Navigating a maturing private credit market: Insight for advisors

Key takeaways

• As the private credit market has matured, it has also grown more complex. A lack of uniformity makes credit selection increasingly important.
• Recent stress in the market is not broad-based, in our assessment, but concentrated among specific borrowers, sectors and vintages. This represents an important shift for advisors evaluating manager performance.
• While artificial intelligence (AI) is delivering disruption it is also surfacing an expanding set of opportunities over the next several years.
  
  

Private credit has matured from a niche allocation into a core component of many diversified portfolios. That evolution has expanded the opportunity set, but it has also made the market more complex. For financial advisors, the story today is less about whether private credit remains attractive and more about where the most compelling opportunities may be emerging.

The current macro backdrop remains supportive. Economic growth expectations are positive, financial conditions have improved and income generation continues to underpin credit returns. At the same time, inflation is still above central bank targets, suggesting interest rates are likely to stay elevated relative to the post-Global Financial Crisis era. That combination creates a favorable environment for income-oriented investments while reinforcing the need for careful credit selection.

Income as a key support

One of private credit’s defining characteristics has been its ability to generate relatively attractive income. Elevated base rates continue to support floating-rate direct lending strategies, and income has remained well above realized credit losses.

Importantly, recent data suggest credit performance is still fundamentally healthy. Trailing 12-month realized losses in the Cliffwater Direct Lending Index sit below their long-term average, despite a modest increase in unrealized losses in Q1 2026. This reflects a combination of borrower-specific developments, software-related pressure and wider public market spreads.

Direct lending yields continue to compare favorably with both leveraged loans and high yield bonds, as shown in the chart below. Historically, private credit has also maintained a yield premium over syndicated markets, reflecting both its lower liquidity and differentiated sourcing opportunities.

For investors seeking income, today’s higher-for-longer rate environment continues to provide support.

Private debt has historically offered a yield ‘pick-up’ vs. public markets
Average yield-to-maturity, 2004-2026

Big picture masks growing dispersion

While the aggregate picture is relatively constructive, we find that the market is becoming increasingly differentiated beneath the surface.

Rather than broad-based deterioration, stress has been concentrated among specific borrowers, sectors and vintages. This represents an important shift for advisors evaluating manager performance.

Recent data provide examples of this growing dispersion:

• Fundraising has diverged across vehicles. Business development companies (BDCs) have experienced modest net outflows,¹ while closed-end private credit fundraising has remained resilient, reflecting continued institutional demand.²
• The upper middle market has expanded much faster than the lower middle market, creating differences in portfolio construction, borrower diversification and competitive dynamics.
• Credit stress has become increasingly concentrated in loans originated during 2021 and 2022, which account for roughly three-quarters of recent foreclosure activity.³ Many of these loans were originated when valuations were elevated and financing costs were substantially lower than they are today.

For advisors, this reinforces the idea that private credit should not be viewed as a homogeneous asset class.

Manager selection increasingly important

As private credit has grown, differences in underwriting standards, portfolio construction and sector exposure have become more important drivers of performance.

Borrower fundamentals appear broadly resilient, with most companies continuing to grow and interest coverage improving from recent lows. Fair value marks also suggest that credit pressure remains manageable rather than systemic, with the majority of loans experiencing little change in valuation during the first quarter of 2026.

Yet not all managers are positioned equally. Portfolio composition, vintage exposure, loan-to-value discipline and sector allocation are increasingly important differentiators. Managers with strong underwriting capabilities and the flexibility to navigate borrower-specific challenges may be better positioned as market dispersion continues to widen.

Software still an area to watch

Technology, and software in particular, continues to merit close attention. Software represents a meaningful share of private credit portfolios, yet uncertainty surrounding AI disruption, valuation resets and upcoming refinancing needs has created uneven outcomes across borrowers.

The distinction between software business models has also become more pronounced. Vertical software companies have generally maintained stronger valuation multiples than horizontal software businesses, reflecting more specialized use cases and stronger customer relationships. At the same time, we find that loans with higher loan-to-value ratios have experienced larger valuation declines, highlighting how capital structure continues to influence credit performance.

Rather than avoiding the sector altogether, this points to the need for investors to source managers capable of distinguishing stronger businesses from weaker credits.

AI creates new opportunities

Artificial intelligence is influencing private credit from another direction as well. The rapid expansion of AI infrastructure, including data centers, digital infrastructure and power-related investments, is creating substantial financing needs. While public bond markets have absorbed significant issuance, private capital is increasingly expected to complement traditional financing as investment requirements continue to grow.

For private credit managers with expertise in infrastructure and complex financing solutions, the AI buildout may represent an expanding opportunity set over the coming years.

Public and private markets remain complementary

Private credit also continues to compete and cooperate with broadly syndicated loan markets.

Capital has historically moved between direct lending and syndicated markets as financing conditions evolve. Recent activity has remained relatively modest, but over time, advisors should expect borrowers to continue choosing whichever financing channel offers the most attractive combination of certainty, pricing and flexibility.

This dynamic reinforces that private credit does not operate in isolation. Conditions in public credit markets, including risk appetite, refinancing activity and new issuance, will continue to influence direct lending opportunities.

The bottom line for advisors

Today’s private credit market looks very different than it did just a few years ago.

The broad investment case remains intact. Higher base rates continue to support attractive income, realized losses remain relatively contained, and direct lending continues to compare favorably with many public credit alternatives.

At the same time, success is increasingly dependent on manager skill rather than broad market exposure.

As the asset class matures, advisors may benefit from looking beyond headline yields to evaluate how managers approach underwriting, sector selection, portfolio construction and risk management. The growing dispersion across borrowers, industries, strategies and vintages suggests these characteristics are likely to play an increasingly important role in long-term outcomes.

We believe the opportunity in private credit remains compelling. Yet, increasingly, selectivity may prove to be the greatest source of value.