How convincing are claims that private credit can substitute for traditional fixed income in institutional portfolios, and what blind spots do you see in their risk modelling?
Mark McKeown, managing principal / head of fixed income research, Meketa Investment Group: Including private credit in public-market bond portfolios can reduce daily credit-market volatility and provide diversification, but it also introduces liquidity constraints that vary by institutional client. Longer-term investors such as insurance companies are better positioned to use private credit, while institutions with shorter horizons typically require higher liquidity.
As a result, private and public bond portfolios are generally kept separate, though private credit can offer diversification benefits for certain client types. Investment-grade private credit is increasingly used in core bond portfolios, particularly through asset-backed securities. Below investment grade, including high yield and bank loans, private credit is often incorporated within multi-asset credit (Mac) strategies.
These blended public/private strategies tend to have higher fees and limited liquidity, typically quarterly or annual, making them less attractive to institutional investors. While demand from retail investors continues to grow, institutional portfolios remain focused on liquid credit, which continues to offer compelling value.
Paul Angell, head of investment research at AJ Bell: We remain unconvinced. At AJ Bell, we look to deliver simple, low cost and transparent investment solutions, with private credit a mismatch for us on transparency alone. Rather, we like credit funds with large teams of analysts assessing the publicly available information of the companies and bonds they hold in their portfolios, a set-up we don’t see replicated with private credit funds. Additionally, the infrequent dealing periods do not suit the daily dealing requirements of our model portfolios.
Rob Burdett, head of multi-manager team, Nedgroup Investments: Private credit has enjoyed a strong run and is increasingly being positioned as a replacement for traditional fixed income, marketed on higher yields, low volatility and diversification. However, the smooth return profiles often reflect the absence of daily mark-to-market pricing rather than true stability. Illiquidity can mask volatility, allowing credit risk to build until it emerges in a downturn.
Risk models frequently rely on backward-looking assumptions shaped by a decade of benign credit conditions, with recovery rates based on stronger covenant protections than exist today. Despite claims of low correlation, correlations tend to rise during periods of stress, while manager dispersion remains significant and is often understated in portfolio modelling.
Private credit does have a role in institutional portfolios, particularly for long-term investors seeking an illiquidity premium. However, it is not a substitute for traditional fixed income, which provides liquidity, transparency and duration. Treating it as such risks turning a sales narrative into an investment thesis.
Rich Weiss, multi-strategy CIO, American Century Investments: The case is unconvincing. While private credit has a legitimate role in many institutional portfolios, it is not a direct substitute for traditional fixed income, just as private equity is not a substitute for public equities. Liquidity, lockups, pricing, and fees differ materially and must be properly accounted for.
Moreover, many arguments in favour of private credit rely heavily on recent favourable returns, which may be misleading given the strong credit environment of recent years. Credit spreads have been exceptionally tight and could easily widen, posing a risk to many private credit vehicles.
What are the biggest gaps you see between institutions’ strategic fixed income needs and the products asset managers are currently bringing to market?
Mark McKeown: Some institutions have developed public/private IG or Mac blends for retail channels, but these structures are generally a poor fit for more sophisticated institutional clients and consultants. Several successful European Mac credit managers have struggled to raise capital in the US, often due to a failure to recognise key market differences that require different vehicle structures than those used in Europe. We see differentiated European credit managers that have not fully assessed US institutional client needs or the vehicle structures required to support investment in liquid credit strategies, limiting their ability to gain traction in the US market.
Paul Angell: We feel well covered across the portfolio, with high-conviction positions in investment grade (sterling and global), high yield and emerging market debt. While we allocate less to strategic bond funds, we favour those that combine meaningful duration with effective asset allocation and security selection across fixed income sub-sectors. When executed well, this approach offers investors a credible way to capture both beta and alpha within bond markets.
Rob Burdett: Across fixed income, the gap between institutional needs and manager offerings remains wide. Institutions continue to prioritise reliable duration for liability matching, liquidity for rebalancing and collateral, transparent structures, and predictable income. Yet much of the industry’s product development remains focused on higher-fee, yield-enhancing strategies.
While commercially attractive, these products often fail to meet the core needs of pensions, insurers and other long-term allocators. There remains a shortage of high-quality long-duration instruments, limited inflation-linked solutions aligned with real return liabilities, and too few transparent, low-cost core fixed income options.
Rich Weiss: I don’t believe most asset managers are offering sufficiently globally balanced and diversified strategies. With a likely shift toward a more bipolar global economy led by the US and China, a realignment of treaties and financial linkages appears inevitable. Fixed income strategies that recognise and seek to capitalise on this shift are likely to be increasingly valued.
Where do you think value lies for institutions—tight credit spreads, selective emerging markets, or shorter-duration instruments offering carry without duration risk?
Mark McKeown: Liquid credit markets in the US and Europe are currently compelling, supported by higher base rates and attractive total yields across high yield, bank loans and CLOs. Risk-adjusted returns have also benefited as lower-quality issuance has increasingly shifted to private credit, leaving a higher-quality pool in liquid markets.
While spreads remain tight, liquid credit yields now compare more favourably with private credit than in the past. Investors should therefore question whether the narrower illiquidity premium in private credit justifies locking up capital. Multi-asset credit strategies remain liquid, low duration and offer compelling yields relative to other asset classes.
Paul Angell: We continue to underweight duration risk, particularly for lower-risk investors. With shorter-dated bonds offering cyclically high yields, we see little incentive to extend along the curve and therefore keep duration low. While credit spreads remain tight, we are comfortable staying broadly neutral on credit risk, supported by contained leverage levels across both investment grade and high yield corporates this cycle. We also continue to value the diversification and higher-yield benefits that emerging market debt brings to portfolios.
Rob Burdett: The current opportunity set is mixed. Credit spreads remain tight and, while higher base rates support attractive income, upside is limited, and downside risks are asymmetric, creating a “carry until it breaks” environment with little margin of safety.
Selective emerging markets offer pockets of value, particularly among sovereigns with stronger fiscal positions and in local currency markets that provide attractive real yields. However, currency volatility remains the key risk, making these allocations more suitable for investors with longer horizons.
The most compelling risk-adjusted opportunities are in short-duration instruments, where elevated front-end yields provide meaningful carry, income, and flexibility without significant duration risk, alongside liquidity advantages over private markets.
Rich Weiss: Potentially the biggest opportunities lie in those geographies that stand to benefit from the “bipolar” global economy – One in which both the US and China emerge as duelling hubs of trade and influence.
Matt Ennion, head of fund research, Quilter Cheviot: The private credit market has expanded significantly in recent years, extending fixed income by offering different opportunities to listed bonds and acting as a complement rather than a substitute. Investors, however, need to understand the additional risks associated with the asset class, particularly given the large amount of capital raised, where outcomes are likely to vary.
A number of semi-liquid credit funds are set to launch, a structure that aligns with the natural maturity profile of credit. Even so, due diligence remains essential. While this is not currently a gap we need to fill, we continue to monitor developments.
