Wealth Management
Summary
Private credit has matured from a niche allocation into a core component of institutional portfolios. This piece examines today's opportunity set, the risks that tend to get underpriced in late-stage vintages, and the manager traits we weight most heavily in selection.
Content
Private credit has moved from an alternative allocation to a structural component of many institutional portfolios. The shift has been driven by a combination of bank retrenchment after successive regulatory cycles, the search for yield in a rate environment that now favours lenders, and the steady professionalisation of direct lending as an asset class in its own right. A decade ago, private credit sat on the edge of most allocation discussions. Today it sits close to the centre.
What the opportunity looks like today
Spreads in direct lending remain attractive relative to public credit on a risk-adjusted basis, and all-in yields across senior-secured strategies are at levels that previously required taking meaningful equity risk. At the same time, the dispersion between top-quartile and bottom-quartile managers has widened significantly. Manager selection now matters considerably more than the decision to allocate to the asset class in the first place.
We are also seeing the middle market evolve structurally. Borrowers that might have accessed the syndicated loan market a few years ago are increasingly choosing private credit for certainty of execution, speed and the ability to negotiate bespoke terms. That shift has created a richer opportunity set for disciplined lenders, but it has also attracted a wave of new capital that has not yet been tested in a genuine credit cycle.
What we watch closely
- Underwriting discipline as competition for deals intensifies and pressure on terms builds
- Covenant quality in new vintages, particularly around documentation flexibility and EBITDA adjustments
- Workout experience of the manager, measured not by marketing materials but by what they have actually recovered in prior cycles
- Portfolio construction discipline, including concentration limits, sector diversification and exposure to cyclical versus non-cyclical borrowers
Risks worth respecting
Illiquidity is the defining feature of the asset class, not a minor inconvenience to be managed around. Capital committed to private credit strategies is genuinely locked up for years, and investors need to size positions assuming they will not be able to exit early at anything close to fair value. Leverage at the fund level is a second, often underappreciated risk, particularly in strategies that have grown rapidly during the recent vintage.
How we position
Investors willing to accept illiquidity in exchange for yield and credit quality still find compelling entry points today, provided they work with managers who have seen a full credit cycle and size positions appropriately within a broader portfolio. The opportunity is real. The discipline required to capture it has not changed.
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