Private credit: Opportunity in uncertain times

This article is intended for readers with a good understanding of investments. Investing in private markets is often complex and illiquid and brings higher idiosyncratic risks than investing in public markets, and as such, it is suitable only for experienced investors. This article is also general in nature and provided for informational/educational purposes only. It does not take into account any specific investment objectives, the financial situation or particular needs of any particular person.  

Key points 

• Private credit has been one of the fastest-growing asset classes since 2010
• The asset class has the potential to hedge against the impact of tariffs, as private borrowers are typically less exposed to foreign-sourced revenues
• Private credit spans a variety of strategies, but special situations particularly stand out, in today’s environment
• While not without risks, private credit has historically delivered strong risk-adjusted returns, making it a valuable component in portfolios seeking income, resilience and diversification.

Private credit, a form of non-bank lending to unlisted companies, has become one of the fastest growing asset classes in the last 15 years. Global assets under management are expected to reach $3 trillion by 2028, nearly ten-times the size of the asset class in 2010¹ (see chart). 

Whilst this is a small fraction of the wider fixed income universe, private credit has matured into an important financing option for an increasing range of businesses and private equity-backed borrowers: borrowers that increasingly favour private credit over traditional bank financing, thus expanding its appeal to a diverse range of investors. 

Growth in private credit assets under management 

Private credit has rapidly expanded over the last 15 years

Credit fundamentals remain strong 

Tighter banking regulations following the global financial crisis, opening the door for private credit funding to fill a large lending gap left by traditional lenders, which had retreated from financing mid-market borrowers². More recently, rising interest rates improved the risk/reward profile of private credit. As deals, particularly in the US and Europe, tend to be priced on a floating-rate basis, higher borrowing costs have translated into higher yields and greater spreads against public fixed income securities³.  

In fact, the asset class has been among the strongest performing assets since the beginning of 2022⁴. Although default risk has increased, credit fundamentals remain strong with the average net leverage of private borrowers remaining on a steady downward trajectory⁵.  

Tariff protection?

With growing uncertainty around wide-ranging trade tariffs introduced by President Trump in April, investors are looking for ways to protect their portfolios from ‘tariff risk’. This could present a favourable opportunity for private credit managers. 

Private credit may serve as an effective hedge against the impact of the tariffs, as private borrowers are typically less exposed to foreign-sourced revenues (see chart). This is particularly evident in the mid-market borrower segment, which tends to show a favourable skew towards domestic revenues. 

Whilst companies’ supply chains will inevitably change, this domestic exposure has the potential to offer some protection from increasing policy uncertainty. That said, this may not offer complete protection. While domestic revenue exposure can help mitigate some tariff-related risks, companies, including mid-market borrowers, could still face challenges from rising input costs. Nonetheless, increasing transaction activity and ‘higher for longer’ interest rate expectations, the risk/return profile for private credit are likely to remain attractive in 2025 and beyond. 

US middle market – Higher concentration of domestic revenues 

US middle market companies generate far more revenues domestically than do their S&P 500 peers, potentially limiting exposure to increased trade tariffs 

Return drivers 

From an investor’s perspective, private credit typically delivers higher yields than traditional public fixed income, often referred to as the 'illiquidity premium'. This occurs due to the complexity and reduced liquidity of private lending. It also tends to have a lower correlation to public markets, which can potentially improve risk-adjusted returns when included in a traditional equity-bond portfolio.  

In addition, private credit provides access to a broad range of borrowers and sectors outside of public markets, adding diversification benefits. Since private loans are not actively traded, they are less exposed to daily market swings. Finally, a floating interest rate structure helps to make the asset class an effective hedge against inflation, as interest payments adjust upwards during periods of rising consumer prices (and interest rates), allowing investors to maintain their purchasing power.  

Range of strategies 

Private credit spans a wide spectrum of strategies, each intended to meet different risk and return objectives. Direct lending, an approach that makes direct, illiquid loans to private non-investment grade companies outside of the traditional banking system, is the largest and has grown significantly in recent years. With increasing pressure on private equity firms to provide liquidity and to deploy the significant capital raised in recent years, we believe that this creates a favourable backdrop for direct lending.  

Special situations is another strategy gaining traction, one which involves providing tailored financing to companies in distress, stands out for its ability to capitalise on market inefficiencies and periods of dislocation, making it a particularly compelling opportunity in today’s environment. Two decades of private equity buyouts in a near-zero interest rate environment, followed by a sharp 500 basis point rise in interest rates, has left many portfolio companies financially constrained however, not inherently distressed. Consequently, traditional growth strategies like M&A and geographic expansion have been put on hold to prioritise debt servicing. This creates a unique opportunity for special situations managers to step in and provide capital solutions to strong businesses that are strategically and operationally sound. 

Within special situations, real estate represents a distinct opportunity for several reasons. Despite rates being forecast to fall later in 2025, yields remain above historical levels. In addition, real estate asset values have been falling since early 2022, meaning that loans are now backed by lower asset values, reducing downside risk. In addition, a mid-market banking crisis in 2023 resulted in less bank lending activity from smaller lenders, the main source of financing for mid-market companies, leaving a gap for private investors to fill. 

Diversification opportunity 

Whilst history is no guarantee of future performance, private credit has shown resilience across different market environments, something that is especially valuable during periods of extreme volatility, as experienced in recent weeks.  

Investing in private credit is not without its risks, liquidity constraints and credit risk are of course factors to consider, however these can be managed with a careful selection process and a long-term mindset. For investors who are willing to lock up their capital for many years private credit can offer a compelling way to access attractive yields and to diversify portfolio exposure.