Introduction
A tale of rising sophistication among LPs
The retrenchment of banks from middle-market corporate lending after the 2008 global financial crisis (GFC) kick-started the rise of alternative credit1 as an investment opportunity for investors looking to diversify their portfolios. Traditional banks had to reduce their lending activity, as they shored up their balance sheets, which created a multi-trillion dollar funding gap for businesses globally.2
Consequently, institutional investors stepped in to fill the void and capitalize on new opportunities via direct lending, working with alternative credit managers. The growth and structuring of the successful private equity markets was the obvious starting point.
That was the beginning of the story for many investors, but in the almost two decades that have followed, the market has undergone rapid expansion. For instance, the Alternative Credit Council, part of the Alternative Investment Management Association (AIMA), estimates that global traditional private credit assets under management were US$3.5 trillion at the end of 2024.3
And the alternative credit universe has matured to encompass a diverse group of underlying strategies including infrastructure debt, commercial real estate debt (CRE debt), special situations/distressed debt, asset-based lending (ABL) including niche areas like NAV loans and collateralized loan obligations (CLOs). As it has grown and matured, alternative credit shifted from an optional holding to a core building block of many investors’ portfolios. And their allocations look set to become more sophisticated and multi-faceted in the years ahead.
But at the same time as the alternative credit industry grows and matures, it is also now increasingly in the media crosshairs as reporters try to better understand the asset class. Last year, complex financing arrangements at two US companies, Tricolor and First Brands, exploded into the mainstream news. This kicked off a heated debate about the roles and overlap between bank syndication, private credit, off balance sheet loans and ultimately the quality of underwriting.
Our latest study, which surveys 135 senior investment professionals4 at investors globally, along with in-depth interviews with investment executives at leading pensions, insurers, family offices and consulting firms, explores the future trajectory of alternative credit investing by a range of allocators. It sheds light on the next phase of diversification within alternative credit, shifting approaches to portfolio construction and expectations for the future of the asset class.
Footnotes
- In the research this report is based on, alternative credit is defined as including asset-based lending, direct lending, special situations debt and distressed debt, collateralized loan obligations (CLOs), commercial real estate debt and infrastructure debt, which may be spread across investors’ hedge fund, private credit and opportunistic portfolios. In contrast, private credit is seen as comprising illiquid credit only. Consequently, we have generally used the term alternative credit in this report, unless quoting external sources or individuals who have used the term private credit, or where private credit is widely used (for example, when discussing the convergence of public and private credit).
- The Great Cross-Border Bank Deleveraging: Supply Constraints and Intra-Group Frictions; by Eugenio Cerutti and Stijn Claessens, IMF Working Paper, September 2014: “The global financial crisis (GFC) has seen a large retrenchment in cross-border banking, with aggregate gross foreign banking claims as of end-2013 some 20 percent below their pre-crisis peak in June 2008 of USD 30 trillion.” In addition, for the US economy, see Federal Deposit Insurance Corporation Quarterly 2019, Leveraged Lending and Corporate Borrowing: Increased reliance on Capital Markets with important Bank Links: “Since the financial crisis, nonfinancial corporations have used debt securities more and have used bank loans less than at any time since 1950. Bank loans recovered from a sharp decline in share after the financial crisis but remain around 12 percent of corporate borrowing, half the level in 1990.”
- Financing the Economy 2025, Alternative Credit Council, AIMA: “We estimate that global private credit AUM stood at approximately US$3.5trn at the end of 2024, a 17% increase from our estimate of US$3.0trn at the end of 2023.”
- This includes CIOs, investment directors, investment strategists, head of asset allocation/fixed income/alternatives/manager selection, portfolio managers and senior investment analysts at pension funds, endowments and foundations, insurance companies, family offices and sovereign wealth funds.”
RISKS
Investment strategies involving Private Markets (such as Private Credit, Private Equity and Real Estate) are complex and speculative, entail significant risk and should not be considered a complete investment program. Such investments should be viewed as illiquid and may require a long-term commitment with no certainty of return. Depending on the product invested in, such investments and strategies may provide for only limited liquidity and are suitable only for persons who can afford to lose the entire amount of their investment. Private investments present certain challenges and involve incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity. There also can be no assurance that companies will list their securities on a securities exchange, as such, the lack of an established, liquid secondary market for some investments may have an adverse effect on the market value of those investments and on an investor's ability to dispose of them at a favorable time or price.
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