Props for Private Credit

A prolonged higher-for-longer rates regime is supportive for private credit returns, in our view. Sub-investment grade (IG) direct lending yield (c.10% currently) remains high in absolute terms, although only average relative to history.¹ IG private credit yields (c.5-7%) are pricing towards the top of the historical range, offering potentially attractive returns.²

Similar to public markets, private credit spreads are relatively tight—although the illiquidity premium has been stable so far in 2025. We are seeing increasing dispersion, with borrowers insulated from tariff volatility experiencing limited effect on pricing, while those more impacted or of lower credit quality need to offer wider spreads to attract lender demand. We prefer to be defensive in the current environment—non-cyclicals over cyclicals—and focus on diversification. 

We view private credit as relatively sheltered from the recent macro volatility—at least in terms of direct tariff impact. A large chunk of IG private credit is infrastructure, utilities and real estate issuers, all of which are supported by highly predictable cashflows. Sub-IG borrowers, meanwhile, are concentrated in companies with domestic operations and service-based revenue, rather than goods-based. Direct exposure to tariff impact has been estimated at around 10%.³ 

Fundamentals have been robust, with earnings growth capable of managing leverage in a higher rate environment so far. But prolonged trade tensions and fiscal concerns will have a broader influence and add to overall risk for the asset class.

Figure 1: Fundamentals remain robust as private credit borrowers managed through higher borrowing costs

Source: Q1 2025 Lincoln Private Market Index. Data as of April 2025.

We believe that cost increases, lower demand and more uncertainty for business planning will likely hit earnings growth, leading to weaker borrowers breaching debt covenants. We see smaller companies as disproportionally impacted, due to limited pricing power and revenue diversification. Another source of risk is the 2021-2022 vintage of loans—originated when yields were low and leverage high. They are coming up for refinancing in 2025-26 and could struggle due to higher debt costs and a weak M&A market. 

All these factors raise concerns of an increase in defaults and represent a big test for the covenant-loose loans that have dominated direct lending issuance in recent years.

1. Source: L&G as of May 2025. 
2. ibid.
3. Source: KBRA and Fitch.

This article is based on content from L&G Asset Management’s midyear global outlook.

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