Separating the Signal From the Noise in Private Credit

KEY POINTS

• The current private credit environment reflects cycle normalization, not systemic risk
• Dispersion is increasing—across borrowers, sectors and vintages
• Headlines about redemptions, software disruption and payment-in-kind (PIK) interest are real, but there are nuances
• Manager selection and underwriting discipline will drive outcomes going forward

A Normalizing Cycle

In recent months, private credit sentiment has shifted from enthusiasm to caution as private credit markets adjust after a long period of “easy money.” That environment, characterized by elevated private equity activity and accommodative financing conditions, drove a significant expansion in credit markets. U.S. leveraged buyout (LBO) loan volume has increased significantly, reaching $391.7 billion in direct lending deal volume since the pandemic.⁵ Clearly, this growth has contributed to pockets of overexuberance and potentially less stringent underwriting practices among some investors.

Still, it is important to put the current situation in perspective. Most importantly, it should be emphasized that we do not think that the recent stress in private credit markets is systemic.

Outcomes within direct lending and broader private credit are not uniform. Several factors drive outcomes for investors, including how capital is deployed. Indeed, we believe the current environment is revealing company-specific issues as well as differences in underwriting standards, not a fundamental break in the system. That underscores why the dispersion of returns is increasing across lenders, sectors and vintages.

Market fundamentals remain broadly stable, and private credit as an asset class continues to provide a yield premium relative to public debt. Defaults on loans remain near historical averages, and non-accruals—loans with debt 90 days or more overdue—remain low (see below). Moreover, while private credit assets under management have grown at a CAGR of roughly 14% over the past decade, that still represents only about 9% of total corporate borrowing.⁶

Viewing Risks With Nuance

Investors have become concerned about some sections of the private credit market, however, particularly the impact on software lending of advances in AI, as well as broader macro uncertainty. As a result, redemption activity in a number of strategies has increased modestly, and in response, business development companies (BDCs) and other tender offer and interval funds have limited redemptions. But it is important to note that the elevated redemption activity reflects investor sentiment and allocation shifts, not a deterioration in credit fundamentals.

BDCs—frequently used private credit investments—are designed to help balance investor liquidity needs with the illiquid nature of the underlying assets. These structures are intended to protect long-term investors and preserve portfolio integrity, rather than force asset sales when redemptions occur. That’s why semi-liquid structures like BDCs are designed to better align investor liquidity with underlying assets.

To be sure, as with any investment products, there are always risks to consider when investing in private credit, and the current environment is no exception. While PIK activity—particularly PIK introduced through amendments—can be a sign of credit deterioration, usage has stabilized recently as borrowers’ ability to pay cash interest is improving. (see below).

In addition, market stress has been more pronounced among smaller and middle-market borrowers, particularly companies in the $25–50 million EBITDA range, while larger issuers have generally remained more stable.⁷

Outlook Themes

Going forward, we believe the fundamentals of the private credit market remain sound, although there are still risks that investors need to navigate. With that in mind, we see four key themes driving the private credit outlook over the next few months:

1. Dispersion is key. We believe there will be increased dispersion among private credit manager returns. To put it simply, this is a credit pickers’ market.

2. Yields remain attractive. The private credit premium—in other words, the return relative to public credit investments—has compressed in recent months, but it has not disappeared. Yields remain compelling relative to public markets.

3. Selection-driven returns. Looking forward, we believe performance will increasingly depend on a strong focus on borrower quality, underwriting discipline, and the structuring and sourcing of loans. Direct lending is and remains a core allocation of investors’ fixed-income portfolios, but sustained performance will come from lenders that emphasize selectivity and disciplined underwriting, with a focus on risk mitigation.

4. Opportunities are emerging. One of the inevitable consequences of a market dislocation is that it creates opportunities in distressed assets, and this is no exception. This is particularly evident in sector-specific areas that have borne the brunt of negative sentiment, but is also a result of refinancing pressure. More than $1.3 trillion in loans are maturing in 2026; public markets are likely to absorb much of this volume, but may be less receptive to more complex credit situations, creating opportunities for private lenders (see below).⁸

The Bottom Line

We believe private credit continues to provide significant benefits for investors, including diversification, steady income and returns driven by disciplined underwriting and structuring. In our view, the current private credit environment reflects cycle normalization, not systemic risk, and is functioning as intended. In short, we believe private credit is becoming more selective, not less attractive.

How Private Equity Adapts to a Disrupted World

KEY POINTS

• Trade, supply chain and cost shocks are widening the gap between businesses. This is increasing the gap between those that can adapt and those that cannot 
• Market tailwinds are less reliable. With borrowing costs higher and valuations offering less room for upside, returns are more likely to come from earnings growth—not from the market
• Operational improvements are more important than ever. Pricing, cost control and efficiency can help protect margins and create value as conditions become less predictable
• Resilient businesses stand out. Companies with essential demand, pricing power and clear opportunities to improve operations may be better positioned to navigate disruption

A Fluid Environment

The backdrop for private equity has shifted. Recent years have been marked by trade tensions, supply chain disruptions and swings in input costs. These forces are not constant—but when they occur, they tend to be larger and more disruptive than in the past. Recent shocks have reached levels well above prior periods (see below).

For private equity investors, the implication is clear: The focus has shifted from trying to predict the economy to owning businesses that can perform when costs rise and conditions become less predictable. As a result, the gap between businesses that can adapt and those that cannot is widening.

Why the Playbook Is Changing

In the post–global financial crisis low-rate environment, private equity often benefited from falling interest rates, ample leverage and rising valuations. That environment made it easier to generate strong returns, even without significant operational change. 

Today, those tailwinds are less reliable and available. Bain & Company estimates that achieving a typical return now requires roughly double the level of annual EBITDA growth compared with a decade ago (see below). In practical terms, more of the return must come from improving the business itself—not from favorable market conditions. This raises the bar for value creation.

From Market Tailwinds to Operational Control

As a result of the evolving market environment, operational improvement is becoming more central to value creation. Pricing, cost discipline, productivity and working-capital management are areas where management teams can take direct action to influence outcomes. 

A recent survey of senior private equity operators, primarily C-suite executives and partners in industrials and business services, shows a clear move toward operational levers (see below). A large majority expect operational improvements to become more important over the next 12 months, while far fewer expect gains from financial engineering or multiple expansion. In other words, value creation is increasingly being driven by actions inside the business. These characteristics can help businesses maintain margins even as conditions change.

Where This Matters Most

A heightened focus on operational improvements and margin expansion tends to favor companies with

•  Essential, mission-critical products or services
• A recurring revenue base and embedded customer relationships
• Clear opportunities to improve operations and enhance cash flow

These characteristics are often found in market-leading industrial and business services sectors, where demand is less discretionary and operational improvements can be implemented over time. 

The key is not to avoid exposure to change, but to invest in businesses that can adapt to it.

The Bottom Line

Successful private equity investments have always relied on improving businesses. What has changed is how central that improvement has become. In a world of larger shocks, returns are less likely to be driven by market conditions and more likely to come from what can be controlled. As dispersion increases, the ability to identify and improve resilient businesses may become more valuable—and more difficult to replicate.

Why Volatility Can Create Opportunities for Disciplined Infrastructure Investors

KEY POINTS

• Infrastructure has historically delivered stable performance with lower volatility than equities during major market disruptions
• Infrastructure’s features make it a compelling option for long-term, risk-adjusted returns in today’s macro environment
• Rapid growth in energy demand—driven by digitalization, AI and electrification—requires a diversified mix of energy sources, creating significant long-term investment opportunities
• Accessing opportunities requires expertise, global scale, local market knowledge and disciplined capital allocation

Historically Low Volatility

Recent history has seen its share of market volatility episodes—the 2008 global financial crisis, the 2013 “taper tantrum” and the COVID era in 2020, as well as other periods of market turbulence. Throughout, infrastructure investing has offered stability, steady performance and low volatility relative to broader equity markets (see below).

Infrastructure’s historically low volatility may be particularly attractive in the current environment, which has been defined by low real yields, persistent inflationary pressure and geopolitical turmoil. Investors with medium- to long-term risk-adjusted return targets may find it increasingly difficult to meet their performance goals in traditional asset classes.

Infrastructure provides an alternative. We believe real assets stand out as an essential part of an investment portfolio in this evolving environment. Infrastructure investments can offer inflation-linked cash flows backed by hard assets that help protect real returns.

Capturing the Opportunity

Delivering the opportunities presented by infrastructure is not easy. It takes the right investment approach to identify promising infrastructure projects based on solid long-term fundamentals that can weather market disruptions.

In our view, a manager with sophisticated operational and development capabilities, as well as a diverse portfolio across technologies and geographies, should be well positioned to deliver attractive returns and long-term value.

To illustrate this point, let’s look at the energy sector. Energy is a fundamental building block for delivering economic and digital growth. It powers our day-to-day lives.

Electricity demand is surging, with global power generation more than doubling since 2000 (see below). This growth is driven by three main avenues: 1) digitalization, with the advent of artificial intelligence; 2) the growth of electrification for transportation; and 3) industrialization, in particular, industrial electrification.

No single energy technology can meet this growing demand. Renewable energy sources are among the lowest-cost solutions, but global power needs are increasing faster than renewable technology can be put in place. For governments and other entities buying power, a successful strategy will need to include a range of energy assets, including renewables, as well as battery storage solutions to store renewable energy, nuclear, natural gas, and additional alternative clean technologies.

Each technology individually can’t meet the growing demand, but the right mix of an “any and all” energy solution can offer a potential balance of cost and reliability for the grid. For investors, a diversified portfolio of energy assets can help hedge geopolitical and macroeconomic risk while capturing potential higher long-term returns.

For infrastructure investors, a disciplined approach to capital allocation is increasingly important, particularly with energy. Generating returns in such an environment requires a focus on securing long-term contracts backed by creditworthy counterparties and delivering technologies that stand to win on the fundamentals. These are, of course, the same rules that define success in other forms of infrastructure investing, but the energy sector demands unique discipline and expertise at a time of fast-paced demand, uncertainty and complexity in energy markets. 

The Bottom Line

The demand we will witness over the next decade for infrastructure will be tremendous, but such a transformational market shift comes with the risk of potentially making poor capital-allocation decisions. 

Mitigating that risk means maintaining a focus on the core principles of any good investment strategy. That includes maintaining a long-term horizon, exercising rigorous due diligence, and recognizing complexity at every stage. Moreover, sound risk management involves hedging project costs against revenues, locking in long-term contracts with strong counterparties and diversifying to be able to pivot to regions of the world with attractive risk-adjusted returns.

Capitalizing on opportunities in infrastructure requires more than capital. Equally if not more critical are the operational capabilities behind the investment. These include a global procurement team that can negotiate in different regions—and with scale—making it better positioned to protect against supply chain disruptions. Deep local expertise and strong operating teams are also essential to navigate regulatory frameworks, supply chain challenges and geopolitical uncertainty—and drive value, wherever the winds may shift.

Real Estate Recovery: Resilience Amid Volatility 

KEY POINTS

• Private real estate appears attractive and likely to maintain its recent momentum, despite recent market volatility
• Normalizing deal flow, improving valuations and stabilizing cap rates support this momentum
• Historically, real estate has exhibited resilience characteristics including low correlations, steady income and inflation-hedging properties that support an attractive outlook

Three Factors Are Driving Momentum 

Private real estate continues to gain momentum, a trend that began in 2024, despite persistent equity market volatility. In fact, it reinforces a historical trend: Private real estate historically has exhibited significantly less volatility than public equity markets during market downturns (see below).

Three factors are driving private real estate’s momentum:

1. Deal flow is normalizing. In 2025, total transaction volume rose to $354 billion—the highest level since 2022. This is a sign of investor confidence returning to the commercial real estate market (see below).

2. Valuations have stabilized. Renewed deal activity has contributed to stable valuations, which continued to rise in 2025, and were up 7.4% from a trough in late 2023 (see below).

3. Cap rates have stabilized. Cap rates have stabilized as well, influenced by the recent drop in interest rates (see below). If rates continue to move lower, that should potentially push cap rates to lower levels, and in turn, lower implied risk. In the meantime, there are still attractive opportunities to acquire properties that have stable current income profiles at discounted valuations.

Outlook for the Rest of the Year 

We believe that real estate will continue its momentum and perform well this year, despite the headwinds created by greater market volatility. Private real estate has resilient characteristics that potentially can provide a cushion during turbulent markets. These include:

• Lower correlations. Private real estate historically has shown lower correlations with public equity markets, which offers diversification benefits and helps result in lower volatility than the stock market.
• Income-driven returns. Even if capital appreciation slows, private real estate has historically generated consistent cash flows, particularly in sectors like industrial or residential real estate, which tend to be less sensitive to economic downturns.
• Inflation hedge. Real estate values and rents often rise with inflation, offering protection against rising costs.
• Value reset opportunities. Although valuations are improving, they are still below recent peaks. In addition, replacement costs for real estate remain elevated due to higher building costs. Thus, we still see attractive investment opportunities with strong underlying sector fundamentals.
• Long-term focus. While short-term market noise may give investors pause, the long-term value opportunity of real estate can offer stability for the long run.

The Bottom Line

Private real estate’s historical resilience during periods of market turmoil underscores why many investors are seeking to increase their allocation to the asset class. Stable, long-term, value-add real estate investment strategies are attractive for helping investors meet their investing goals by strengthening their portfolios over the long term—and these strategies can provide a cushion during shorter-term volatility.

Read More in our Alts Quarterly Q2 2026.