Private credit has matured from a nascent asset class into a critical area of capital markets, covering corporate credit, asset-based finance, and real estate debt across investment-grade and below-investment-grade credit. The result is a private credit market that largely mirrors public markets in size and breadth, but with important differences in liquidity, credit, and structure. As these markets converge to create a vast, diverse, and complex credit landscape, the opportunity generally favors investors with flexible capital and deep expertise across public and private markets.

While much of the past decade’s expansion in credit was fueled by low interest rates and tighter bank regulations, today’s environment is defined by higher rates, inflationary pressures, rapid technological innovation, and growing economic uncertainty. This backdrop suggests a shift toward more flexible, active approaches to credit and income-oriented investing. These more active strategies rely on careful relative value analysis, rigorous underwriting and stress testing, and more complex deal structuring—all aimed at improving investor outcomes in credit markets.

Public and private credit markets are converging in areas such as spreads, collateral types, and even borrowers, but not in liquidity, deal structures, or transparency. This mix of convergence and divergence creates opportunities and risks for allocators seeking to optimize credit allocations. This is especially important as credit takes on a larger, more structural role in asset allocation plans, given its ability to serve both as a return and yield enhancement tool within fixed income and as a risk-mitigating element in equity allocations amid historically expensive valuations. 

To extract maximum value, credit investors should increasingly need to navigate public and private credit holistically, carefully analyzing credit risks, deal structures, liquidity, and ways to capitalize on the growing interconnectedness between these markets.

One of the most prominent opportunities is sourcing risk as private borrowers seek to refinance via public markets. Another is in asset-based finance, where investors aim to capitalize on private-to-public arbitrages by building loan portfolios in private markets and then using securitization to finance or monetize those investments in public markets. An integrated platform spanning the liquidity spectrum can help investors seek more attractive outcomes.

We believe active management will be critical to successful investing in public-private market convergence. 

Convergence extends well beyond investment strategies and philosophies and is reshaping partnerships between asset managers and allocators. When interest rates were near zero, replacing fixed income with less liquid, higher-yielding credit was critical for many allocators. Today, with liquid fixed income able to pursue mid-to-high single-digit returns for investors, allocators view the trade-offs between liquid and less liquid credit quite differently. Some allocators now see opportunities in public fixed income as a “private credit replacement,” as these strategies can offer competitive returns to areas such as corporate direct lending, but often with reduced risk, more liquidity, greater transparency, and lower fees.

Given this backdrop, allocators are seeking broader, more flexible partnerships that focus on outcomes rather than access. Outcome-oriented partnerships evolve with the opportunity set in markets, while access-focused partnerships emphasize the amount and pace of capital deployment, irrespective of relative value. These outcome-oriented partnerships can also lead to providing better economics through greater scale, the ability to react quickly to dislocations, and access to coinvestments. 

In our view, the changing playbook in credit investing can offer improved alignment with allocator needs and the potential for enhanced net-of-fee risk-adjusted returns. Despite signs of complacency across many credit sectors, given the lack of cyclicality over the past 15 years, our belief is that more active management across credit sectors and the liquidity spectrum will be critical to successful investing in a world of public and private market convergence. 

All investments contain risk and may lose value. Investors should consult their investment professional prior to making an investment decision. This material contains the current opinions of the author but not necessarily PIMCO and such opinions are subject to change without notice. PIMCO as a general matter provides services to qualified institutions, financial intermediaries, and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material is intended for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product.