Private credit is doing exactly what investors hoped it would in a year like this: providing strong, floating-rate yield and acting as a shock absorber from market volatility. Both Direct Lending and Asset-Based Finance (ABF) can offer investors consistent, compounding, contractual income. The ongoing shift in tariff-driven inflation dynamics suggests that business costs could rise, especially in sectors reliant on imported goods, underscoring the critical value of credit selection, diversification, and active risk management.
But with $2.2 trillion1 in private credit AUM amassed over just five years, the space has become increasingly crowded. As dry powder stacks up, investors are rightly asking: Is credit quality holding? How attractive is the relative value given spread tightening? How does risk evolve from here?
To help cut down the noise and help us unpack what this all means, we sat down with Dan Pietrzak, Global Head of Private Credit at KKR, for his take on where we are, what he’s watching, and what he believes could drive returns from here.
Let’s start with volatility. It’s back. How does that shape your outlook?
There is clearly heightened sensitivity around geopolitical tension and looming uncertainty around U.S. policy. That will always make markets feel uneasy and result in slower capital markets activity. The sharp equity sell-off following Trump’s “Liberation Day” tariff announcement underscores just how fragile sentiment is around sudden policy shifts. But that doesn’t necessarily translate to broad credit issues. In fact, credit has held up particularly well in the recent equity sell-offs, and dislocation often creates opportunity for credit investors. Big picture, we remain constructive on the global investment environment and our portfolios have performed well to date.
What role can private credit play in an investor’s portfolio?
Direct Lending thrives because of its consistent, long-term ability to generate steady, compounding income. That’s exactly why it remains a core portfolio staple. Not long ago, floating rates were near zero and returns depended almost entirely on loan margin. Today, investors benefit from elevated base rates and the relevant spread—resulting in strong cash yields and compelling all-in returns for senior secured risk. This allows investors to secure strong returns without compromising credit quality or moving too far down the risk spectrum. We also focus on the upper middle-market, or companies with $50-$150 million of EBITDA, which tend to have more levers they can pull to turn things around in difficult periods. In an environment like this, we’re trying to make sure we lend to high-quality companies with a significant competitive moat around them.
While we focus on scaled companies in Direct Lending, ABF provides complementary exposure to that with hard collateral and different economic drivers. Instead of lending to businesses, you’re lending against tangible assets—autos, equipment, consumer loans. It is a distinct risk profile and a diversifier to traditional corporate credit.
What many don’t realize is that ABF is also secured risk, backed by real collateral. That’s particularly compelling in periods like this, where tariff-driven cost pressures are front and center. Traditional unsecured credit depends on earnings forecasts and cash flow assumptions—both vulnerable to macro shifts. ABF, by contrast, is anchored in contractual structures tied to liquidation value, not speculative growth models.
As interest rates have moved lower, direct lending spreads have come in. Has that affected investor appetite for the asset class?
There is still a lot of investor demand for direct lending. Even with spread compression, elevated base rates make today’s all-in yields compelling—especially for senior-secured risk. As mentioned, the cash yield an investor can achieve for senior-secured risk is more compelling today compared to the last decade following the Global Financial Crisis (GFC). Being able to make 10%+ gross return on an unlevered basis is attractive. In fact, many investors have opted for a levered version of direct lending, which has held up just as well given the cost of leverage coming down as spreads tighten more broadly. This dynamic still makes it possible to earn low-teens returns. The power of compounding is real.
What if inflation resurfaces and rates reverse course?
That is our downside scenario. If inflation does flare up, we would anticipate higher defaults—particularly for levered companies where free cash flow is already tight, and the company has less cushion to deal with the negative impacts. This is where credit asset selection matters the most. We are underwriting to stress cases and looking closely at cyclical exposure. And if things do turn, we have the tools—including a dedicated workout team, portfolio monitoring, and legal resources—to respond quickly. We are also often the sole or lead lender, which gives us the ability to actively manage through any issues.
As competition increases in direct lending, how do you think about preserving quality in the portfolio?
We are not afraid to walk away from deals that don’t meet our terms. Ultimately, it is a borrower-friendly market, but that is more a reflection of spread compression, which has been driven by a lack of supply amid very high demand. Thus far, I think the market has done a nice job of holding its ground on maintaining collateral protections.
At the end of the day, private credit is a storage business. This isn’t trading—we own these loans until we get repaid. So, structure, documentation, and fundamental risk are our north stars. Spreads have compressed, but we’ve generally seen covenants and security packages hold up. We’re leaning into that discipline.
Where are you seeing white space in ABF?
The opportunity set in ABF is enormous—over $6 trillion today and projected to exceed $9 trillion,2 making it larger than the syndicated loan, high yield bond, and direct lending markets combined. Yet it remains relatively undercapitalized, especially at scale.
As global capital markets evolve, banks are reevaluating balance sheet usage, and corporates are shifting toward asset-light models. That’s opening the door for long-term capital providers like us. Since 2022, we’ve acquired over $30 billion in portfolios from banks repositioning their exposure, and we expect to remain active partners—whether in deal collaboration or risk transfer transactions.
Another major trend is the broader move from capital-heavy to capital-light. Public markets are rewarding asset-light companies and we are seeing that play out in real time. Large corporates are increasingly looking to offload assets and partner with long-term capital providers, while specialty finance companies are seeking scaled, strategic capital to support their next phase of growth. At the same time, institutional demand is rising—corporate pensions are rotating out of equities into higher-yielding, private investment-grade credit in search of spread premium and portfolio diversification.
What about M&A? Is deal flow finally back?
It’s picking up, but not quite at the pace many market participants expected post-election. There is still a lot of dry powder, and investors are pushing for realizations, DPI figures are still depressed. But geopolitical headlines have kept some GPs on the sidelines.
We do think activity will ramp—just maybe more gradually than people hoped.
There’s been ongoing debate around transparency in private credit valuations. How do you respond to that?
We use independent, third-party valuation providers—just as banks do—and I’d expect most large platforms in our space to follow suit. Having spent nearly two decades at banks before joining KKR, I can say the process in private credit is equally robust and well-governed. Valuations are point-in-time assessments based on the best available information. If an asset is marked reasonably one quarter and faces a credit event the next, that doesn’t mean the prior mark was flawed. Circumstances can change quickly—a key customer loss, for example—and it’s important to understand the facts before drawing conclusions.
REFERENCES
1 Pitchbook: Global Private Debt Report as of March 18, 2025
2 Integer Advisors and KKR Credit research estimates based on latest available data as of March 31, 2024, sourced from country-specific official / trade bodies as well as company reports. Represents the private financial assets originated and held by non-banks based globally, related to household (including mortgages) and business credit. Excludes loans securitized or sold to government agencies and assets acquired in the capital markets or through other secondary/ syndicated channels.
