Private credit yields to remain attractive despite reduced illiquidity premium
PRIVATE credit’s appeal extends far beyond its illiquidity premium, experts have said, amid increasing competition from public markets.
The sector benefitted from the ultra-lowinterest-rate regime after the pandemic, but higher rates have meant that traditional fixed income markets have been able to offer more attractive yields.
Industry stakeholders have told Alternative Credit Investor that large amounts of capital available amongst private credit funds and increased competition from banks, which have been loosening lending standards, are some of the root causes changing the landscape for investors.
“When liquid alternatives start looking this good, the premium for locking up capital naturally shrinks, eroding one of the key advantages of the asset class,” said Tammy Davies, partner
in the finance department of US law firm Morrison Foerster, who specialises in bespoke and complex credit arrangements.
Meanwhile, Daniel Haydon, analyst for equity strategies at financial research firm Morningstar, said that “the quantum of the impact is not yet known… but the directional effect seems clear.”
“The nature of the
market at the aggregate is changing,” he added. Still, the strength and resilience of private credit markets globally are underpinned by more than their illiquidity premium, points out Morningstar DBRS’ head of European financial institutions, Marcos Alvarez. “It is also important to remember that the yield of private credit assets is not only driven by the illiquidity
premium but also by the credit risk premium, which remains substantial in this asset class."
Alvarez does not expect a material reverse in the flow of assets from private credit to the traditional banking sector in the next 12 to 18 months. He argues this is because banking regulators in most jurisdictions are seen to be reluctant to relax lending standards
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There has been no summer slowdown in the world of alternative credit, as the industry steams ahead with blockbuster fundraises and new fund launches.
From TPG Twin Brook Capital Partners’ and Coller Capital’s $3bn (£2.2bn) private credit secondaries deal, to CVC’s latest €10bn (£8.6bn) raise for its European direct lending strategy, activity is carrying on over the typically quiet summer season.
It is a similar story at Alternative Credit Investor, where we are busy preparing for November’s Alternative Credit Awards – set to be our biggest event yet – and confirming our plans for 2026.
We’re excited to be rolling out more events in response to industry demand next year, including the expansion of our awards series into the US and a day conference in London. These events will complement our London-based awards ceremony and our exclusive COO Summit, which will take place again in 2026.
Please keep an eye on our website at alternativecreditinvestor.com for the latest updates.
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cont. from page 1
and because solvency requirements make it more onerous for banks to lend in certain cases, relative to private lenders.
“There is a secular movement of assets to private lending that goes beyond just loosening lending standards,” he added.
Morrison Foerster’s Davies agrees. She says the illiquidity premium “remains in areas that have always justified it – such as
non-sponsored middle market opportunities, opportunistic credits and other esoteric investments that require more creative structuring, deeper underwriting, and greater appetite for complexity”. She argues that in these specific segments, investors are still rewarded “for providing capital where others are less willing or able to go”.
Moreover, the illiquidity premium
within private credit also differs from sector to sector and region to region, says Evangelia Gkeka, senior analyst for fixed income strategies at Morningstar. “Private credit managers with a wide-ranging mandate can still find opportunities with an attractive complexity premium compared to public markets,” she explained.
The increased interest from retail investors in
private credit assets is, nonetheless, testing the market, notes Davies. “As managers work to attract retail investors, many are launching fund structures that aim to replicate the experience of a liquid product,” she said. “The very feature that once defined private credit's competitive edge is being engineered away in the pursuit of new investors who seek the illiquidity premium but may not have the appetite for it.”
Slow uptake expected of private credit in UK ISAs
THE INCLUSION of long-term asset funds (LTAFs) in stocks and shares ISAs is unlikely to boost retail investment into private credit in the short term, stakeholders have said.
In July, the UK government announced it will allow the vehicles to be incorporated within stocks and shares ISAs from April 2026, to encourage British savers to put money into long-term private markets investments.
Despite the news being largely welcomed by the financial community, ISA providers seem to be taking a cautious approach.
AJ Bell D2C managing director Charlie Musson told Alternative
Credit Investor: “We continue to monitor the development of LTAFs but have no plans to offer them at this stage.”
He noted that customers on the AJ Bell platform already have access to infrastructure, property and private equity assets through other wellestablished structures.
Meanwhile, a report by Morningstar argues that
technological constraints might form a major obstacle for attracting retail investors. Daniel Haydon, an analyst for equity strategies at the financial research firm, says that while LTAFs can already be held within innovative finance ISAs, they are very niche and have not seen much take-up.
“The market is still small
and immature and for now there is limited platform availability”, added Evangelia Gkeka, senior analyst for fixed income strategies at Morningstar.
Morningstar estimates that the UK Financial Conduct Authority has so far approved £5bn of assets under LTAFs, with approximately £3bn of committed capital not yet been called.
Secondaries set to be main beneficiary of 401(k) inclusion
PRIVATE credit and equity secondaries are predicted to be the biggest beneficiaries of the inclusion of private assets in 401(k) plans in the US.
President Donald Trump last month signed an executive order to make it easier to include private markets funds in individual retirement plans, triggering much excitement amongst asset managers in the space.
In recent earnings calls, from Apollo Global chief executive Marc Rowan to Carlyle chief executive Harvey Schwartz, many executives highlighted the opportunity in distributing to retirement plans.
However, Bill Cox, global head of corporate, financial, and government ratings at KBRA, has predicted that secondary strategies will become the biggest beneficiary of this opportunity because of the eventual realisation that many retail investors will not have the opportunity to access the best-in-class platforms in each asset class.
He noted the plethora of studies that show investing in private markets has boosted the performance of public pension funds, but argued that they mask
a fundamental issue, which will be very important when it comes to including funds in 401(k) plans.
“The difference in performance amongst public pension funds has less to do with whether or not they’re allocating to alternatives than to which alternatives they’re allocating to,” he said.
“It's really about who you allocate to and how volatile or how relative they perform compared to their peers in the private market strategies.”
Furthermore, without the right tools or the resources, individual investors will not be able to vet the hundreds of thousands of general partners that are out there.
“But secondary strategies theoretically could evolve to absorb the
flow of retail money into the broader category of alternatives,” he explained. It will also be an opportunity that larger alternative asset managers will be able to take advantage of more easily.
“There's definitely infrastructure that needs to be built,” said Jeremy Swan, managing partner at CohnReznick. “There's a credibility factor. There are a lot of different aspects of it that would be significantly easier for a Goldman, a Blackstone, and the globally recognized names with significant infrastructure to have the ability to roll this out relatively quickly. That's the advantage that they have in the market right now.”
Cox agrees that opening up private credit to retail
investors will come with a lot of infrastructure, administrative and regulatory burdens that likely will only be able to be addressed by the larger platforms.
The inclusion in 401(k) plans could also create some additional risks for asset managers.
Although Swan says it is too early to tell whether it might lead to some lawsuits in the future if anything goes wrong, he added: “We are always in a litigious environment when it comes to the alternative asset classes. Does it increase the ability and potential for additional litigation? Yes.”
But he also noted that it is difficult to say whether that will stop people from investing in private markets.
Alternative Credit
The Alternative Credit Awards will take place on 19 November 2025, at the Royal Lancaster London.
The event – hosted by Alternative Credit Investor – is the only dedicated alternative credit awards ceremony in the UK and has quickly become a must-attend industry event.
The evening will comprise a champagne reception, gala dinner and awards ceremony, commemorating the shining stars of the alternative credit industry.
Fund managers, specialist lenders and service providers will be presented with accolades on the night.
Credit Awards 2025
Categories include Fund Manager of the Year, Senior Lender of the Year and Fund Administrator of the Year.
Go to our website at alternativecreditawards.com for more information about the awards.
Tables are limited so get in touch as soon as possible to secure your place.
For table enquiries, please email sales and marketing manager Tehmeena Khan at tehmeena@alternativecreditinvestor.com.
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Deal activity forecast to pick up in Q4
AN UPTICK in deal activity is expected later this year, after a lacklustre first half amid US policy uncertainty.
Dealmakers have been cautious due to US President Donald Trump’s ‘Liberation Day’ on 2 April this year and ever-changing tariff announcements.
“Out-of-the-box acquisition financing is generally down compared to previous years – I think the data suggests it’s been the slowest first half since Covid,” said Kirstie Hutchinson, partner in the finance team at law firm Macfarlanes.
“People were cautiously optimistic about transacting at the start of this year, before the fresh volatility triggered by US tariffs uncertainty kicked in. If you don’t have stability for a clear enough line of sight, it’s difficult for people to transact.”
Hutchinson, who deals predominantly with private equity sponsors, said that “the drivers are there for new transactional activity” although she noted that “sponsors are thinking very carefully about processes ahead of the fourth quarter”.
“I would hope markets will smooth sufficiently
if there are no new geopolitical shocks – but as we’ve seen over the last few years, that risk can’t be dismissed,” she added.
A turn in the cycle
There have increasingly been warnings from industry onlookers about a turn in the cycle that could impact the stratospheric trajectory of private credit. Critics argue that the sector – which came into its own following the 2008 financial crisis when banks retrenched from lending – has not yet been substantially tested in a downturn.
While default rates will inevitably rise amid challenging macroeconomic conditions and a higher interest rate environment postpandemic, Hutchinson said, “I don’t see a
financial Armageddon on the horizon”.
“There are increased default rates and we’re in time of flux,” she added. “AI is changing things up. But this is an inevitable part of the cycle. Some businesses will fail. Some people will see an opportunity and take those businesses on, with new strategies, and will need debt funding. Private capital is ably poised to provide it.”
Bad businesses are no longer being propped up with ready credit, she explained, noting that more lenders are actively taking control in a higher default environment.
Hutchinson also highlighted changing terms in the current market, such as the demise of amortisation or cash sweeps in loan documentation.
“Everyone has a
payment-in-kind toggle,” she added.
“Non-call periods have settled down. Accordions feature consistently, as everyone wants the infrastructure in place for follow-on money. Boltons as a strategy show no sign of abatement.
“That’s probably another reason for the popularity of continuation vehicles – if you are pursuing a thoughtful buy-and-build strategy, clearly you may want to hold on to the asset for longer in order to optimise growth and the eventual outcome.”
Hutchinson also noted a rise in debt refinancing of equity investments, where firms capitalise on opportunities quickly by acquiring an asset with equity partly sourced from short-dated liquidity, and then replace that with leveraged debt up to a year later.
BridgeInvest finds opportunities in US CRE as traditional lenders exit market
BRIDGEINVEST, a US-based specialty asset manager, reached a “milestone” $1bn (£737.5bn) in assets under management this year, as traditional institutions continued to exit the US commercial real estate mortgage market, making way for private lenders.
Founder and managing partner Alex Horn (pictured) told Alternative Credit Investor that having historically been serviced by traditional banks, institutions are now “systematically reducing their exposure to CRE and concentrating their exposure to clients making big deposits”.
BridgeInvest focuses on the US middle market, with loans between $15m to $150m and has three main lending programmes: development lending, special situations, and value-add bridge funding.
“Over the past 12 months, we closed $700m of loans, which doubled our origination volume compared to the prior year and that’s despite a tighter credit market,” Horn said. “Traditional institutions are exiting this space, leaving this huge void for private lenders.”
At the same time,
investors are benefitting from fixed incomelike returns with real estate-backed assets, he explained.
“In this environment, investors value hard asset-backed loans with income streams that they can rely on,” he added.
He has also seen BridgeInvest’s investors continue to expand their portfolio to include more alternative investments, with high-net-worth institutions willing to “forego liquidity for consistent yield”.
“What we hear a lot from our foreign investors is that, despite all the volatility and the geopolitical tensions around the world, US commercial real estate
remains one of the most consistent assets over decades,” he said. “So, investing in senior secured credit in that asset class is what they view as a good alternative for corporate debt worldwide.”
Horn, who founded BridgeInvest in 2011, notes that it is an interesting time for private lenders because “when I started the business… borrowers didn’t want to take money from private lenders, that was really the lender of last resort back in 2011”.
“Today, they are a viable alternative to a traditional lender,” he added. “The more institutional names that become private lenders, the more it adds legitimacy to the
sector as a whole.”
Horn said that BridgeInvest has looked at $46bn of transactions in the past 12 months. Of those, it identified $870m that it wanted to do, and ended up closing the vast majority, at just under $700m.
BridgeInvest has been taking advantage of the “industrial hangover” in the US to invest in the industrial asset class, in a “contrarian” play, Horn explained.
The over-supply of industrial real estate is a result of the pandemic, which triggered an influx of new developments, particularly in the logistics and warehouses space. Horn said this has created a “big supply overhang” and an increase in vacancies, with rental rates decelerating rapidly.
However, he insists that the industrial asset class “is not going anywhere” on the basis that, without new stock being built, tenants are forced to look at existing developments.
“Our conviction today is that where assets used to take three to six months to lease, [they] are going to take 12 to 24 months to lease, but they will eventually get leased,” he said.
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Risk takers
Synthetic risk transfers are widely seen as a win-win for banks and private debt funds alike, but does their rising popularity come with potential pitfalls?
Jon Yarker reports
THE USE OF A SYNTHETIC risk transfer, or SRT, is a way for banks to meet their ever-increasing regulatory capital requirements. In a cost-effective fashion, banks can reallocate risk weighted asset (RWA) exposure, with a growing base of private debt investors flocking to these transactions. SRTs gives these firms access to high quality,
bank-originated assets, meaning these are rapidly emerging as a mutually beneficial arrangement when it comes to risk exposure.
The use of SRTs has flourished in the US private debt market, where firms have sought to replicate what they have seen work well for both parties in Europe.
“US banks have been very focused on capital optimisation as a result
of recent regulatory changes over the last few years, which has created opportunities for these banks to join a previously dominated European SRT market,” says Sara McGinty, partner in the alts team at Ares Management. “In part, the rise of SRTs is driven by banks’ desires to optimise RWAs and use their balance sheets more efficiently.”
RWAs reflects the fact SRTs
“ The rise of SRTs is driven by banks’ desires to optimise RWAs and use their balance sheets more efficiently”
are an innovative response from the industry, where banks are under greater pressure to manage their risk exposures. This has helped the use of SRTs become more commonplace, and Assia Damianova – special counsel in the capital markets group at Cadwalader – says they are now established as a “standard and useful tool” for banks.
“The level of regulatory guidance helps issuing banks along with the process; and the continued development and refinement of the legal documentation to support those trades make execution relatively fast and efficient,” she adds.
This way, SRTs allow banks to meet their regulatory requirements while satiating the appetite of
a rapidly growing private debt industry. Standardisation has developed in this field, with banks’ SRTs covered under the EU simple, transparent and standardised (STS) structure. Kanav Kalia, managing director at Oxane Partners, says such maturity and sophistication gives further reassurance to firms engaging with SRTs for the first time.
“The market’s maturity has played a vital role in the rising popularity, with increased standardisation, transparency, and clear regulatory expectations outlined in the EBA’s updated SRT Guidelines 2022, including provisions on synthetic excess spread and risk retention,” explains Kalia. “Additionally, the market demonstrated resilience during periods of stress, including the Covid-19 pandemic, where issuance recovered quickly, thus giving both banks and investors greater comfort in the asset class.”
SRTs are being used for a growing range of risk types, broadening out from vanilla reference pools of corporate and SME loan portfolios. Anthony Breaks, head of global asset-based finance at Schroders, highlights the evolution he is seeing first-hand.
“We have seen the spectrum of bank commercial lending books becoming reference pools for SRTs – from trade to SME to specialist to green, infrastructure and commercial real estate exposure –retail assets have been less prevalent historically,” says Breaks. “With changes in capital requirements will come the need for banks to look at SRTs alongside other optimisation tools across their balance sheets.”
One growing area of interest in SRTs is their use in insurance and reinsurance-based credit, according to Oxane’s Kalia.
“These structures, sometimes known as credit insurance SRTs or unfunded synthetic securitisations, involve bilateral or syndicated credit protection provided by insurers or reinsurers, offering banks a capital-efficient and often a more bespoke solution, especially for concentrated or higher-value portfolios,” explains Kalia. “This reflects the convergence of banking and insurance risk management practices and underscores the increasing role of private markets and institutional investors in absorbing bank credit risk.”
The ‘Rs’ in SRTs… So far, so good but the increasing popularity of SRTs is not without its own risks. An SRT transaction can serve both parties’ needs but some are concerned by the pace of growth in this area. Here, Man Group co-head of risk sharing Matthew Moniot sees two primary risks broadly related to the growing popularity of SRTs.
“First, there's evidence that banks are becoming more aggressive in their risk appetite – both by expanding credit eligibility to include more marginal cases and by potentially loosening underwriting standards,” says Moniot. “Second, we're observing a deterioration in documentation quality, particularly among newer programmes and issuers entering the market, which introduces operational and legal risks that require careful monitoring.”
Such concerns are perhaps inevitable with any area of financial services as a particular product or service becomes more popular. Alan Shaffran, senior portfolio manager and partner at Magnetar Capital, says he gets asked if investors are being “gamed” by
banks with the use of SRTs. He refutes this assertion but admits it “pays to be paranoid” when engaging with these transactions.
“A private investor should only invest in an SRT transaction where it can independently derive high conviction on the overall investment profile of the deal, meaning across a range of anticipated and unanticipated scenarios,” says Shaffran. “This requires several necessary elements: an appropriate mix of data on and diversity in the underlying portfolio, a well-crafted deal structure that doesn’t give excessive optionality to the bank, such as in replenishment, while aligning the interests of the bank with the investor, the
“ The market demonstrated resilience during periods of stress”
bank to be fully transparent on its underwriting and risk regimes, and infrastructure to model the deal with as much precision as possible.”
This emphasis on due diligence is shared by others. SRTs in Europe may benefit from the STS framework but such transparency is not universal, and where it is unavailable some firms are wary of engaging. McGinty points out the need for deep understanding of the underlying assets to properly inform an overall risk profile. Where visibility is limited, Ares will not participate.
“For example, some SRTs are blind pools with full passive reliance on the banks’ underwriting,” says McGinty. “We remain cautious about
the black box commoditised nature of some of the corporate SRTs, which is why Ares focuses on higher quality fully disclosed asset pools.”
Regulatory scrutiny
Like any product experiencing a rapid surge in popularity, SRTs have attracted the attention of regulators. Specifically, their widespread use in Europe recently prompted the EBA to specifically reference them in a risk assessment report on capital and RWAs. In addition to potentially stacking risk to create
a “maturity wall” of sorts, the EBA questioned how much undue risk purchasing parties were taking on: “This could create certain ‘circles of risks’, as in the end a private credit fund’s SRT investment would become an implicit risk for a bank that invests – e.g. through providing repo-based or other funding – in that fund.”
Opinions about these concerns are split in the industry. Marcos Chazan, senior director in Alvarez & Marsal’s financial services industry group, sees “no
evidence” of these at present.
“Some SRT investors have been in the sector for more than 15 years,” argues Chasan. “As a result of increased investor demand, spreads have tightened significantly in recent years. This is a reflection of the SRT market becoming more efficient.”
Meanwhile, others like Man Group’s Moniot, see merit in the EBA’s doubts: “We share the EBA's worries and believe there has been a marked deterioration in the overall capital quality of the
SRT buyer universe. This suggests that greater regulatory scrutiny is likely warranted and should be expected going forward.”
Regulators are naturally going to scrutinise SRTs given their focus on systemic risk. Banks are using SRTs to help comply with such risk-focused regulations, and policymakers will want to
“ Banks are becoming more aggressive in their risk appetite”
know where these transactions lead. Magnetar’s Shaffran sees this as an obvious element for regulators to look at, but points to some mitigating factors he is confident the EBA is keeping in mind in relation to SRTs. These include the low leverage, markto-market structure of such financings and banks’ full recourse to funds they are lending to.
“Moreover, we take comfort that the SRT market has thrived amid many rounds of regulatory change in part due to strong and continuous engagement between regulators and market participants who all want the SRT toolkit to be versatile and prudently utilised,” he adds.
SRTs continue to deliver the dual benefits of easing banks’ risk burdens, while satisfying a growing private debt industry’s demand for attractive and highyielding products. However, further popularity could attract more scrutiny to ensure they are not being used to flout regulations instead of simply complying with them.
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