Best Ideas 2026

The Compelling Convergences

in a Credit Income Approach

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The convergence of public and private credit sharpens the focus on how these assets may perform in an individual portfolio. A portfolio with the flexibility to allocate to a manager’s best ideas across the public and private credit continuum highlights the following four points:

  • The rationale for investing in public and private assets in a single portfolio;
  • capturing liquidity premia in a flexible portfolio oriented for credit income;
  • diversification benefits for asset correlations and the portfolio;
  • and the complementary benefits of bespoke lending across private markets.

The Rationale for Portfolio Convergence

Unto their own, the asset classes that may be combined in a flexible credit portfolio comprise significant size and growth. From a fixed income perspective, the global public credit markets represent a $31 trillion opportunity set, while the $2 trillion global private credit market is expected to double in size by 2030.1

The combination of public and private assets not only provides the portfolio with access to more borrowers, but it also opens the opportunity set across borrowers’ capital structures. For example, an AI-related hyperscaler may have outstanding public debt, securitized construction loans, and direct loans related to its data-center buildout. A portfolio manager seeking exposure to the name would consequently seek the optimal relative value amongst those outstanding securities.

In a portfolio oriented for credit income, the implementation of investment ideas across asset classes varies. For example, on the public credit side, our current allocation approach is generally neutral on duration and focused on carry amid historically tight credit spreads. On the private credit side, we are seeking complementary exposure to non-sponsored borrowers, lien protection, and add-on transactions with existing borrowers (see our latest fixed income insights here).

Furthermore, specific allocations to public and private assets may depend on market conditions and relative value considerations. While private credit yields continue to exceed those of comparable public assets, that dynamic changes over time and supports a relative value approach across public and private assets.

Exhibit 1 shows that, in the COVID aftermath, public credit spreads—including those in the high yield bond market—exceeded private credit spreads for much of 2022. At that time, a relative value approach may have pointed to a public credit overweight relative to private assets. Given the public market’s elasticity to macroeconomic and broad credit market events (i.e., periods where spreads widen and subsequently mean revert), when these events occur, marginal portfolio adjustments tend to favor investments in public assets. 

Exhibit 1: The shifting relative value dynamic between public and private credit spreads 

Line chart comparing bps of PC Upper Middle Market, PC Large Cap and HY from January 2022-September 2025.
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Source: Bank of America Securities.
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Line chart comparing bps of PC Upper Middle Market, PC Large Cap and HY from January 2022-September 2025.
Source: Bank of America Securities.

However, the respective views on individual asset classes belie the compelling opportunities when these assets are combined in a complementary portfolio. For example, Exhibit 2 provides a risk/return perspective on a portfolio with the flexibility to invest across public and private assets in comparison to a portfolio dedicated to public high yield bonds and the U.S. Aggregate Index, respectively. 

Our representative portfolio returned 9.6% from the start of 2024 through Q3 2025, exceeding the returns from high yield bonds and the Aggregate Index, with a lower standard deviation of returns.2, 3 The performance of the representative portfolio amounts to a Sharpe ratio of nearly 1.70, well in excess of those for public high yield and the Aggregate Index.  

Exhibit 2: The potential performance benefits of a flexible credit income-oriented portfolio

Plots represent the return % and standard deviation % of a flexible credit income portfolio as well as High Yield and U.S. Agg indices. Table also shows sharpe ratio of all three.
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Source: All data as of 9/30/2025, unless noted otherwise. Source of index data: PGIM using data from Bloomberg. All indexes are unmanaged. An investment cannot be made directly in an index. U.S. Agg: BBG U.S. Aggregate Bond Index; High Yield Bonds: BBG U.S. High-Yield - 1% Issuer Cap Index. Source of portfolio data: PGIM
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Plots represent the return % and standard deviation % of a flexible credit income portfolio as well as High Yield and U.S. Agg indices. Table also shows sharpe ratio of all three.
Source: All data as of 9/30/2025, unless noted otherwise. Source of index data: PGIM using data from Bloomberg. All indexes are unmanaged. An investment cannot be made directly in an index. U.S. Agg: BBG U.S. Aggregate Bond Index; High Yield Bonds: BBG U.S. High-Yield - 1% Issuer Cap Index. Source of portfolio data: PGIM

Capturing Liquidity Premia

Given the prolonged tightening in public credit spreads in the post-COVID environment (albeit with periods of volatility, e.g., the collapse of Silicon Valley Bank in early 2023), all-in private credit yields have recently exceeded those in comparable public markets. That excess is primarily attributable to the illiquidity premium in private credit.

Figure 3 takes a high-level approach of decomposing that illiquidity premium with an initial step of factoring in default costs. When doing so, the effective yield on private credit declines 240 bps to 7.5%, while the yields on broadly syndicated loans and high yield decline by 170 bps and 70 bps, respectively. An additional adjustment for fees could also factor into a public/private yield comparison.

Figure 3: Context Around Private Credit's Illiquidity Premium

First bar graph shows yields of private credit, BSL and high yield. Second bar chart shows yields adjusted for default cost for private credit, BSL and high yield.
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Source: PGIM
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First bar graph shows yields of private credit, BSL and high yield. Second bar chart shows yields adjusted for default cost for private credit, BSL and high yield.
Source: PGIM

Diversification, Correlation, and Information Ratio  

Taking the effects of an expanded opportunity set a step further, a portfolio with the ability to invest across the public/private credit continuum should also be more diversified compared to those focusing on specific, individual asset classes. That diversification carries implications for cross-asset correlation and, consequently, the portfolio’s information ratio. 

Given private credit’s non-mark-to-market characteristics and bespoke lending terms, the asset class exhibits a relatively low level of volatility. When combined with public credit in a dedicated portfolio, the addition of private credit allocations—potentially ranging from asset-based finance (ABF) to private credit secondaries—lowers the correlation across the portfolio’s assets, and the volatility of returns should decline as a result.

When viewed from the perspective of a portfolio’s information ratio—with volatility being the denominator—the reduced volatility lifts its information ratio, indicating the potential for greater risk-adjusted returns in an actively managed portfolio.

 

The Benefits of Bespoke Direct Lending

The focus on opportunity sets and diversification applies across the private credit universe as well. Sponsored and non-sponsored borrowers generally present different credit attributes, and a portfolio seeking the optimal risk-return profile and level of diversification may consider lending to both segments of the private credit market.

Non-sponsored companies comprise about 90% of the middle-market direct lending market. While these loans can be more difficult to source—indicating that this segment may be underserved by many direct lending funds and highlighting the value of a broad sourcing network—they may have beneficial attributes when combined in a wholistic credit income portfolio.

For instance, non-sponsored allocations may be more focused on non-change-of-control deals given the potential credit implications that could surface with an acquisition or merger. Furthermore, when compared to loans to sponsored entities, non-sponsored loans generally consist of better, negotiated terms at lower leverage levels with better information disclosures to the lender.

The flexibility to select between sponsored and non-sponsored deals generally avoids conflicts of interest that can occur in captive origination deals. The ability to choose from origination types means that portfolio exposure is evaluated on risk and return prospects as opposed to pre-determined criteria, such as lending volume objectives.

 

Concluding Thoughts

The fading delineation between public and private credit markets carries broad investment implications. It not only underscores the ongoing convergence of risk/return profiles, but it also highlights the strategic rationale for a flexible, credit-oriented portfolio. The ability to capture illiquidity premia, harness the diversification benefits of an expansive opportunity set, and establish bespoke lending terms highlights the importance of allocating across the credit continuum in a continually evolving investment landscape.

1 Preqin as of 9/30/2025. All figures are nominal.

2 The private credit exposure in the representative portfolio totaled nearly 20% in notional terms as of September 30, 2025. Public securitized credit, high yield, and bank loans comprised the majority of the remaining notional allocations at the time.

3 The lower standard deviation of returns in private credit is primarily due to the sector’s non-mark-to-market characteristics. 

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