Private Credit: The Floating-Rate Advantage

The ongoing market volatility and uncertainty has made private credit more attractive for investors who are seeking potential diversifiers and income providers for their portfolios. As we discussed in our last Alts Quarterly, private credit can play just such a role and can provide portfolios with some stability during periods of market stress. Private credit offers investors the potential for attractive income and risk mitigation, as well as important structural advantages well-suited to today’s complex macro environment.

Among those structural advantages is the important feature of private credit’s usage of floating-rate coupons. Let’s take a closer look at why that matters, particularly in an environment where interest rates remain elevated while the future path of interest rates and inflation is uncertain.

The majority of private loans, from corporate direct lending to private asset-backed financing (ABF), include floating-rate coupons, which reset higher as base rates rise. This helps to support return potential even amid inflationary pressures.

Floating-rate coupons are typically indexed to a base rate like the Secured Overnight Financing Rate (SOFR), plus a fixed spread above it. As base rates rise, so does interest income, helping preserve or even enhance yield potential in rising rate environments.

In contrast, traditional publicly traded fixed income, such as investment-grade bonds and Treasuries, typically suffers in rising rate environments: Prices fall as yields rise. With fixed coupon payments, real (inflation-adjusted) income can erode over time. (See the chart below.)

Although the likelihood of further near-term rate hikes is low, it is important to note that rates remain elevated relative to recent years. As a result, private credit yields, driven by floating-rate coupons linked to SOFR, are currently quite attractive. Many floating-rate private credit instruments also include interest rate floors, ensuring a minimum yield even if rates decline. Additionally, privately negotiated agreements often include protections like repayment penalties, call protection, and call premiums, which can help stabilize returns during periods of flat or declining rate environments.

Floating-rate structures are common across many areas of private credit, including private ABF, where income is backed by real, cash-generating assets rather than solely a corporate borrower’s enterprise value. It’s also important to highlight how ABF can potentially help strengthen portfolios in volatile and uncertain markets. ABF portfolios are typically anchored by underlying asset performance (e.g., leases, loans, receivables), which can remain resilient even in low-growth environments. These assets may have shorter duration, contractual cash flows, and amortization schedules that help reduce sensitivity to market swings. Additionally, private ABF strategies tend to focus on sectors or asset types that are structurally insulated from broader economic cycles, such as aircraft leasing, music royalty streams, or mortgage pools. As a result, performance is often more dependent on operational performance of the assets than on macroeconomic conditions or credit markets. This combination of floating-rate structures and resilient, cash-generating assets is particularly advantageous in today’s environment, where growth remains sluggish but interest rates are still elevated.

Summing Up

Today’s backdrop of muted growth and rising inflation expectations presents several challenges for traditional stock and bond portfolios. In this environment, strengthening income streams can be a critical way to enhance portfolio resilience and keep investors on track toward their goals. The structural advantages of private credit—from corporate direct lending to private ABF—may offer an important edge in meeting this challenge.

Read more in our Alts Quarterly Q3 2025.

A WORD ABOUT RISK

As an asset class, private credit comprises a large variety of different debt instruments. While each has its own risk and return profile, private credit assets generally have increased risk of default, due to their typical opportunistic focus on companies with limited funding options, in comparison with their public equivalents.

Because private credit usually involves lending to below-investment-grade or non-rated issuers, yield on private credit assets is increased in return for taking on increased risk.

Investments in real estate-related instruments may be affected by economic, legal or environmental factors that affect property values, rents or occupancies of real estate. Infrastructure companies may be subject to a variety of factors that may adversely affect their business, including high interest costs, high leverage, regulation costs, economic slowdown, surplus capacity, increased competition, lack of fuel availability and energy conservation policies.

Alternative investments often are speculative and include a high degree of risk. Investors could lose all or a substantial amount of their investment. High-yield bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally, the longer a bond’s maturity, the more sensitive it is to this risk. Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision.

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Bloomberg Global Aggregate Index is a market capitalization-weighted index, comprising globally traded investment grade bonds. The index includes government securities, mortgage backed securities, asset-backed securities and corporate securities to simulate the universe of bonds in the market. The maturities of the bonds in the index are more than one year.

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Preqin Private Equity Index captures in an index the return earned by investors on average in their private equity portfolios, based on the actual amount of money invested in private capital partnerships. Each data point is individually calculated from the pool of closed-end funds for which comprehensive performance data is held, as of both the start and end of the quarter.

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