Indexology^® Blog

The private credit market has grown significantly, becoming a key component of the global financial landscape. Traditional banks have tightened lending practices due to increased regulatory scrutiny and risk aversion following the 2008 Global Financial Crisis. In response, private credit has emerged as an alternative for businesses facing challenges in securing financing from traditional sources.

This blog explores the factors driving private credit’s rise and how it compares to public debt and traditional financing.

A Multi-Layered and Growing Market

Several factors have fueled private credit’s expansion, including institutional investors’ pursuit of yield, increased market sophistication and greater awareness of the segment’s unique characteristics.

Private credit includes diverse debt strategies, such as senior debt, subordinated capital and credit opportunities. Senior debt funds offer secured loans for acquisitions and restructurings, benefiting from priority claims on assets. Subordinated capital (mezzanine funds) sits between equity and secured debt, often financing buyouts while generating interest payments. Credit opportunity funds invest in various credit instruments across global markets, including distressed debt and structured finance, providing potential for diversification.

Private Credit vs. Public Debt: Liquidity and Accessibility

Private credit and public debt differ in liquidity and market accessibility. Private credit refers to debt investments that are not publicly traded and typically issued by non-bank lenders. These instruments are often illiquid, with lock-up periods restricting sales. However, this illiquidity may result in higher yields compared to public debt.

Public debt, including corporate bonds and government securities, trades in the public bond market, offering greater liquidity with expanded access for prospective buyers or sellers. This accessibility allows individual and institutional investors to easily participate. However, increased competition often results in lower yields.

For investors, the liquidity tradeoff is crucial. Private credit’s illiquidity requires a longer investment horizon, whereas public debt’s liquidity provides flexibility but potentially lower yields than can be found in private debt markets.

Transparency and Reporting Standards in Private vs. Public

A key distinction between private credit and public debt is transparency. Public debt is subject to strict regulatory requirements, including standardized disclosures and regular reporting. This enables investors to make informed decisions based on widely available financial data.

Private credit, however, lacks uniform reporting standards. Borrowers are not always required to disclose financial information publicly, and reporting practices vary across issuers. This opacity makes due diligence and fund manager expertise critical in assessing credit risk.

To mitigate transparency challenges, private credit lenders rely on strong borrower relationships, detailed covenants and negotiated reporting requirements. Even so, investors must be comfortable with less readily available information, making trust in their fund managers essential.

Private Credit: Filling the Gaps Left by Banks

The lending landscape has evolved since the 2008 financial crisis. Traditional banks—once primary credit providers—face stricter regulations, limiting their ability to lend, particularly to middle-market businesses and specialized sectors. Higher capital requirements and risk management constraints have reduced their exposure to certain loan types.

Private credit lenders have stepped in, offering capital alternatives to businesses that may not meet traditional lending criteria. These non-bank lenders provide financing solutions with greater flexibility, including tailored repayment schedules, customized covenants, and the ability to underwrite complex transactions.

By serving businesses overlooked by traditional banks, private credit supports economic growth, particularly among small- and medium-sized enterprises (SMEs), which are widely viewed as key contributors to innovation and employment.

Synergies Between Private Credit and Traditional Lending

While private credit and bank lending are often seen as competitors, they also complement each other. Banks may originate loans and syndicate portions to private credit funds, managing risk while continuing to serve clients.

Additionally, banks and private credit firms may co-lend on larger transactions, combining resources and expertise. Such partnerships allow banks to remain engaged in lending while meeting regulatory requirements, while private credit firms gain access to larger, more complex deals.

Learn more in our recent analysis, “The Rapid Rise of Private Credit.”

Don’t miss our next blog where we explore the opportunities and risks associated with private credit.

This blog was co-authored by Ricky LaBelle and Greg Vadala.

Which factors weathered the mega-cap slump that dragged The 500™ down in February? Explore highlights from the latest SPIVA U.S. Scorecard and the defensive factors standing up to challenging markets.

What’s powering the latest innovations in thematics? S&P DJI’s Head of Thematic Indices, Ari Rajendra, and Invesco’s Head of EMEA ETF Equity Product Management, Chris Mellor, discuss the rise of thematic investing and how AI and NLP technologies are sharpening the tools tracking transformative trends.

GARP (growth at a reasonable price) has long been a staple investment strategy, but it was popularized by investing legend Peter Lynch after the Magellan Fund posted a remarkable average annual return of 29.2% from 1977 to 1990.¹ As the name implies, it’s a strategy that seeks to strike a balance of tracking stocks with both growth and value characteristics. While the S&P 500^® GARP Index has historically outperformed over the long term, its recent underperformance relative to the S&P 500 in 2024 has led to a situation where it is no longer trading at a “reasonable” price, but rather at a “historically cheap” price relative to The 500™. Interestingly, this blog will reveal that the current valuation disconnect occurs during a period of particularly strong fundamental performance factors for the S&P 500 GARP Index.

Valuation Comparison

Exhibit 1 illustrates the historical trailing 12-month price-to-earnings (P/E) ratio discount of the S&P 500 GARP Index relative to The 500 since June 1995. As of Jan. 31, 2025, the current discount is 51.0%, attributed to The 500’s P/E ratio of 28.3 compared to the S&P 500 GARP Index’s P/E ratio of 13.9.

As Exhibit 1 shows, the discount has historically tended to mean revert when reaching extended levels, with another notable divergence occurring in June 2000 when the discount peaked at 59% near the Tech Bubble. In the one-, three- and five-year periods following June 2000, the S&P 500 GARP Index outperformed The 500 by 25%, 45% and 78%, respectively.

Growth Comparison

Exhibit 2 shows that the S&P 500 GARP Index’s 2024 operating earnings per share (EPS) growth rate is in line with its five-year median of 12.3%. Both figures indicate a significant premium compared to the operating EPS growth rates of The 500 and the S&P 500 Equal Weight Index in 2024. The five-year median is presented instead of the average due to the volatility of operating EPS, particularly during the 2020-2022 COVID-19 period, which can distort the average calculation.

Quality Comparison

The same trend observed in the operating EPS growth comparison is evident in the quality comparison as well. As shown in Exhibit 3, the S&P 500 GARP Index’s 2024 return on assets (ROA) of 4.9% is 24% higher than its five-year average of 3.9%. In comparison to The 500 and the S&P 500 Equal Weight Index, this 4.9% ROA reflects a 31% and 100% increase, respectively.

The S&P 500 GARP Index’s 2024 return on equity (ROE) of 17.0% is 10% above its five-year average and is closely aligned with The 500’s 2024 ROE of 17.3% (see Exhibit 4). Compared to the S&P 500 Equal Weight Index’s ROE of 11.0%, the S&P 500 GARP Index’s ROE reflects a 54% premium.

Conclusion

Despite its notable valuation discount, the S&P 500 GARP Index’s 2024 fundamental performance—assessed through growth and quality metrics—was strong compared to both its benchmarks and its historical performance. The S&P 500 GARP Index demonstrated strong fundamental performance in 2024 while simultaneously trading at one of its widest valuation discounts since the Tech Bubble peak in 2000.

1. “Betting on the Market Pros: Peter Lynch.” PBS.

While the market offers many dividend strategies, few incorporate dividend forecasts to provide a forward-looking assessment. The S&P 500^® High Dividend Growth Index utilizes the industry-leading S&P Global Dividend Forecasting dataset to select constituents from the S&P 500 that are projected to have the highest dividend yield growth. This innovative index applies a unique methodology, tracking companies based on a dividend growth score calculated by subtracting 12-month trailing yield from the 12-month forecasted yield.

Launched on Oct. 23, 2023, the S&P 500 High Dividend Growth Index has made a strong start, outperforming other well-known dividend indices. Furthermore, it has historically shown higher dividend yields and dividend growth rates than The 500™.

In this blog, we will examine the historical characteristics of this index, including its risk/return profile, dividend yield and dividend growth rate. We will also assess its dividend contributions over time and review its sector allocations throughout the years.

Performance since Launch

The S&P 500 High Dividend Growth Index has outperformed other leading dividend strategies both YTD and since its launch, posting returns of 5.75% and 30.51% over those periods, respectively. Exhibit 1 shows that in 2024, the index posted strong performance with a 16.26% return, outperforming most dividend strategies.

Similarly, the S&P 500 High Dividend Growth Index has exhibited solid performance in line with its benchmark, which is not an easy feat given the recent strong performance of mega-cap stocks.

Long-Term, Back-Tested Performance

Since 2010, which includes back-tested performance, the S&P 500 High Dividend Growth Index has posted a robust annualized return of 13.54% and a risk-adjusted return of 0.75. The S&P 500 High Dividend Growth Index’s performance has closely aligned with The 500, a notable achievement given the dominance of growth-oriented stocks over the past decade (see Exhibit 2).

Dividend Yield

As shown in Exhibit 3, the dividend yield of the S&P 500 High Dividend Growth Index consistently outpaced the dividend yield of The 500 from 2011 to 2025. On average, the S&P 500 High Dividend Growth Index’s dividend yield was 3.09%, outperforming The 500’s dividend yield (of 1.82%) by 1.27%.

Dividend Growth Rate

From 2011 to 2025, the S&P 500 High Dividend Growth Index and The 500 grew their dividends at annual rates of 10.6% and 8.8%, respectively. More recently, from 2023 to 2025, the S&P 500 High Dividend Growth Index’s dividend growth rate was 8.7%, surpassing The 500’s 6.5% rate (see Exhibit 4).

Dividend Contributions

As displayed in Exhibit 5, dividends contributed a greater percentage to the total return of the S&P 500 High Dividend Growth Index than to the total returns of the market-cap and equal-weight benchmarks, as well as style indices like value and growth. Notably, the dividend contributions of the S&P 500 High Dividend Growth Index were 9.8 percentage points higher than those of The 500.

Sector Weights

Exhibit 6 shows how the sector weights of the S&P 500 High Dividend Growth Index have changed over time. On average, the largest sector weights in the index have been Financials, Industrials, Utilities and Information Technology. For a dividend strategy, the weights across the sectors have been overall balanced.

Conclusion

The S&P 500 High Dividend Growth Index combines forward-looking and historical metrics for constituent selection. Its innovative design has historically delivered higher dividend yields and growth rates than its benchmark, all while maintaining strong total returns. Although this index has only been live for just over 12 months, it is noteworthy that it has outperformed similar high dividend yield and dividend growth indices by posting strong returns over this period.