Loans are typically senior secured, floating rate over a benchmark, and negotiated bilaterally, which means covenants and pricing are set directly between lender and borrower rather than by a syndication market.
Yield comes from three sources: the base rate, a credit spread, and an illiquidity-premium for holding a loan with no trading market. That last component is also the risk, since exiting before maturity usually means selling at a negotiated discount or not at all.
Because loans are marked by model rather than by trade, credit deterioration can appear late. Watch payment-in-kind interest as a share of income, the pace of amendments, and how concentrated a fund is in a single sector or sponsor. See leveraged-buyout and interval-fund.
Related: illiquidity-premium, leveraged-buyout, interval-fund, distressed-debt, distribution-yield, private-equity