Rewriting The Credit PlaybookRewritingTheCreditPlaybook

The dividing line between public and private credit markets is fading. This convergence is reshaping capital markets by offering more choices across the credit universe and changing the way investors put money to work. However, as markets become more complex, investors need to reassess how they are evaluating opportunities and risks in their credit portfolios—particularly as geopolitics, tariffs, and a realignment in supply chains give rise to unexpected challenges.

PGIM brought together experts from its affiliates to discuss the interplay between public and private credit. In this webinar, our speakers covered credit strategies for optimizing asset allocations, the evolution of securitized credit, the expanding opportunity set in real estate credit, direct lending’s role in reshaping credit markets, and more.

The following is a summary of the conversation:

• Credit’s convergence: With the convergence between public and private credit markets, investors are increasingly moving away from allocations to distinct asset classes (e.g., IG corporates, CLOs, direct lending) and instead allocating to objectives (e.g., SOFR + X bps). This convergence has not only introduced greater innovation in strategies but also innovation across structuring and vehicles, such as BDCs, evergreen funds and rated-feeder structures, which are making private credit available to more investors. While the opportunity set is expanding, this public-private convergence is also introducing more complexity, in the form of regulatory oversight and risk assessment. This calls for investors to seek more integrated, holistic solutions that can implement a diverse range of credit strategies across the public and private spectrum while also managing the complicating needs of this new norm.
• Securitized credit: Public securitized credit tends to offer better risk-adjusted spreads than fixed income alternatives. It also provides direct exposure to specific types of assets such as auto loans, residential mortgages, and unsecured consumer loans, which are otherwise difficult to access. The sector’s credit exposures can be further enhanced by selecting specific collateral pools and negotiating structural protections in the growing private asset-based finance (ABF) market. The growth of the ABF market has been driven by an increased need for capital to fund both established and emerging sectors. These ABF transactions often come with a spread premium relative to public securitized credit due to their illiquidity and complexity. Deploying capital via ABF requires scale and substantial resources to source investments, conduct due diligence, and manage transaction execution.
• Real estate credit: The diversity in real estate sectors offers a range of investment options with exposure to a large swath of the economy, from residential housing to harder-to-reach segments like self-storage. Given that these investments are collateralized and secured by real assets, they could provide investors with better downside protection—as well as predictable income streams and low correlation to other asset classes—amid market uncertainty. Tariff-related volatility has drawn attention to more defensive segments such as the living sector, which includes residential, senior and student housing. With valuations near their cyclical bottom, investors could find interesting entry points across the real estate universe. A levered loan strategy is one example where public and private markets overlap; managers are increasingly issuing pools of these private loans to the public collateralized loan obligation (CLO) market.
• Private credit & direct lending: Private credit is broad and includes corporate issuers (both private and public companies), infrastructure debt, structured ABF, and the rapidly growing direct lending asset class. With the line between public and private credit blurring, structured solutions (CLOs, rated-feeder funds, evergreen, etc.) are providing broader access to private credit and creating more choices for investors (institutional and retail/private wealth) seeking to enhance diversification in their credit portfolios particularly through middle-market direct lending. Direct lenders who can source unique deal flow in the middle market and employ disciplined credit underwriting will differentiate themselves in a competitive environment. While banks still dominate lending markets in Europe, there are growing opportunities for institutional investors to offer solutions that meet capital needs, particularly as policy changes drive new business investment in the region. Globally, supply-chain risks will create challenges around underwriting. Similarly, tariff uncertainty could dampen M&A activity and thus benefit managers with deep networks and access to non-sponsored deals. Direct lending tends to remain stable through market cycles, and lenders can be more patient. Moreover, middle-market lenders that benefit from covenants and tighter structures should also benefit in times of stress as loss avoidance is the number one source of alpha in direct lending.