Investors in traditional types of liquid income strategies are increasingly concerned about expensive valuations, low income, rising interest rates and signs that the credit cycle has entered its late stages. Many institutional investors have taken the view that private credit offers some degree of insulation against these dynamics. To date, institutional investors have typically implemented this view by allocating to “middle market” lending strategies within growth or liability matching portfolios.
In the benign default environment since the global financial crisis, these strategies have seen strong returns and low default rates. Looking ahead, we can see two important dynamics playing out which imply that investors may have to use more creative solutions to generate attractive risk adjusted returns from private credit.
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