Friends Not Foes

Often framed as rivals, private and liquid credit should instead be viewed as powerful complements for both issuers and investors. We believe these two markets are settling into a symbiotic coexistence, as the distinctions blur between the likes of direct lending and broadly syndicated loans.

The rise of private credit has been one of the defining post-Global Financial Crisis developments. Now a mainstream asset class, corporate private debt constitutes over $1.7 trillion in assets and has become a fixture in institutional portfolios.¹ This rapid growth has often been characterized as being at the expense of the more established liquid credit markets. However, the ability for borrowers to flexibly access both liquid and private credit markets should be viewed positively by investors exposed to corporate credit risk. These distinct but interlinked markets together broaden the range of available credit solutions, serving to support the financial health of issuers. (See Figure 1.)

Investors can also benefit from the nuanced propositions of these two markets, which may increasingly reflect similar underlying credit risk but differing levels of yield, liquidity, and volatility. For sophisticated investors, the decision shouldn’t be between private or liquid credit, but instead around the most effective way to gain exposure to these complementary markets.

Figure 1: Private Credit Has Become a Core Pillar of Sub-IG Financing

Source: ICE for Global High Yield Bonds, UBS for Global Senior Loans, and Preqin for Global Corporate Private Credit, as of March 2025

The Rise of Private Credit

The story is now a familiar one. Banks, crippled by stringent capital regulations in the wake of the 2008 meltdown, retrenched from corporate lending. This paved the way for alternative lenders to fill the funding gap. The rise of private debt was then solidified by the Covid-19 pandemic and subsequent macroeconomic challenges. With the traditional syndicated debt markets periodically unavailable, a wide range of borrowers sought credit offering both rapid execution and enhanced flexibility: it’s no coincidence that private debt fundraising spiked during this period. (See Figure 2.)

Figure 2: Private Credit Fundraising Rose Dramatically in 2021-22

Source: Preqin

It's worth noting that the growth of private credit has been supported by establishing a strong track record of solid performance and minimal credit losses. Like high yield bonds before it, private credit, in the form of direct lending, has transitioned from obscure to mainstream.

A More Versatile Financing Ecosystem

Large borrowers benefit from having two sets of lenders that can step in across different market conditions. The interplay of liquid and private credit has been clearly illustrated in just the last few years.

With liquid credit markets subdued in 2022, private lenders were able to provide much-needed financing. The mark-to-market volatility that spooked liquid markets wasn’t a factor for private credit, which benefits from asset prices less exposed to broader market sentiment. Importantly, private lenders can move unilaterally (or in smaller lender groups), meaning they inherently circumvent banks – which at the time were saddled with hung loans and reticent to underwrite new deals.

While this removed potential deal flow for public lenders, the injection of private debt stabilized many public borrowers at a time when liquid markets couldn’t help. This was especially true for lower-rated borrowers, for which public markets had scant appetite. These migrating issuers paid a premium to refinance in the private market but received a crucial lifeline in the form of flexible credit.

As liquid credit markets found greater stability entering 2024, with a firmer understanding of the trajectory of interest rates and more confidence in a soft landing, public financings boomed, albeit primarily driven by refinancings. With both the liquid and private credit markets now truly open again, we’ve reached parity in refinancing activity between the direct lending and broadly syndicated loan market: roughly $25 billion of loans have gone in each direction so far this year.² (See Figure 3.)

Figure 3: Loans Have Been Moving Almost Equally Between the BSL and Private Credit Market

Source: Pitchbook, as of September 30, 2025

A Complementary Investment Proposition

When combined, we believe the liquid and private credit markets provide an excellent solution due to the range of complementary nuances that allow investors to solve for an optimal blend of yield, liquidity, and volatility. (See Figure 4.)

First, liquid credit has a clear tradability advantage, generally benefiting from regular two-way pricing. In comparison, private loans, which lack regular market pricing, have an unclear liquidity profile: secondary markets exist but aren’t particularly developed and often require sellers to accept a chunky discount. For most private debt investors in closed-end funds, liquidity is limited to distributions and return of capital, something that limited partners can’t control.

Combining liquid and private credit in a single portfolio can present an efficient solution. The liquid portion of the portfolio can be used to promptly meet investor liquidity requirements and allow near-instant deployment of new capital. The ability to invest in liquid credit can also be valuable during periods of dislocation, as managers can access discounted bonds and loans, creating pull-to-par opportunities that may enhance total returns. Meanwhile, the private portion of the portfolio dampens volatility, being marked on fundamentals rather than prevailing market psychology, and may offer an attractive yield premium.

Figure 4: Combining Liquid and Private Credit in a Single Portfolio

Note: Indicative profile.

Particularly notable is the diversification benefit of blending private and liquid credit. Direct lending funds are much more concentrated than liquid credit funds, which may contain several hundred issuers. Blending the two means investors can receive exposure to a broader mixture of company size, sector, and geography.

Beyond The Core

The obvious entanglement is between direct lending and broadly syndicated loans, both of which primarily provide private equity sponsors with senior floating rate debt. But it’s important to note there’s much more to the liquid and private debt markets. We believe particularly accretive diversifiers may include:

• Asset-backed finance (ABF), which offers a different risk/return profile to corporate lending, being backed by pools of contractual assets and providing lenders with continuous principal repayment. ABF represents a massive addressable universe, with private lender participation still limited. (See Figure 5.)

• Sectoral private credit niches, which involve highly tailored origination and underwriting methods, often requiring specialized knowledge, as with life sciences or infrastructure lending.

• CLOs, which benefit from powerful structural protections and a spread premium over similarly rated corporate bonds. CLOs aren’t immune to mark-to-market volatility but historically have a very low impairment rate.

• Real estate debt, in the form of direct loans or securitizations (i.e., CMBS, RMBS), which offers a different underlying risk to corporate credit and may be less exposed to potential macroeconomic headwinds.

Figure 5: Asset-Backed Finance Is a Relatively Untapped Corner of Private Credit

Source: Oliver Wyman

What Next?

Private and liquid credit are set to continue this symbiotic coexistence. Financing requirements will remain high as M&A activity gradually returns and borrowers seek to refinance a looming wall of debt. We anticipate a sustained rise in capex requirements across Western economies, including data center financing, increased defense expenditure, and digital infrastructure build-out. We expect to see both liquid and private credit markets playing an important role in meeting these financing needs, including through potential collaboration on larger deals.

Investors can take advantage of this dynamic by leveraging both private and public credit investments to optimize their portfolios for acceptable levels of liquidity and volatility. Beyond now-mainstream asset classes like direct lending and high yield bonds, this’ll likely include less traditional areas such as asset-backed finance and liquid structured credit. We believe the new diversification lever isn’t a 40% corporate bond allocation but instead a dynamic portfolio of liquid and private credit.

Credit Markets: Key Trends, Risks, and Opportunities to Monitor in 4Q2025

(1) Converts lead the way!

Convertible bonds have experienced strong growth in both performance and issuance volume in 2025 as this under-the-radar asset class has benefitted from several tailwinds.

September set a monthly record for convertible bond issuance, with nearly $30bn of new supply.³ This was supported by a notable rise in issuance in Asia and Europe, which contributed around 45% of the supply.⁴ Issuance for the asset class now exceeds $125bn so far this year, as sustained stock market strength and tight credit spreads have supported a surge in deals.⁵

Performance has been strong thus far in 2025, particularly for balanced convertibles, which benefit from participation in equity upside. AI has been a highly accretive theme for the convertibles market, with Deutsche Bank research indicating AI-linked issuers have returned triple that of the broader market!⁶

(2) European credit markets are active

Europe continues to be a bright spot for sub-investment grade credit issuance.

• The third quarter saw record European CLO activity, as robust demand for liabilities helped AAA-rated spreads compress back below 130 basis points for tier-one managers.⁷

• Senior loans also finished September at record issuance levels for the year-to-date period. This was supported by a wave of repricings, but “new money” issuance has still edged higher from the lows of 2023.

• High yield bonds clocked a record third quarter, following a bumper September. (See Figure 6.) Similar to loans, this was dominated by refinancings, which made up nearly 70% of total volume.⁸

• Direct lending activity has been strong, with over €30bn of volume so far this year, exceeding the level for the same period in 2024.⁹

We expect European credit to remain active as (a) private equity firms seek to increase exposure to the region and (b) several themes – not least increased defense and infrastructure spend – create sustained capex needs. European credit issuance have been met with ample demand from lenders, including those seeking to diversify U.S.-centric credit portfolios and access the compelling hedged yields offered by EUR-denominated bonds and loans.

Figure 6: 3Q2025 Was a Record Third Quarter for European High Yield Issuance

Source: PitchBook | LCD • Data through Sept. 30, 2025

(3) The credit market remains bifurcated

Index averages remain a somewhat misleading proxy for the state of credit markets, as quality names remain well bid but unloved ones rapidly fall through the cracks. Recent well-publicized credit problems have exacerbated this dynamic, as has a CLO buyer base with limited demand appetite for CCC-rated loans. Accordingly, while B- and BB-rated loans currently trade within their long-term average spread, CCC-rated loans are trading outside their historical average, with an average spread in excess of 1,200 bps.¹⁰ (See Figure 7.)

We discussed this bifurcation in depth on a recent podcast.

Figure 7: CCC-Rated Loans Are Trading Outside Their Long-Term Median

Source: XX