Institutional Investors Stress Importance of Diversification in Credit - Chief Investment Officer

Institutional investors are reassessing their credit portfolios as interest rates and inflation are expected to remain elevated, raising input costs and the cost of capital for companies. Geopolitical and economic uncertainty are also weighing on allocation decisions. According to Goldman Sachs' 2026 Global Alternatives Survey: The LP View, institutions continue to invest heavily in alternatives but are becoming more selective. Private credit shows the sharpest deterioration in sentiment: 33% of respondents had a worsening view of the asset class in 2026, up from 29% in 2025. Respondents named manager quality, crowding and headline risk as their primary concerns, and noted that the growth of evergreen funds targeting the private wealth channel is distorting pricing in crowded segments, particularly direct lending.

Traditional fixed income is also under pressure. BlackRock's Edward Ng, head of the Americas OCIO for Endowments, Foundations and Healthcare, Multi-Asset Strategies and Solutions, said allocators entered the year with shorter duration and have remained there because the yield curve is flat and flattening. He expects the direction of travel to be longer duration, and said absolute yields have reached a range that suits long-term CPI-plus-five portfolios. Ng suggested opportunistic fixed income strategies or diversifiers such as emerging markets and high yield as options for navigating volatility.

Within private credit, direct lending remains the core allocation, but investors are diversifying. Zia Uddin, president of Monroe Capital, said broad private credit exposure now delivers largely beta-like returns because of greater dispersion among managers and because large upper-market loans price similarly to broadly syndicated loans. He said investors are rotating into lower middle market private credit, venture, asset-backed finance and real estate credit, where he sees more inefficiencies that can generate alpha. Sources report a significant repricing across many direct lending funds, and Elijah Reese, head of investment management research and strategy for institutional investing at Aon, said the industry's push for transparency on marks has produced divergent outcomes, with some managers holding marks while others repriced significantly. Reese also noted growing strategy overlap among managers, which can blur the line between investment-grade and below-investment-grade exposures and create unrecognized correlation risk.

Uncertainty about the economy is rising. Uddin warned that EBITDA is not real cash flow and that companies will need cash flow to get through the 2027-2028 maturity wall. Damien Dwin, president and CEO of Lafayette Square, a middle market business development company, said early indications suggest a recession has already begun, that the smallest borrowers face serious challenges, and that credit spreads will widen further in calendar 2027. He expects allocators to become more conservative and warned of "zombie LPs" trapped in opaque investments. Ng said managers must be questioned on underwriting and exit assumptions, asking whether assets can be sold at current prices if buyers' cost of capital has risen. Reese advised close attention to covenants and a focus on short- and medium-term investments to limit concentration and forecasting risk, including in digital infrastructure, where rapid changes in compute, business models and power needs make long-term modeling difficult.