Recently, spreads on certain public credit markets hit some of the tightest levels in decades. For investors who have traditionally looked to credit for yield and diversification, the blurring lines between public and private markets provide an opportunity to rethink their portfolio construction and consider the wider spectrum of investments available.
The convergence of public and private credit is the culmination of a long-term structural shift. Between 2009 and 2023, the total private credit market grew tenfold and reached $3tn in total assets under management. This dynamic expansion began as banks withdrew from certain lending markets as the regulatory environment tightened. In the low-yield, post financial crisis environment, institutions seeking better returns flocked to fill the gap.
For investors, the timing is compelling. Interest rates are expected to fall, supporting credit conditions. However, the pathway for rates might not be straightforward. This environment means investors can use short-duration assets for liquidity management and as an offset to rate volatility, while also looking to longer-duration asset classes for total return over the long term.
New fund structures democratising the market
Today, new and more liquid fund structures – including mutual funds, ETFs and evergreen vehicles - are helping a much wider investor base access markets historically reserved for institutions. This evolution is broadening participation and unlocking new growth potential across the converging credit landscape.
CLOs: A resilient, liquid option
In PGIM’s 2025 Gatekeeper Pulse survey, 54% of participating Asia-based selectors believe securitized credit is becoming an increasingly important component of individual investor portfolios. Taking collateralised loan obligations (CLOs) as a case in point, CLOs have historically been an institutional asset class. However, there is a democratization trend in the industry, with increasing participation from private wealth clients. In early 2025, the global CLO market was already valued at over $1.4 trillion.
CLOs are bundled corporate loans structured in tranches with varying levels of risk and return. Renowned for their high-quality credit with structural resilience, AAA and AA CLOs have long been favored by banks and insurance companies. Positioned at the top of the capital structure and investing exclusively in senior tranches, AAA and AA CLOs have not experienced a single default over their 30-year history. Even through stressed market environments such as the 2000 tech bubble, global financial crisis and the Covid-19 shock, AAA and AA CLO tranches remained actively traded. Comparatively, liquidity in the corporate bond markets was less consistent.
CLOs’ floating rate coupons and minimal durations make them resilient to interest-rate volatility and present a compelling source of diversification in portfolios.
Opportunistic credit: Long-term return potential
Currently, credit market complexities are driving tighter financial conditions and a need for creative capital solutions to address a range of challenges including excessive leverage, shrinking enterprise multiples, maturity walls and interest burden.
Investors with a longer time horizon and the ability to withstand near-term volatility can explore investing opportunistically across a diverse mix of strategies, such as event-driven and relative value, spanning both public and private leveraged finance. Here, investors can benefit from illiquidity and complexity premia.
Direct lending and ABF: The emerging pillars of private credit
Direct lending continues to show strong growth. As one of the largest and least risky segments of the private credit market, direct lending has seen strong inflows. While this has led to upper market segments becoming crowded, compelling opportunities remain in the less crowded lower middle-market. This massive and underserved pool – around 99% of companies worldwide - has limited access to public market financing.
Another structural growth area gaining traction is Asset-Backed Finance (ABF). This sector is highlighted by PGIM as where megatrends converge: the need for home improvement and energy efficiency financing, the shift toward asset-light corporate models, and the expansive buildout of digital infrastructure such as data centres and fibre networks. These transactions finance the real economy, backed by contractual cashflows from consumers and businesses, ranging from mortgages and auto loans to credit card receivables and leasing contracts.
Why deep risk expertise is essential
It is a common perception that private credit is inherently riskier than public markets. In reality, risk depends on deal structure, underwriting quality and governance, not just the asset class label. Well-structured private deals with strong covenants can be less volatile than some public high-yield bonds. Private credit deals are often highly customised, which means they do not benefit from the same level of statistical diversification as public bonds. Each deal requires deep due diligence because historical averages or benchmarks may not apply. This makes manager selection and underwriting discipline critical.
PGIM envisions the recent integration of its public fixed income and private credit teams will further enhances alignment across the firm’s risk monitoring capabilities. Backed by extensive institutional experience, the unified US$1 trillion credit platform offers investors more tailored, institutional-quality solutions to access the expanded opportunities from the growing convergence between the asset classes.
For Professional Investors only. All investments involve risk, including the possible loss of capital. These materials are for informational or educational purposes only. Past performance is not indicative of future results.
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