Private Credit's Strategic Shift Toward Investment-Grade Opportunities

The private credit market is undergoing a strategic reallocation of capital, with investors increasingly favoring investment-grade opportunities over high-yield segments. This shift is driven by a combination of macroeconomic pressures, evolving risk-return dynamics, and structural changes in capital markets. As of Q3 2025, private credit assets under management (AUM) have surged to $2.1 trillion, with projections indicating a compound annual growth rate (CAGR) of 12% through 2029, reaching $2.6 trillion The next era of private credit | McKinsey^[1]. This growth is fueled by the withdrawal of traditional lenders, such as banks, from corporate credit markets due to regulatory constraints and the rise of long-dated, nonbank capital sources The next era of private credit | McKinsey^[1].

The Rise of Investment-Grade Private Credit

Investment-grade private credit has emerged as a compelling alternative to traditional fixed-income assets, particularly in a low-yield environment. Unlike high-yield bonds, which have seen credit spreads compress to near-historic lows, investment-grade private credit offers a more resilient risk-adjusted return profile. For instance, asset-based finance (ABF)—a subset of investment-grade private credit—provides secured exposure to tangible assets, reducing sensitivity to macroeconomic volatility. The ABF opportunity set is estimated at over $6 trillion today, with potential to exceed $9 trillion by 2029, surpassing the combined size of the syndicated loan, high-yield bond, and direct lending markets The next era of private credit | McKinsey^[1].

This reallocation is also a response to the limitations of core-plus strategies in public markets. Historically, core-plus managers have struggled to outperform the Bloomberg US Aggregate Bond Index during periods of high-yield underperformance, such as the 2022 inflationary shock Rethink the plus in core-plus with investment-grade private credit^[2]. In contrast, investment-grade private credit offers enhanced yields without sacrificing credit quality, making it an attractive addition to fixed-income portfolios. Actively managed ETFs like the SPDR® SSGA IG Public & Private Credit ETF (PRIV) and the State Street® Short Duration IG Public & Private Credit ETF (PRSD) now provide investors with liquid access to this asset class, blending public and private investment-grade credit in a transparent format Rethink the plus in core-plus with investment-grade private credit^[2].

Risk-Adjusted Returns: A Nuanced Comparison

While high-yield private credit remains a source of attractive returns, its risk profile has become less favorable in 2025. The U.S. leveraged loan market, for example, delivered a 9.05% return in 2024, but this is expected to moderate to 7.5–8.0% in 2025 due to spread compression and elevated base rates Private Credit 2025: Navigating Yield, Risk, and Real Value^[3]. In contrast, investment-grade private credit has maintained strong credit fundamentals, with default rates for senior-secured loans remaining below 0.5% despite rising interest rates Private Credit 2025: Navigating Yield, Risk, and Real Value^[3].

From a risk-adjusted perspective, investment-grade private credit outperforms high-yield bonds in several key metrics. The Bloomberg U.S. Corporate Investment Grade Index has an option-adjusted duration of 6.79 years, compared to 3.30 years for the high-yield index, making the latter more volatile in interest rate environments Credit Futures: The Risk-Returns of Investment Grade and High-Yield Bonds^[4]. Additionally, high-yield private credit carries a higher probability of default (1.4% for high-yield private credit vs. 0.31% for corporate bonds) Credit Futures: The Risk-Returns of Investment Grade and High-Yield Bonds^[4]. These dynamics underscore the growing appeal of investment-grade private credit as a diversifier in multi-asset portfolios.

Challenges and the Path Forward

Despite its advantages, investment-grade private credit is not without risks. A potential inflationary environment or economic downturn could strain borrowers with leveraged capital structures, particularly in sectors with thin margins. For example, companies in the industrial and energy sectors have shown signs of stress, with rising use of payment-in-kind (PIK) facilities and declining interest coverage ratios Private Credit Trends in 2025^[5]. Prudent underwriting and active risk monitoring are therefore critical to preserving value.

Looking ahead, investors should prioritize high-quality companies with competitive moats and non-cyclical business models. Diversification across sectors and geographies will also be key, as will the use of active management to navigate market inefficiencies. As Apollo's credit origination platforms demonstrate, robust due diligence and flexible structuring can enhance risk-adjusted returns while mitigating downside risks Rethink the plus in core-plus with investment-grade private credit^[2].

Conclusion

Private credit's strategic shift toward investment-grade opportunities reflects a broader recalibration of risk and return in a post-pandemic world. While high-yield segments remain viable, the growing emphasis on credit quality and diversification positions investment-grade private credit as a cornerstone of modern fixed-income portfolios. As the asset class continues to evolve, investors who embrace active management and structural innovation will be best positioned to capitalize on its long-term potential.