Indexology^® Blog

In recent blogs we examined why private credit has been growing, as well as the potential opportunities and risks associated with the asset class. Now, we turn to the future of this evolving market, examining the trends shaping its growth, the role of institutional investors and how private credit may continue to develop as a mainstream investment strategy.

Scaling and Expanding Private Credit

Private credit could be poised for further expansion as investors seek higher yields and alternative sources of return. To sustain this momentum, private credit firms are refining their strategies, focusing on scalability and diversification. This includes expanding into new geographies and industries, as well as exploring specialized lending approaches like asset-backed lending and opportunistic credit.

Advancements in technology are also playing a role. Data analytics and automation are being integrated into underwriting and risk assessment processes, improving efficiency and allowing firms to manage portfolios more effectively. Additionally, new product structures—such as interval funds and evergreen vehicles—are being explored to attract a broader investor base, offering more flexible access to private credit.

Business Development Companies and Market Evolution

The rise of Business Development Companies (BDCs) has contributed significantly to the growth of private credit in recent years. These investment vehicles provide financing to small- and medium-sized enterprises (SMEs), often through debt or equity investments. Their structure allows investors to gain exposure to private credit without sacrificing the oversight and transparency required by regulators in public markets.

However, since BDCs trade on public exchanges, they can be influenced by broader market fluctuations. This means that while they offer a gateway into private credit, their performance may still be affected by equity market dynamics.

Institutional Investors and Market Maturity

Institutional investors—including pension funds, insurance companies and endowments—are playing an increasingly important role in shaping the private credit market. Their long-term investment horizons and substantial capital commitments may help stabilize the asset class.

As these investors allocate more capital to private credit, they are also driving improvements in governance, transparency and risk management. Their due diligence processes set higher reporting standards, encouraging greater consistency across private credit funds. At the same time, institutional investors are fostering innovation by backing niche strategies and specialized lending platforms, helping to broaden the range of investment opportunities in the space.

As participation from institutional investors continues to grow, the private credit market may benefit from enhanced liquidity, lower volatility and a more structured approach to investment—helping solidify its place as a mainstream asset class.

The Road Ahead for Private Credit

Looking forward, private credit is expected to play an increasingly prominent role in the financial landscape. With banks still facing regulatory constraints that limit lending, private credit is likely to continue to fill financing gaps for businesses—especially in the middle-market segment.

The growing involvement of institutional investors, along with ongoing innovation in product structures and risk management, may contribute to further maturation within the asset class. As a result, private credit may become even more integrated into investment strategies, offering a potential combination of income and diversification.

While challenges remain, including liquidity constraints and market saturation concerns, private credit’s historical performance suggests that it may continue to attract interest. As market participants seek new sources of return in an evolving financial environment, private credit is well-positioned to play an expanding role in the investment landscape in the future.

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

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This blog was co-authored by Nicholas Godec and Ricky LaBelle.

The S&P 500^® recently entered a “correction,” a term used when the price index falls by more than 10% from its highs. It may yet decline further, the fact of which might tempt market participants to delay equity purchases until, say, the index has declined by 20%—which would define the start of a “bear market.” The potential relative merits of “waiting for a discount,” as examined historically via the nearly seven-decade-long record of the S&P 500, offer an intriguing perspective.

We began with every trading day in The 500™’s history on which the closing index level was not already 20% or more below the prior all-time high. For such days, we then measured how long it was before a 20% decline first occurred and what the overall change in the index level was over that period. Exhibit 1 shows the length of time in years of such waiting periods, historically.

The average waiting time was 3.0 years, while among the smaller sample of days when the index was already 10% or more down from a high (but not yet 20% down), the wait for a bear market was almost as long—equal to 2.1 years.

Sometimes, the index rose more than enough to offset the subsequent decline. At the historical extreme: from Nov. 29, 1988, it was over 12 years until the next bear market began, by which time the index had risen a cumulative 336% (including the final decline). Exhibit 2 shows the change in the index level during the waiting period associated with each starting point in history, and Exhibit 3 shows the accompanying distribution of those index changes, ignoring zero values.

Most of the time, waiting meant a slightly lower index level—the median index change was a decline of 1.7%. However, some of the time, the index change was highly positive, which led to an average index change equal to a 30.0% increase. Restricting to the days when the index was down 10% or more, but not yet 20% down, the average index change during the wait was, again, almost as material, equal to a 22% increase.

Exhibit 4 shows equivalent statistics using declines of 1%, 2%, 5%, 10%, as well as the original 20%. The sample size of “start points” get smaller down the table, as the proportion of days when the index was already in such a decline increases.

Overall, the pattern was similar for smaller declines: the median index change during the wait for a discount was a small decrease, but the average index change was positive, and the maximum index change was much higher. In other words, most of the time, waiting resulted in a small discount. But some of the time, waiting meant missing out on large gains.

The well-known money manager Peter Lynch once quipped that “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” That may be true. As to whether the current S&P 500 downturn represents a buying opportunity, of course, only time will tell.

The private credit market has seen significant growth in response to regulatory shifts, pursuit of yield and increased awareness of its unique characteristics. A previous blog explored its rise, and in this post, we will analyze private credit’s comparative performance, consistency and correlation to public markets—particularly broadly syndicated loans (BSL), which share private credit’s illiquidity and complexity.

The Allure of Private Credit

Interest in private markets is driven largely by the illiquidity premium that often accompanies lock-up periods. Over the one-year period ending Dec. 31, 2023, public and private credit performed similarly (see Exhibit 1).

However, over a 10-year horizon, private credit indices exhibited stronger performance (see Exhibit 2). Notably, all indices declined during March 2020’s COVID-19 shock, but private credit demonstrated a stronger recovery, illustrating the divergence between private and public markets.

In the first five years of the period studied, private credit typically delivered higher returns than public credit, though investment grade bonds occasionally outperformed. A study by PineBridge Investments found that private credit outpaced the BSL market by approximately 157 bps on average, largely due to its illiquidity premium.¹

Understanding Correlation in Private Credit

To further analyze private credit’s behavior, we examined correlation between public and private credit indices (see Exhibit 3).

• Investment grade bonds show little correlation to private credit strategies
• High yield bonds have notable correlation with all private credit strategies
• Leveraged loans exhibit strong correlation (80% or higher) with private credit, except for subordinated capital

This suggests leveraged loans may be a useful public market comparison for private credit, given shared characteristics such as floating-rate coupons. It also highlights how credit risk, rather than interest rate sensitivity, drives performance in these instruments.

Navigating Risks in Private Credit

Private credit involves lengthy lock-up periods (typically 7-10 years) and illiquidity, limiting investors’ ability to exit positions. While private lenders cater to borrowers who are unable to secure traditional bank loans, private and public credit markets differ in liquidity and syndication.

In the public BSL market, loans are syndicated and actively traded, leading to price fluctuations. Private credit loans, though, are primarily “buy and hold,” not subject to syndication and generally unavailable to the broader market. This means investors manage capital calls and distributions over time while maintaining committed capital obligations.

In addition, private credit’s rapid growth raises questions about sustainability and potential oversaturation. Deal-making has kept pace with demand, but long-term durability remains uncertain.

Private credit managers negotiate preferred terms in loan agreements, but these require time and extensive assessment. Many private credit loans feature floating-rate coupons priced above the secured overnight financing rate (SOFR). With potential interest rates decreases, it remains to be seen how private credit will compete with, or complement, public markets as investor demand continues.

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

Don’t miss our next blog where we explore the future of private credit.

Learn more about Private Investment Benchmarks

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This blog was co-authored by Nicholas Godec and Greg Vadala.

¹ Wolfson, Kevin and Joseph Taylor. “Private Credit vs. Broadly Syndicated Loans: Not a Zero-Sum Game.” PineBridge Investments. July 2024.

What trends are the latest thematic indices tracking and what’s powering these innovative tools? S&P Dow Jones Indices’ Ari Rajendra and Vidushan Ragukaran discuss how S&P DJI is leveraging AI, machine learning and NLP to innovate and track dynamic industries and emerging trends.

The results from our SPIVA U.S. Year-End 2024 Scorecard demonstrate another challenging year for active managers, with 65% of U.S. large-cap funds underperforming the S&P 500^®, slightly above the report’s 24-year historical average of 64%. But small-cap managers fared significantly better, with only 30% of small-cap funds underperforming the S&P SmallCap 600^®, the lowest underperformance rate on record. What might explain the widely contrasting fortunes between large-cap and small-cap managers?

2024 was characterized by positive skew in the S&P 500’s constituent returns, as shown in the top half of Exhibit 2, with the average return outpacing the median return by 1.6%, evidencing a longstanding challenge for more concentrated active managers, who may be less likely to own these top performers in their strategies. Because the largest stocks in the index were among the best performers, the index’s return of 25.0% was well above the simple average, an additional headwind for managers who were underweight in the largest stocks. These results are not surprising, as the average return has been greater than the median for The 500’s constituents in 20 out of the past 24 years.

Combining these elements of skewness and large-cap outperformance, a simple way to analyze the conditions for stock selection is to measure the percentage of constituents that beat the benchmark. Only 28% of member stocks beat the S&P 500 in 2024, which is the second-lowest percentage in 24 years and close to the 26% in 2023, which was another challenging year characterized by large-cap dominance.

Turning our attention to small-cap managers, the bottom half of Exhibit 2 shows that 44% of S&P SmallCap 600 constituents beat the benchmark in 2024, close to the long-term average of 45%. The S&P 600^®’s return distribution was positively skewed as well, with an average return exceeding the median by 2.8%, consistent with the positive skew in 22 of the past 24 years. Just as we observed with large caps, the S&P 600 return of 9% was above the average, indicating that larger stocks within the small-cap benchmark outperformed.

Both large- and small-cap managers shared relatively slim prospects for stock picking, characterized by a positively skewed distribution of benchmark returns and the outperformance of larger stocks. But small-cap managers may have benefited from ample opportunities to tilt up toward outperforming large caps, with a 16% return differential separating the S&P 500 and the S&P 600, the widest differential in the SPIVA Scorecard’s history. Exhibit 3 illustrates that small-cap fund underperformance rates historically tended to improve with large-cap outperformance.

While conditions for stock picking were generally tough in 2024, small-cap managers had a banner year. The SPIVA U.S. Year-End 2024 results provide evidence that style bias may play a major role in explaining active manager outperformance across the capitalization spectrum and is importantly an indication that true stock selection skill may be more rare.

The author would like to thank Nick Didio for his contributions to this blog.