Gordon Model
Private Credit glossary · Loan Structures & Instruments
Definition
A return-decomposition framework: expected return = current cash yield + cash-flow growth. Adapted to direct lending — which has no equity-style growth in cash flows — the model collapses to E[R] ≈ y_c - Expected Credit Losses, i.e., contractual current yield minus PDtimesLGD on the portfolio. For a typical first-lien middle-market book yielding 11% with 80 bps EL, the Gordon-implied net return is sim 10.2% before fees.
Gordon Model in plain English
The Gordon Model is a simple way to answer "what return should I expect from this investment?" The core idea: your total return is just the cash it pays you now (the yield) plus how much that cash grows over time. Lending is a special case — a loan pays a fixed interest rate and doesn't "grow" like a company's profits, so growth drops out and you're left with: expected return ≈ the interest rate you're promised, minus what you lose to borrowers who don't pay you back. Think of it like a $11 lemonade coupon that pays every year: you expect roughly $11 of yield, but if a small fraction of coupons bounce, you shave a little off the top — here about 0.80 per $100 lent, leaving around 10.2%.
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