Private credit’s new frontier: Innovation, liquidity, and resilience

As the sector matures, investors are venturing into new segments, such as investment-grade (IG) private credit, asset-backed lending, shipping finance, and fund finance.

We believe this expansion is being driven in part by the emergence of innovative fund structures, which are broadening access to private credit. Different fund structures allow for more high-net-worth investors and even retail investors to access private credit – a trend that we expect will grow over the next few years. For institutional investors, the message is clear: the private credit universe is broadening, and those who adapt will be best positioned to capture new opportunities and manage risk.

Liquidity without sacrifice

Smart structures for volatile times

Liquidity remains a perennial challenge in private credit, especially during periods of market volatility. Rather than relying on the sale of private assets to meet liquidity needs – which can result in deep discounts for forced sellers – we emphasize the importance of designing fund structures that preserve value. We address this by seeking alternative methods to add liquidity to the fund structure, ensuring investors can access capital without compromising asset integrity.

We believe addressing this challenge calls for a deliberate strategy that aligns with the characteristics of the underlying asset classes and the needs of end investors. Rather than relying on asset sales, solutions may include incorporating public fixed income allocations to maintain liquidity, as well as implementing slow-payout structures for shorter-duration assets to provide access to cash without steep discounts. The right mix depends on careful consideration of portfolio objectives and investor requirements.

Building resilience

Underwriting, monitoring, and covenant discipline

In an environment where economic cycles can turn quickly, robust underwriting and vigilant monitoring are essential. When underwriting a transaction, aim to do so throughout the cycle. Look at what could potentially cause a loan to go wrong and then aim to structure and protect against those outcomes. We believe ongoing monitoring is just as critical as origination. By recognizing the early warning signs, underwriters can work with borrowers before the default happens.

Sourcing, diversification, and regulatory mastery¹

The institutional edge

We believe a well-balanced portfolio starts with a broad origination funnel and rigorous filtering for pricing, credit quality, and covenant strength. Diversification is incredibly important when we're constructing any kind of portfolio.¹

Some of the factors we analyze during the filtering process include: our exposure to other industries and different types of borrowers, whether the debt is secured or unsecured, and whether we’re lending to the parent company or the operating one. We also ensure that we stagger maturity dates across the portfolio if an investor wants liquidity.

Our sourcing advantage stems from the firm's strategic focus on small- and mid-sized borrowers. These segments often experience less intense competition and more attractive pricing. This targeted approach allows us to access compelling opportunities that larger players might overlook, thereby enhancing portfolio diversification and potential returns.

Serving a diverse client base – including insurance companies, family offices, and pension funds – requires regulatory agility. We believe in maintaining a strong focus on compliance, particularly for insurance clients with stringent requirements.

Stress testing and the road ahead

Staying prepared for uncertainty

While private credit data is less transparent than in public markets, default studies suggest relatively benign outcomes in investment-grade and asset-backed strategies. We believe the IG segment, particularly when backed by physical assets, has shown favorable default data.

While acknowledging the limitations of the asset class, liquidity is constrained, and portfolios should be constructed with this in mind.

This Insight article is based on a recent interview with Marianne Zangerl, Deputy Global Head of Fixed Income.

Endnotes

¹ Diversification does not ensure a profit or protect against a loss in a declining market.

Important information

Alternative investments involve specific risks that may be greater than those associated with traditional investments; are not suitable for all clients; and intended for experienced and sophisticated investors who meet specific suitability requirements and are willing to bear the high economic risks of the investment. Investments of this type may engage in speculative investment practices; carry additional risk of loss, including possibility of partial or total loss of invested capital, due to the nature and volatility of the underlying investments; and are generally considered to be illiquid due to restrictive repurchase procedures. These investments may also involve different regulatory and reporting requirements, complex tax structures, and delays in distributing important tax information.

Among the risks presented by private equity investing are substantial commitment requirements, credit risk, lack of liquidity, fees associated with investing, lack of control over investments and or governance, investment risks, leverage and tax considerations. Private equity investments can also be affected by environmental conditions / events, political and economic developments, taxes and other government regulations.

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