A dirty little secret in a $1.2 trillion world of credit is getting exposed as the Wall Street rout deepens: For big-ticket leveraged borrowers, private debt is now a cheaper financing option than the ailing public market, up-ending industry norms.

As banks get pummeled by risk aversion and sinking asset values, direct lenders are lavishing risky companies and private-equity firms with capital at rates below what's available in the volatility-lashed high-yield and syndicated-loan market.

These asset managers are so desperate to unleash all the billions amassed in the low-yield era that they're increasingly putting up with lower returns than their risk-averse peers in other parts of the credit world are willing to stomach. As traditional lenders beat a retreat, the bonanza is helping power leveraged buyouts (LBOs) with deals including The Access Group, Davies Group, Ivirma Group, and Zendesk.

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