U.S. direct lending returns improved in 2Q26, recovering from the AI-driven shock that had pushed first quarter performance to its lowest level in nearly four years. According to the Cliffwater Direct Lending Index (CDLI), return improved to 1.9% in 2Q26, up from 1.1% in the first quarter, as the CDLI’s average fair-value slipped 37 basis points to 98 in 2Q, after declining by over a point in the first quarter. Performance was in line with the broadly syndicated market, which returned 1.88% in the quarter, per the Morningstar LSTA Leveraged Loan Index. Similar to direct lending, the stabilization in software loans drove the improvement: the Software & Services sub-index dipped 120 basis points in 2Q, compared to a drop of over six points in the first quarter.
Technology, which represents 24% of the CDLI (at cost value), remained key to the health and performance of the asset class. The sector, which declined 2.2% in 1Q, was down 0.7% in the second quarter, which drove the share of loans marked at or below 90 higher to 7.5%, with technology loans representing a 10% share, ahead of consumer/retail and healthcare. Pressure from lower fair value marks drove approximately 63% of BDCs to report a lower weighted average fair-value mark in 2Q, compared to 77% in 1Q, according to BDC Collateral.
Despite the pressure on marks, underlying fundamentals remained stable. The Golub Capital Altman Index, which tracks actual revenue and EBITDA growth across roughly 110 to 150 middle-market borrowers in the lender’s portfolio, reported revenue and earnings growth of 3.1% and 3.7% year-over-year in the first two months of 2Q26. Software companies in the cohort outperformed with 4.0% revenue growth and 9.8% earnings growth, suggesting the divide between declining marks and resilient earnings reflect fears around disruption from AI, rather than a fundamental credit event.
Overall payment in kind (PIK) levels remained stable, although the trailing four-quarter rate of loans in the CDLI amended to include PIK increased to 3% from 2.2% in 1Q26. Across the broader BDC universe, BDC Collateral reported PIK income averaged 5.9% of total investment income, with greater dispersion: 13% of BDCs drawing more than 10% of income from PIK while under half of the BDC universe under 5%. Analysis from Morgan Stanley further shows that while the number of loans exercising PIK has increased, the average PIK rate is lower, leading to more stabilized PIK levels.
Realized losses in the CDLI were muted at 0.1%, with non-accruals falling to 1.7% of cost value, in line with the long-term average, after rising to 1.9% in the previous quarter. The trailing four-quarter default rate in the CDLI held at 2%, with healthcare as the single highest defaulted sector, just ahead of technology.
Interest income remained the primary driver of returns, contributing 2.3% in 2Q, down from 2.5% a year ago because of lower base rates. The yield on the CDLI ticked up to 10% in the second quarter, reflecting wider spreads on new loans and the narrower loan markdowns.
