Key Takeaways
- • Private credit markets have expanded to approximately $1.8 trillion in assets under management across multiple subsectors, driven by yield-seeking investors during the post-2008 low-interest-rate environment and now positioned as a defensive strategy amid higher rates and below-trend growth.
- • Neuberger Berman identifies three critical investment themes: maintaining quality bias with focus on strong cash-generative companies in defensive sectors positioned high in the capital structure; deploying capital into liquidity gaps where private credit providers captured opportunities in 2022 when capital markets contracted and banks held hung deals; and leveraging asset-based lending as an inflation hedge given collateral value appreciation potential.
- • Private credit has demonstrated resilience across economic cycles by offering contractual maturity dates, collateral backing, and senior positioning in capital structures, positioning the asset class as a complement to traditional fixed income and equity allocations within diversified portfolios.
Summary
Private credit has emerged as a material asset class commanding nearly $1.8 trillion in assets under management, reflecting a structural shift in fixed-income investing following the 2008 financial crisis. The expansion was catalyzed by yield-starved investors seeking returns beyond government securities and corporate bonds during the extended low-interest-rate environment. As of March 2023, Neuberger Berman's private debt leadership—including Susan Kasser (Head of Private Debt), David Lyon (Head of Capital Solutions), and Dmitry Gasinsky (Senior Portfolio Manager & Head of Residential Real Estate Finance Strategies)—characterizes private credit as an "all-weather" asset class warranting integration into well-diversified institutional portfolios.
The investment thesis rests on three foundational themes. First, quality bias represents the primary risk management imperative. As economic growth moderates and interest rates remain elevated, private credit providers face pressure to position themselves high in capital structures while concentrating exposure on quality companies with strong near-term cash flow generation, particularly in defensive sectors less vulnerable to economic deterioration. Second, liquidity support has emerged as a critical value driver. Throughout 2022, private-equity-backed companies encountered a funding gap as public capital markets froze and traditional banks accumulated hung deals on their balance sheets. Private credit providers capitalized on this dislocation, deploying capital to fill liquidity voids at attractive yield levels relative to risk—a dynamic reflecting the asset class's flexibility relative to traditional banking conduits. Third, inflation protection through asset-based lending deserves portfolio consideration; as collateral underlying these loans appreciates in inflationary environments, the mechanism provides partial hedging against persistent price pressures that continue to challenge economic growth.
Structurally, private credit instruments offer distinctive portfolio characteristics: contractual maturity dates, collateral backing, and priority positioning senior to equity in capital structures. These features, combined with return profiles typically exceeding traditional fixed income with only marginally higher volatility, position private credit as a viable alternative to conventional bond allocations. The asset class has demonstrated resilience through economic cycles, suggesting applicability across varying macroeconomic conditions. For institutional investors, family offices, and hedge funds reassessing portfolio construction in an environment of normalization toward higher rates and lower growth, private credit's expanding breadth—now encompassing middle-market lending, real estate finance, infrastructure lending, and specialty finance—affords sophisticated investors multiple vehicles to achieve yield objectives while maintaining prudent risk management.
The investment thesis rests on three foundational themes. First, quality bias represents the primary risk management imperative. As economic growth moderates and interest rates remain elevated, private credit providers face pressure to position themselves high in capital structures while concentrating exposure on quality companies with strong near-term cash flow generation, particularly in defensive sectors less vulnerable to economic deterioration. Second, liquidity support has emerged as a critical value driver. Throughout 2022, private-equity-backed companies encountered a funding gap as public capital markets froze and traditional banks accumulated hung deals on their balance sheets. Private credit providers capitalized on this dislocation, deploying capital to fill liquidity voids at attractive yield levels relative to risk—a dynamic reflecting the asset class's flexibility relative to traditional banking conduits. Third, inflation protection through asset-based lending deserves portfolio consideration; as collateral underlying these loans appreciates in inflationary environments, the mechanism provides partial hedging against persistent price pressures that continue to challenge economic growth.
Structurally, private credit instruments offer distinctive portfolio characteristics: contractual maturity dates, collateral backing, and priority positioning senior to equity in capital structures. These features, combined with return profiles typically exceeding traditional fixed income with only marginally higher volatility, position private credit as a viable alternative to conventional bond allocations. The asset class has demonstrated resilience through economic cycles, suggesting applicability across varying macroeconomic conditions. For institutional investors, family offices, and hedge funds reassessing portfolio construction in an environment of normalization toward higher rates and lower growth, private credit's expanding breadth—now encompassing middle-market lending, real estate finance, infrastructure lending, and specialty finance—affords sophisticated investors multiple vehicles to achieve yield objectives while maintaining prudent risk management.
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