Investment Strategy
Jul 17, 2025
Alternative Investments
Why private credit remains a strong opportunity
Amid a changing macro environment and a boom in investment, we believe private credit sustains its advantage
Sitara Sundar, Head of Alternative Investment Strategy & Market Intelligence
Published July 31, 2025
Private credit has recently enjoyed surging popularity. Over the past decade, assets under management grew at an annualized rate of 14.5%.1 And with good reason: Private credit has historically been associated with the potential for consistent returns, healthy yields and low volatility, enabled by low incurred credit losses.
But the possibility of a meaningful economic slowdown, “higher for longer” interest rates, and potentially persistent inflation could make it more difficult for private credit to continue to deliver these benefits. Add the influx of capital into the asset class-and its potential ability to skew industry fundamentals-and investors are beginning to voice concerns about a private credit crisis.
We believe fears of a systemic crisis in private credit are overstated.
- Growth of the private credit industry has been meaningful, but it is still a smaller part of all corporate borrowing. We don’t believe it’s large enough to create a systemic risk.
- Senior direct lending returns should remain resilient due to elevated yield starting levels, seniority in the capital structure, and underlying portfolio diversification.
That said, the industry would not be immune to an economic slowdown. In this article, we’ll explore the recent history and fundamentals of the private credit market, the potential for future returns, and the need for diversification.
Private credit growth – meaningful but not detrimental
The growth of private credit has far outstripped that of other fixed income asset classes. Over the past decade, corporate borrowing has grown at about 5.5% annualized; commercial and industrial bank loans at about 3%. As mentioned above, private credit has grown at 14.5%.2
Once a small corner of credit markets, today, the private credit market is almost the same size as the public high yield bond market, and more than half that of bank commercial and industrial lending. However, that still only amounts to about 9% of all corporate borrowing. While detractors of private credit argue that this growth may pose a risk to financial-system stability, we don’t believe that’s a large enough share of the market to pose a systemic risk should we enter a recession. It is also worth noting that the pace of fundraising in private credit has started to taper.
But while we believe the systemic risk is low, the rise in AUM does raise questions about whether the return profile of private credit is sustainable. At this level of AUM, is it reasonable to expect the continuation of double-digit returns and negligible losses?
Resilient returns – so far
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Senior direct lending returns should remain resilient even in the face of moderating economic growth, higher rates and elevated inflation. This is because of the asset class’s elevated yield starting levels, seniority in the capital structure, and underlying portfolio diversification. Indeed, using the broadly syndicated loan market as a proxy, since 1992 there have only been three years when senior direct lending produced negative returns.
That being said, the changing macroeconomic environment may create cracks under the surface in lower-quality pockets of the industry. Taking a close look at key metrics helps ensure that investors remain on firm ground.
When assessing fundamentals in private credit, the focus is on the health of the borrowing company, determined by metrics such as EBITDA growth3, the company’s level of leverage, and interest coverage ratios (comparing what the company owes in interest to its earnings).
While EBITDA growth and leverage ratios have remained relatively in line with historical averages over the past five years, corporate fundamentals in this sector are not as robust as those in public markets, and carry more risk. Interest coverage ratios, for instance, are at 2x, with an increasing percentage of private credit companies falling below this threshold. That indicates heightened risk compared to public markets.
This increased risk is partly due to post-global financial crisis banking regulations, which shifted lending to smaller, middle market companies and from the public markets to the private markets. Investors should bear in mind that there is more risk in private credit than in public market vehicles, whether leveraged loans or high yield.
Selected metrics for public versus private credit investments, Q1 2025
Risk in private credit is slightly higher than in public leveraged loan market
Source: "1Q25 Leveraged Loan Credit Fundamentals," JP Morgan Investment Bank North America Credit Research, June 23, 2025.
Our outlook
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We believe senior direct lending is a strategic hold and should be relatively resilient across economic cycles. That is due, in part, to today’s higher starting yields, the asset class’s power as a portfolio diversifier, and the loans’ seniority within the capital structure.
For example, using simplified calculations, given a starting yield of about 10% and 1x turn of portfolio leverage, default rates would need to rise above 6% and recovery rates would need to be less than 40% to generate negative total returns over the long run4. For high quality managers, this combination of high default rates and low recovery rates is not common.
We believe that private credit could be considered as a component of private investment portfolios, potentially ranging from 5-20%, depending on the investor’s goals and risk tolerance. Within this allocation we recommend diversification across the various segments of private credit, such as direct lending, GP/LP solutions, asset-backed credit, and opportunistic credit.
- Direct lending allows diversification through the extension of credit to sectors beyond traditional corporate lending, such as to sports businesses and health care. This also allows investors to tap sector-specific growth trends.
- GP/LP solutions are a growing opportunity. This incorporates capital solutions, driven by capital and liquidity needs from private equity general partners (GP), as well as secondaries, driven by private credit limited partners (LP) leveraging secondary markets for portfolio management.
- Asset-backed credit offers multiple levels of diversification. The underlying collateral pools consist of numerous individual cash flow streams backed by thousands of distinct assets, providing diversification within a single investment.
Most importantly, given the current market environment, the performance of these assets is generally influenced more by idiosyncratic asset-level factors than by macroeconomic changes. These may include shifts in regulation and policy and tech innovation that disrupts specific industries.
The total addressable market for asset-backed finance is projected to range from $12 trillion to $20 trillion over the next decade. Currently, private credit holds a 5% market share in asset-backed finance, compared to 12% in corporate credit.5
In the coming years, we anticipate private credit will expand its presence in the asset-backed finance market by offering scaled and flexible financing solutions, mirroring its growth trajectory in the corporate credit market over the past decade.
- Opportunistic credit offers another compelling avenue at the higher-risk, higher-potential return end of the market. These strategies seize emerging opportunities brought on by market dislocations, allowing experienced managers to turn challenges into advantages.
While we do not expect a macro distress cycle, we have started to see an uptick in distressed loan volume given pockets of distress in the economy, creating opportunities for specialized lenders who understand the underlying businesses and are able to manage through crises.
Percentage of leveraged loans trading below $80; default rates
Pockets of distressed loans create opportunity
Source: JPMAM Guide to Alternatives, Bloomberg, Cliffwater, Gilberto-Levy, Preqin. Direct Lending: Cliffwater Direct Lending Index; Distressed Debt: Preqin Quarterly Distressed Debt index; Investment Grade: Bloomberg US Aggregate Credit - Corporates - investment Grade Index; High Yield: Bloomberg US Aggregate Credit - Corporate - high Yield Index; Leveraged loans: JP MOrgan Leveraged Loan Index; Mezzanine Debt: Preqin Quarterly Mezzanine Debt Index. Annualized return and volatility represents a 40-quarter period ending 12/31/2024. Data are based on availability as of May 31, 2025.
Those that already have exposure to private credit through senior direct lending may want to increase allocations to GP/LP solutions, asset-backed credit and opportunistic credit. Those who are new to private credit should seek to diversify across all of these segments, with direct lending serving as the ballast in the portfolio, complemented by GP/LP solutions, asset-backed credit and opportunistic credit.
Is private credit worth the risk?
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Next, we should ask whether investors have been compensated for the incremental risk and historical illiquidity of private credit, and whether they will be adequately compensated moving forward. On the first part of that question, the answer is yes: Private credit has outperformed high yield over the long term.
The question of future results requires a more nuanced answer. Private credit returns have been punching above their weight with the 2022 spike in short-term interest rates, generating returns as high as about 12% at its peak.
Private credit returns have ranged from 8-10%, and while past performance is not indicative of future results, we anticipate that returns may normalize to this historical range. We expect that base rates will come down, and we also may see increased competition in the space as bank capital reform increases bank activity in the loan market.
Annualized return over the past 10 years
Private credit: returns have generally outpaced public markets over the long-term
Sources: JPMorgan; S&P/PitchBook Data, Inc.
Past performance is no guarantee of future results. It is not possible to invest directly in an index.
Manager dispersion increases
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We believe variation in the performance of private credit managers will increase. This is critical: Historically, private credit has been an asset class with an extremely tight range of outcomes.
Macroeconomic factors stand to be one contributor. An economic slowdown may lead to pockets of stress in companies that are over-levered and experiencing tight cash flows. This may be especially true of companies that are sensitive to a cyclical slowdown or importers and those who rely on them and may be vulnerable to higher tariffs.
While about half of private credit lending is to sectors generally less subject to those risks, such as software and healthcare, the underlying strength of economic growth and the level of default activity are still important indicators to watch. We also remain cautious on public business development companies (BDCs)6 that have lower quality asset bases than their private non-traded BDC counterparts.
There is a cushion for private-credit returns. High-quality senior direct lending managers are alert to the need for diversification (both across sectors and in the number of underlying positions), and have invested in loans with senior positions in the borrowing company’s capital structure and strong covenants. We continue to believe in the importance of private credit portfolios to be diversified across managers as well as across the universe of opportunistic and asset-backed credit.
A strategic, diversified approach to private credit
The private credit landscape, in our view, though evolving, offers investors significant potential for durable returns. Diversification across managers and segments, including GP/LP solutions, opportunistic and asset-backed credit, is essential. As the economy faces the elevated risks of a slowdown, manager selection becomes ever more critical. By adopting a strategic and selective approach, investors may better navigate the complexities of the private credit market, potentially positioning themselves for long-term success.
We can help
If you’re interested in learning more about private credit, the latest opportunities and how they may fit in your financial plan, speak with your J.P. Morgan team.
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1“Private Debt: A Game Changer”, Empirical Research Partners, April 2025.
2Ibid.
3EBITDA growth refers to the increase in a company's earnings before interest, taxes, depreciation, and amortization over a specific period, indicating improved operational performance and profitability.
4Assumptions: 10% yield starting point, 1x turn of portfolio leverage, long-term holding period. Total Return: Yield – [Default Rate * (1-Recovery Rate)] * Portfolio Leverage. Assumes fees/cost of debt offset by leverage.
5HPS, February 2025.
6A Business Development Company (BDC) is a type of closed-end investment fund in the United States that invests in small to mid-sized businesses, often providing them with capital for growth and development. BDCs are designed to support companies that may not have access to traditional financing sources, such as bank loans or public equity markets. They are publicly traded and offer retail investors the opportunity to invest in a diversified portfolio of private companies. BDCs are required to distribute at least 90% of their taxable income to shareholders, making them attractive for income-seeking investors.
