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This is a sponsored article from Brookfield Oaktree Wealth Solutions.
Private credit strategies were once only available to the largest institutional investors. But retail investor demand has spurred the development of new vehicles and solutions, making private credit more accessible to a broader range of investors.
Private credit has grown rapidly, with AUM projected to reach US$2.6 trillion by 20291. Investors are drawn to the asset class’s potential for strong long-term returns, lower volatility, attractive yields, diversification, and enhanced risk mitigation. Structural shifts in the lending landscape have accelerated this expansion, though outcomes vary depending on manager selection, market conditions, and underlying credit performance.
Source: Cliffwater Direct Lending Index. Represents the trailing four quarters ending December 31, 2024. The indexes are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. The figures stated are gross of fees.
This article explains the trends driving private credit’s growth, explores investor benefits, and discusses how allocating to private credit strategies may play a key role in the modern credit portfolio.
In this article
The benefits of private credit
“Private credit” refers to loans or credit investments made by non-bank lenders, often outside of traditional banks or public markets. Many borrowers choose private credit for its speed and flexibility, particularly for small to medium-sized businesses. Although private credit spans a wide range of assets and industries, these strategies generally share several key characteristics. These include the usage of floating-rate coupons, shorter terms to maturity than traditional fixed income, potential to negotiate strong covenants, and less liquidity than public market counterparts, which can result in additional yield for investors.
The unique attributes described above contribute to and help explain the five key benefits of private credit investing.
- Reduced interest rate sensitivity. The prolonged low-interest-rate environment that followed the Global Financial Crisis (GFC) resulted in investors turning to private credit, given its potential to deliver higher yields. Now, in today’s higher-for-longer rate environment, investors can turn to private credit as a valuable hedge against the impact of rate increases. Private loans have shorter duration(or less sensitivity to interest rate changes) and other features that can offer a buffer against falling rates.
- Attractive long-term total returns. Private credit has historically produced strong total returns relative to other fixed-income assets, which is at least partly a consequence of the premium investors demand for the illiquidity and complexity of the loans.
Past performance is not indicative of future results. Information does not represent returns of a fund. An investor cannot invest in an index. For illustrative purposes only. Treasuries represented by FTSE 10-Year Treasury (OTR); Investment Grade Bonds represented by Bloomberg U.S. Corporate Bond Index; Senior Loans represented by S&P UBS Leveraged Loans Index; High-Yield Bonds represented by ICE BofA U.S. HighYield Index; Private Credit represented by Cliffwater Direct Lending Index. Source: Bloomberg, Cliffwater. January 1, 2010 through December 31, 2024. - Risk mitigation potential. Private loans are often secured by collateral and sit higher in a company’s debt structure, meaning they are paid first in the event of a default, and include lender protections that require companies to meet certain financial conditions.
- Lower volatility. High-yield bonds and other liquid debt instruments tend to be more volatile than the marked-to-market valuations of private credit investments.
- Enhanced diversification. Private loans have historically exhibited low correlations to traditional asset classes such as stocks and bonds, and the business cycle in general, helping to strengthen portfolio diversification.
Beyond the traditional 60/40: Reimagining the credit portfolio
Credit markets are evolving. After years of near-zero interest rates, they are now at elevated levels. Although the path forward remains uncertain, we believe that rates are likely to remain above the post-GFC average for some time to come. Liquidity has become fragmented, and there is mounting pressure on traditional 60/40 portfolios as stock/bond correlations have risen. In this environment, it is no surprise that investors are reassessing their portfolios and looking for alternative asset diversification to boost income and strengthen portfolios.
Investors have traditionally built bond portfolios with a mix of Treasuries, municipal bonds, investment-grade bonds, and high yield. Today, those allocations may no longer offer the same diversification benefits and may limit the flexibility to navigate to different credit environments. Adding private credit to a traditional fixed-income portfolio can introduce another source of potential return and attractive income, while helping to mitigate risk and enhance overall portfolio resilience.
Past performance is not indicative of future results. Information does not represent returns of a fund. An investor cannot invest in an index. For illustrative purposes only. Return and volatility for the period from January 1, 2008 through December 31, 2024. Equities refers to MSCI World Index; Fixed Income refers to the Bloomberg Global Aggregate Index;Private Credit refers to the Cliffwater Direct Lending Index. Source: Morningstar, Cliffwater.
Private credit is not a one-size-fits-all solution. It is a diverse asset class encompassing a range of strategies. These include:
- Direct lending: Senior debt issued to founder‑ or private‑equity‑owned businesses, often to support growth capital.
- Mezzanine financing: Junior debt positioned between senior debt and equity, commonly used for leveraged buyouts, recapitalisations, and acquisitions.
- Asset‑backed finance (ABF): Specialty lending where loans are secured by a company’s assets, cash flows or receivables.
- Opportunistic lending: Lending to performing companies with acute financing needs, such as liquidity or near‑term maturities.
- Distressed debt: Discounted financing to companies experiencing financial distress, including potential insolvency or bankruptcy.
ABF is an increasingly important part of the private credit universe that links credit risk to tangible collateral while offering diversified exposure to cash-flowing assets.
The growth and benefits of ABF
Private ABF is not new, but the opportunity set is evolving. Tighter regulations, higher capital reserve requirements, and the pullback of regional banks have created more room for alternative lenders to provide financing. ABF helps finance a wide range of vital economic activities, from transportation to consumer lending.
Unlike traditional corporate direct lending, where repayment relies on a company’s fundamentals and its ability to refinance, exposing lenders to corporate risk, ABF structures are often secured by self-liquidation pools of assets. This isolates risk within the underlying collateral, rather than concentrating it in the borrowing company.
Importantly, investors do not need to choose between ABF and direct lending strategies. Both offer unique benefits, and together they can serve as complementary tools helping investors pursue more stable income, manage risk more effectively, and build stronger, more resilient portfolios over time.
A ‘modern’ credit allocation includes ‘all of the above’
Past performance does not guarantee future results. Past performance shown for illustrative purposes only and does not predict or depict the future performance of any investment. Indexes are unmanaged and cannot be purchased directly by investors. The metrics shown are hypothetical and intended for illustrative purposes only. They do not represent actual or projected investment results and should not be relied upon as predictions of future performance. “Public Credit” is based on an illustrative portfolio comprising a 70% allocation to the ICE BofA U.S. Corporate Index and a 30% allocation to the ICE BofA US High Yield Index. “Public + Direct Lending” represents an illustrative portfolio comprising a 35% allocation to the ICE BofA U.S. Corporate Index, a 15% allocation to the ICE BofA U.S. High Yield Index, a 35% allocation to Private Investment-Grade Corporates, and a 15% allocation to Direct Lending based on representative spreads and yields. “Public + Direct Lending + ABF” represents an illustrative portfolio comprising a 35% allocation to the ICE BofA U.S. Corporate Index, a 15% allocation to the ICE BofA U.S. High Yield Index, a 17.5% allocation to Private Investment-Grade Corporates, a 7.5% allocation to Direct Lending, a 17.5% allocation to Investment-Grade Asset-Based Finance, and a 7.5% allocation to Sub-Investment-Grade Asset-Based Finance based on representative spreads and yields. As of April 30, 2025. The chart compares select credit allocation strategies but omits several material factors that may significantly impact investment decisions. Differences in liquidity constraints, management fees, tax treatment, and risk considerations are not fully reflected and should be carefully evaluated before investing.
Summing up: The Oaktree Advantage
Private credit strategies were once only available to the largest institutional investors. But retail investor demand has spurred the development of new vehicles and solutions, making private credit more accessible to a broader range of investors. Today, individual investors have access to a wide range of private credit strategies and can access the diversification benefits they can bring to investors’ portfolios.
Still, private credit investing involves a great deal of complexity, and it is critically important to partner with an experienced private credit manager. Oaktree has deep roots in credit, dating back to the founders’ investing activities in 1978. The Firm has an integrated approach, with more than 260 investment professionals across 25 cities and 18 countries, who utilise a bottom up, risk-controlled and value-driven approach. Oaktree’s product range, which includes Oaktree Asset Backed Finance Fund, Strategic Credit Fund and Global Credit Fund, has demonstrated the ability to help investors strengthen their portfolios and ultimately meet their investment goals.
For more information, see here.
1 Preqin Global Report, Private Debt 2025 (published December 2024).
Important Disclosures
The information contained herein is for educational and informational purposes only and does not constitute, and should not be construed as, an offer to sell, or a solicitation of an offer to buy, any securities or related financial instruments. This material discusses broad market, industry or sector trends, or other general economic or market conditions, and it is being provided on a confidential basis.
It is not intended to provide an overview of the terms applicable to any products sponsored by Brookfield Corporation and its affiliates (together, “Brookfield”). Information and views are subject to change without notice. Some of the information provided herein has been prepared based on Brookfield’s internal research, and certain information is based on various assumptions made by Brookfield, any of which may prove to be incorrect. Brookfield may not have verified (and disclaims any obligation to verify) the accuracy or completeness of any information included herein, including information that has been provided by third parties, and you cannot rely on Brookfield as having verified any of the information. The information provided herein reflects Brookfield’s perspectives and beliefs as of the date of this material.
Opinions expressed herein are current opinions of Brookfield, including its subsidiaries and affiliates, and are subject to change without notice. Brookfield, including its subsidiaries and affiliates, assumes no responsibility to update such information or to notify clients of any changes. Any outlooks, forecasts or portfolio weightings presented herein are as of the date appearing on this material only and are also subject to change without notice. Past performance is not indicative of future performance, and the value of investments and the income derived from those investments can fluctuate.
All investing involves risk. The value of an investment will fluctuate over time, and an investor may gain or lose money, or the entire investment. Past performance is no guarantee of future results.
Private Credit Risks
As an asset class, private credit comprises a large variety of different debt instruments. While each has its own risk and return profile, private credit assets generally have increased risk of default, due to their typical opportunistic focus on companies with limited funding options, in comparison to their public equivalents.
Because private credit usually involves lending to below-investment-grade or non-rated issuers, yield on private credit assets is increased in return for taking on increased risk.
Asset-Backed Finance Risks
Asset-backed finance investments involve significant risks, including credit risk, illiquidity risk and market volatility. There is no guarantee that investment strategies will achieve their objectives or that portfolio diversification will prevent losses. The attractiveness of market segments and investment opportunities described herein are based on current market conditions.
Forward-Looking Statements
Information herein contains, includes or is based on forward-looking statements within the meaning of the federal securities laws, specifically Section 21E of the Securities Exchange Act of 1934, as amended, and Canadian securities laws. Forward-looking statements include all statements, other than statements of historical fact, that address future activities, events or developments, including, without limitation, business or investment strategy or measures to implement strategy, competitive strengths, goals, expansion and growth of our business, plans, prospects and references to our future success. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other similar words are intended to identify these forward-looking statements. Forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining our actual future results or outcomes. Consequently, no forward-looking statement can be guaranteed. Our actual results or outcomes may vary materially. Given these uncertainties, you should not place undue reliance on these forward-looking statements.
Index Provider Disclaimer
The quoted indexes within this publication are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. There may be material factors relevant to any such comparison, such as differences in volatility and also regulatory and legal restrictions between the indexes shown and any investment in a Brookfield strategy, composite or fund. Brookfield obtained all index data from third-party index sponsors and believes the data to be accurate; however, Brookfield makes no representation regarding its accuracy. Indexes are unmanaged and cannot be purchased directly by investors. Brookfield does not own or participate in the construction or day-to-day management of the indexes referenced in this document. The index information provided is for your information only and does not imply or predict that a Brookfield product will achieve similar results. This information is subject to change without notice. The indexes referenced in this document do not reflect any fees, expenses, sales charges or taxes. It is not possible to invest directly in an index. The index sponsors permit use of their indexes and related data on an “as is” basis, make no warranties regarding same, do not guarantee the suitability, quality, accuracy, timeliness and/or completeness of their index or any data included in, related to or derived therefrom, and assume no liability in connection with the use of the foregoing. The index sponsors have no liability for any direct, indirect, special, incidental, punitive, consequential or other damages (including loss of profits). The index sponsors do not sponsor, endorse or recommend Brookfield or any of its products or services. Unless otherwise noted, all indexes are total-return indexes.
Index Definitions
The Cliffwater Direct Lending Index measures the unlevered, gross-of-fees performance of U.S. middle-market corporate loans, as represented by the asset-weighted performance of the underlying assets of business development companies (BDCs), including both exchange-traded and unlisted BDCs, subject to certain eligibility requirements.
The U.S. High-Yield Market Capped Index uses the U.S. High-Yield Market Index as its foundation. The index uses the same design criteria and calculation methodology as the U.S. High-Yield Market Index, but caps the total debt of any single issuer at USD $15 billion of par amount outstanding and also delays the entry of fallen angels for a minimum of one month after their downgrade to high-yield.
The ICE BofA Global High Yield European Issuers Non-Financial 3% Constrained Ex Russia Index is a sub-index that contains all securities in the broader index except those from financial issuers or with Russia as their country of risk but caps issuer exposure at 3%. The index is rebalanced monthly. The index is USD Hedged.
The Credit Suisse Leveraged Loan Index is designed to mirror the investable universe of the $US-denominated leveraged loan market. The index includes only those loans rated “5B” or lower, or if unrated, the initial spread level must be Libor plus 125 basis points or higher. The index includes only funded loans with a tenor of at least one year.
The Credit Suisse Western European Leveraged Loan Index is designed to mirror the investable universe of the Western European leveraged loan market. The index includes loans denominated in U.S. dollars and Western European currencies. Loans must be rated Moody’s/S&P of Baa1/BBB+ or lower, have a minimum initial spread of Libor +125 bps, and be a funded loan. This index is EUR Hedged for the European Senior Loan Composite and USD Hedged for the European senior loan component within Oaktree’s Global Credit strategy.
The Bloomberg Barclays Capital CMBS 2.0 BBB Index is a rules-based index constructed to measure the market of investment-grade CMBS BBB conduit and fusion deals issued since the beginning of 2010.
The JP Morgan CLO 2.0 BBB Post-Crisis Index tracks floating-rate CLO BBB securities in post-crisis vintages, which consists of deals issued in 2010 and later. The index utilizes a market-value-weighted methodology.
The JP Morgan Corporate Emerging Market Bond High Yield Index (CEMBI HY) is a global, liquid corporate emerging markets index that tracks U.S.-denominated corporate bonds (high yield subset only) issued by emerging markets entities.
The Thomson Reuters Global Focus Convertible Index is represented by the Oaktree custom Global Convertibles Index through December 2015 and the Thomson Reuters Global Focus Convertible Index thereafter. The Thomson Reuters Global Focus Convertible Index is composed of larger balanced convertibles that meet monthly price and premium tests, and it has no restrictions on credit rating. Convertibles that are fixed-income surrogates or equity substitutes are removed from the index and replaced by balanced securities. The benchmark was changed prospectively because this index more closely matches the strategy’s current exposures to High Income Convertibles, U.S. Convertibles and Non-U.S. Convertibles. The index is valued in and hedged to U.S. dollars. Prior to January 2016, the benchmark was the Custom Global Convertibles Index, which represents a weighted blend of Oaktree’s primary benchmarks for the U.S. Convertibles and Non-U.S. Convertibles strategies. The benchmark for the High Income Convertibles strategy allocation is represented by the U.S. Convertibles benchmark. The U.S. Convertibles benchmark is the ICE BofA All U.S. Convertible Index, and the Non-U.S. Convertibles benchmark is the JACI Global ex-U.S. (Local) Index through December 31, 2014 and the Thomson Reuters Global Focus ex-US Index thereafter. The shift in the Non-U.S. Convertibles benchmark is a result of Jefferies discontinuing their index. The Thomson Reuters convertible index was selected because it mirrors Oaktree’s convertibles investing approach and is the most widely used index in Europe. The custom index reflects the asset allocation policy weights of the Composite and is rebalanced monthly based on the Composite’s policy weight changes and adjustments, which are implemented in the next full measurement period.
The ICE BofA U.S. Corporate Index tracks the performance of U.S. dollar-denominated investment-grade corporate debt publicly issued in the U.S. domestic market. Eligible securities are rated BBB-/Baa3 or higher, have at least one year remaining to maturity, and have a minimum of $250 million in outstanding face value.
The ICE BofA U.S. High Yield Index tracks the performance of U.S. dollar-denominated, below-investment-grade corporate debt publicly issued in the major domestic markets.
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This is a sponsored article from Brookfield Oaktree Wealth Solutions.
