Time For Income Investors To Bargain Hunt? | Steven Bavaria

The 'income‑factory' strategy targets equity‑like long‑run returns (~9–10%) by prioritizing high cash yields from credit and systematically reinvesting distributions rather than relying on capital appreciation, with managers willing to accept dividend variability to capture durable cash flow.

Headline nominal distribution rates (even 12–14%) can mask capital erosion or cuts: recent examples show 12% income translated to roughly 9% annualized total return, while steadier 7–9% yields reinvested are expected to compound and roughly double income every 9–10 years.

Credit seniority and typical recoveries (~60–70%) materially limit portfolio losses — even stressed default scenarios (e.g., 10% defaults) produce modest hits — which argues that many market discounts imply implausibly severe default outcomes (the selloff prices imply 50–70% default scenarios).

Private‑credit's expansion and opacity raise valid quality concerns, but the fact that many originators and large managers 'eat their own cooking' (hold the loans they originate) aligns incentives and makes deliberate fraud less likely; the larger operational risk is incompetence, not hidden catastrophic losses.

The BDC/private‑credit repricing (many names trading at 20–50%+ discounts) created significant buying opportunities because defaults in many portfolios have not meaningfully risen and institutions/large managers retain substantial stakes, so some discounts reflect mark‑to‑market flows rather than fundamental credit collapse.