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Why Alternative Credit Is at an Inflection Point
11.19.2025
Why Alternative Credit Is at an Inflection Point
Key Points
- Investors are reconsidering the traditional 60/40 stocks and bonds portfolio by shifting into alternative credit. With increasing macroeconomic uncertainty, they are diversifying beyond the classic 60/40 approach to achieve higher income and better risk management through alternative credit.
- An inflection point in credit investing. For many investors, the key question has evolved from whether to allocate to alternatives to how best to align income, liquidity and risk tolerance.
- The shift in thinking from absolute to relative yield is driving product innovation that can help investors to organize alternative credit portfolios around three diversification pillars:1
- Corporate private credit (also referred to as direct lending)
- Private asset-backed finance (ABF)
- Multi-asset credit
- The outlook for 2026. As we head into 2026, we believe it is worth exploring how each of these pillars can play a role in strengthening a portfolio with enhanced income, diversification and risk mitigation potential.
Pillar 1: Structural Tailwinds Driving Corporate Private Credit Growth
Corporate private credit continues to benefit from secular trends, including bank retrenchment from lending and growing borrower demand for flexible financing solutions, particularly around mergers and acquisitions (M&A) activity. Although banks remain well capitalized, regulatory constraints still limit their ability to extend credit broadly (Figure 1).
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Figure 1: Private Lenders Continue to Lead Leveraged Buyout Financing
As a result, borrowers are increasingly turning to private markets, which provide faster, more flexible and more reliable access to capital. For investors, this steady borrower demand translates into a robust pipeline with the potential for attractive risk-adjusted returns. Furthermore, direct lending structures typically sit senior in the capital stack and carry floating-rate coupons, helping to mitigate both default and interest-rate risk.
Pillar 2: ABF—Private Credit’s Next Frontier
Private ABF benefits from having similar dynamics to corporate private credit, but remains a relatively uncrowded opportunity set. ABF also has three key features that distinguish it from corporate private credit:
- Opportunity for consistent cash flows: Contractual cash flows from things such as loans, leases or royalties provide reliable repayment streams.
- Structural protections: Ring-fenced special-purpose vehicles (SPVs) and collateralization help insulate investors from corporate balance sheet issues.
Spread premium potential: ABF typically offers a spread advantage versus both public asset-backed securities and corporate private credit of similar quality.
Pillar 3: The Case for Multi-Asset Credit
Investors are increasingly combining private credit with liquid performing credit, such as high-yield bonds. While private credit can offer a spread premium of 170-200 bps over public credit,3 liquid markets still provide compelling yields around 7%4—with greater liquidity.
A multi-asset credit strategy enables dynamic allocation across liquid and private markets, utilizing a broad range of credit instruments as market conditions evolve. To capture this potential, investors can benefit from working with managers who have experience identifying relative value and managing risk through market cycles.
From Opportunities to Allocation
As central banks recalibrate policy, the ability to reposition across the liquid credit spectrum—from high-yield bonds and senior loans to collateralized loan obligations (CLOs) and convertible bonds—will be essential for capturing income and managing risk dynamically.
Alternative credit is no longer about isolated opportunities. It is about building a resilient portfolio through active allocation across the credit spectrum (Figure 2). Combining private and public credit can provide investors with the potential to capture enhanced yield along with the safety of robust contractual protections. It can also provide the available liquidity needed to adapt quickly to changing market conditions.
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Figure 2: Alternative Credit Connects Portfolios to a Larger, More Varied Market
Bottom Line
Each of the above three pillars plays a distinct role: corporate private credit offers stable income potential; private ABF expands access to a growing, less-crowded market; and liquid credit provides the flexibility to adapt as conditions change.
Looking ahead to 2026, success may depend on active allocation and experience. Navigating across public and private markets requires a cycle-tested approach that seeks to convert opportunity into long-term portfolio resilience. We believe that alternative credit remains one of the most compelling areas for investors today, and that success in this environment requires a thoughtful active allocation strategy and rigorous risk management across a range of market environments.
Read more in our Alts Quarterly Q4 2025.
ENDNOTES
1 Diversification does not ensure a profit or protect against loss.
3 KBRA DLD Research, as of September 30, 2025.
4 Bloomberg, as of September 30, 2025. Liquid markets represented by ICE BofA U.S. High Yield Constrained Index.
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 o 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 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.
The information in this publication is not and is not intended as investment advice, an indication of trading intent or holdings, or a prediction of investment performance.
Diversification does not guarantee a profit or protect against loss. The views and information expressed herein are subject to change at any time. Brookfield disclaims any responsibility to update such views and/or information. This information is deemed to be from reliable sources; however, Brookfield does not warrant its completeness or accuracy.
The opinions expressed herein are the current opinions of Brookfield, including its subsidiaries and affiliates, and are subject to change without notice. Brookfield, including its subsidiaries and affiliates, assumes no responsibility to update such information or to notify clients
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KEY TERMS AND INDEX DEFINITIONS
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.
Bloomberg U.S. Corporate High Yield Bond Index measures the USD-denominated, high-yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below.
Cliffwater Direct Lending Index (CDLI) seeks to measure the unlevered, gross-of-fee performance of U.S. middle-market corporate loans, as represented by the asset-weighted performance of the underlying assets of business development companies (BDCs), including both exchange-traded and unlisted BDCs, subject to certain eligibility requirements.
FTSE EPRA Nareit Developed Real Estate Index is an unmanaged market-capitalization- weighted total-return index that consists of publicly traded equity REITs and listed property companies from developed markets.
FTSE Global Core Infrastructure 50/50 Index gives participants an industry-defined interpretation of infrastructure and adjusts the exposure to certain infrastructure subsectors.
The constituent weights are adjusted as part of the semi-annual review according to three broad industry sectors: 50% Utilities; 30% Transportation, including capping of 7.5% for railroads/railways; and a 20% mix of other sectors including pipelines, satellites and telecommunication towers. Company weights within each group are adjusted in proportion to their investable market capitalization.
Green Street Commercial Property Price Index (CPPI) is a time series index published by Green Street, which tracks the value of U.S. commercial real estate properties. The index is based on transaction prices and appraisals of institutional-quality properties across major sectors, including office, industrial, retail and multifamily. It is widely used as a benchmark for changes in commercial property values over time.
ICE BofA Single-B U.S. High Yield Index tracks the performance of USD-denominated below-investment-grade corporate debt publicly issued in the U.S. domestic market, including all securities with a given investment-grade rating of B.
ICE BofA U.S. Convertibles Index tracks the performance of convertible bonds in the U.S.
ICE BofA U.S. High Yield Constrained Index measures the performance of USD-denominated, non-investment-grade, fixed-rate, taxable corporate bonds.
J.P. Morgan CLO Post-Crisis BB Index is a subset of the J.P. Morgan CLO index that only tracks the BB-rated CLO.
J.P. Morgan Emerging Markets High Yield Bond Index tracks liquid, U.S.-dollar emerging market fixed- and floating-rate debt instruments issued by corporate, sovereign and quasi-sovereign entities.
MSCI World Index is a free-float-adjusted market-capitalization-weighted index that is designed to measure the equity market performance of developed markets.
Nasdaq Index is a market-cap-weighted index tracking companies traded on the Nasdaq stock market.
Preqin Infrastructure Index captures in an index the return earned by investors on average in their private infrastructure 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.
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.
Preqin Real Estate Index captures in an index the return earned by investors on average in their private real estate 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.
S&P 500 Index is a market-cap-weighted equity index of 500 widely held, large-capitalization U.S. companies.
S&P UBS Leveraged Loan Index measures the market-value-weighted performance of the investable universe of USD-denominated leveraged loans.
Secured Overnight Funding Rate (SOFR) is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities. Published by the Federal Reserve Bank of New York, SOFR is based on actual transactions in the U.S. Treasury repurchase (repo) market and is considered a reliable benchmark for short-term interest rates. SOFR has replaced LIBOR as the preferred reference rate for many financial contracts.
World Bank Global Supply Chain Stress Index (GSCSI) is an indicator developed by the World Bank to measure disruptions and stress in global supply chains. The index aggregates data on container shipping volumes, costs and delays, providing a quantitative assessment of supply chain bottlenecks and their impact on global trade. It is used to monitor trends and shocks affecting international logistics and manufacturing.
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