2. Is Private Credit still attractive?
Private Credit first came across the radar of many individual investors when inflation and interest rates soared in 2022. Syndicated markets were largely closed, and borrowers flocked to private lenders as an alternative. Lenders could be extremely selective, earning compelling returns on high-quality loans in both Direct Lending and Asset-Based Finance.
Today, we remain in a period of elevated rates as part of our view of high inflation and rate volatility over the next 5 years. That said, we did see interest rate cuts last year as well as some spread compression, and our U.S. macro team expects the U.S. Federal Reserve to continue to lower rates this year as growth slows, but rates should remain higher relative to recent history.1 As a result, the total return potential in Direct Lending looks better today than it did three years ago as investors can achieve strong returns (cash yields, attractive all-in spread, and absolute yield) without compromising on credit standards or assuming elevated risk (See question 3). Base rates and spreads move over time, but Private Credit has been a source of consistent, compounding income over the long term. Overall, we expect Private Credit to deliver stronger returns over the next five years compared to the past five years, driven by these elevated policy rates and a capital-constrained environment as traditional banks continue to face capital constraints.
Like Direct Lending, ABF has grown as banks have retrenched. In this case, strategies have often been able to directly acquire the pools of high quality loans banks divested both in the wake of the GFC and the failure of Silicon Valley Bank, for example. The asset class is also a compelling solution for companies that want to focus on stable, higher-margin opportunities e.g., PayPal seeking a partner for its successful Buy Now, Pay Later program).
In volatile times, our Global Macro & Asset Allocation team has put a strong emphasis on what they call “collateral-based cash flows,” meaning that the income an investor receives is often contractually determined and tied to a tangible asset with an intrinsic value. Asset-Based Finance fits the bill, and we expect demand for it to continue to rise among both borrowers and investors.
3. What role can Private Credit play in an investor’s portfolio?
Private Credit can offer an appealing combination of yield, diversification, and downside protection relative to traditional asset classes. Direct Lending, with its floating-rate structure, provides a natural hedge in uncertain or volatile rate environments. Meanwhile, ABF brings added resilience through its asset-backed nature—offering both downside protection and inflation mitigation, thanks to the tangible value and contractual cash flows of the underlying collateral.
Our three model portfolios (see 2Q25 Global Wealth Investment Playbook) for individual investors consider three different primary investment goals: Generate Income, Preserve Capital, and Boost Returns. In all of them, we recommend an allocation to Private Credit of at least 5% (Boost Returns) and up to 15% (Generate Income).2
That’s because Private Credit can offer a buffer against volatility, compelling yield, a potential inflation hedge, and diversification (Exhibit 2). Let’s consider each of these benefits in turn.
EXHIBIT 2: Global Index Proxies and Their Generic Asset Class Attributes
