A business development company, or BDC, is a US regulatory structure created in 1980 to channel investment into small and mid-sized companies. Like a REIT, a BDC is an investment vehicle where investors can invest in private markets. In practice, that has made the BDC the dominant US vehicle for direct lending — senior secured loans to middle-market companies that traditional banks have stepped back from financing.

The BDC market has grown enormously over the last fifteen years — from a modest niche in the wake of the 2008 financial crisis into one of the central channels of US middle-market credit, with assets under management now in the several hundred billion dollars across listed and private vehicles. Two forces drove the growth: the post-financial crisis retreat of regional banks from middle-market lending, and the appetite of retail and high-net-worth investors for yield through the long zero-interest rate era since then.

The BDC originates or acquires senior secured loans to mid-market companies, collects coupon income, distributes most of it to investors as dividends, and reports a net asset value based on quarterly valuations of its loan portfolio. The investor's total return is the dividend yield plus or minus any change in the underlying loan values.

That structure was unproblematic in 2017–2022, when defaults were exceptionally low, growth was steady, and yield-hungry retail investors were grateful for any positive coupon. It becomes problematic when the cycle turns.

The Private Credit Blues Has Arrived

When credit conditions deteriorate, the BDC model has a problem. The four symptoms in the headlines this quarter — rising defaults, NAV markdowns, share-price discounts, redemption requests — are all pointing to the same structural issue in the BDC market.

As the Wall Street Journal recently reported, investors in BDC funds lined up to exit at NAV, forcing the manager to sell performing assets. Blue Owl's flagship publicly traded business-development company, Blue Owl Capital Corp, quickly lost 25% of its net asset value.

The fundamental flaw of the BDC model was built on a simple idea. It worked for the better part of a decade because the cycle was strong. It is failing now because the cycle has turned.

Apollo's announcement that it will provide daily valuations across its $800 billion credit book by the end of September is being reported as a sign of strength. In fact it is more like a concession to current investors looking for a way out, as the structural problem in private credit remains.

We can now see that the BDC segment does not compensate for the dispersion of outcomes — and dispersion is exactly what lending into technology growth produces.

The Bootstrap Europe Model: Three Yield Drivers

Bootstrap Europe was founded in 2015 by Stephanie Heller and Fatou Diagne — one of the rare women-led GPs in European credit — on a deliberately inverted premise. The firm's classic deal is a senior secured loan of €1m to €25m to a European technology growth company, with a 36–48 month maturity and principal amortisation throughout. The targeted return is approximately 20% IRR, and it is constructed from three distinct components.

The first component is a cash yield of 13–15% on the loan amount consisting of 10–12% cash interest paid monthly and other fees. This is the same type of return a BDC investor receives: senior secured coupon income from the loan side. Critically, this piece alone is more than competitive with what the largest BDC platforms are now delivering. Apollo's reported 0.5% gross return on direct origination versus Bootstrap's 13–15% yields speak volumes.

The second component is equity exposure through warrants and exit fees, contributing an additional 5–7%. Warrants are issued by the borrower to Bootstrap as part of the loan agreement. A warrant is the right to acquire a defined number of the company's shares at a strike price set at the company's last financing round, exercisable at exit. They typically equal 10–12% of the loan principal at the time of origination. For the borrower, issuing warrants is materially cheaper than raising more dilutive equity. For Bootstrap, warrants are the asymmetric upside — a modest contribution to returns if borrowers merely repay on schedule, and a transformative one when borrowers exit at high multiples.

Riding the Unicorn Upside

As mentioned before, lending into technology companies produces dispersion. Indeed, a number of borrowers may default, but the majority of loans should perform and repay. A small number may become unicorns, and Bootstrap's warrants capture the unicorn outcomes specifically: when a borrower exits at a high multiple, the warrant converts that exit into a cash payout sized to the company's equity appreciation since the last financing round. In the Bootstrap Europe model, one unicorn warrant can cover several defaults and still lift fund returns above what the coupon alone produces.

The ~20% IRR target is therefore not a higher-risk version of the BDC return. It is a differently structured return. Same senior-creditor seat at the table. Plus an equity option the BDC investor never owned.

Recent realisations validate the warrant mechanism too. A Danish biotech company merged with a US counterpart and returned 3x the forecast debt-only IRR on Bootstrap's position. A German startup divested a subsidiary and repaid Bootstrap's loan ahead of schedule at over 20% IRR. Monzo's acquisition of Habito in the UK, the first in the neobank's history, returned equity-like multiples to Fund II investors. Returns of that shape are what the warrant structure is built to produce — and what the BDC model cannot deliver.

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