Active management lands in private credit
14 AUG, 2025
By PIMCO
By Jason Steiner, Portfolio Manager, Private Lending and Opportunistic Strategies at PIMCO
Private credit was once the "wild west" of finance. Born as a consequence of previous junk bond booms, leveraged buyouts, and private equity, private credit has evolved as a niche of non-bank lenders granting variable-rate loans privately negotiated to highly indebted companies. Then, the global financial crisis triggered a rare convergence of forces that accelerated the growth of private credit. Massive government fiscal stimuli, near-zero interest rates, stricter banking regulations, and an increase in capital seeking returns encouraged aggressive lending activity outside the traditional banking system. Investors rushed in pursuit of these exceptional returns.
But as with all new frontiers, direct lending to businesses has become increasingly crowded and less differentiated over time. The era of "easy money" has set with the rise of interest rates. We believe that the influx of investor capital in response to solid historical returns has reached the level of available opportunities.
Direct lending to businesses, which remains the largest sector of private credit, now resembles much more the syndicated bank loan market, widely accessible, and less the relatively exclusive opportunity for high returns as perceived years ago, while continuing to present higher fees, less liquidity, and fewer exit routes for investors. In our view, the old private credit model of the post-global financial crisis era, based primarily on access to direct credit for businesses through semi-liquid vehicles, no longer seems sufficient.
The real novelty in private credit today is the shift from access to active management. We believe that the new model consists of unlocking potential opportunities through active and relative value strategies, comparing risk and return among subsectors and even entire markets, and allocating capital accordingly.
Opportunities have expanded
In the current context, where banks are adapting to rising rates, regulatory changes, and tensions in the real estate sector, private credit has blossomed beyond corporate lending, transforming into a sprawling ecosystem that touches almost every corner of the economy. Private credit markets are now broad and diversified enough to offer a wide range of risk profiles and valuations and encourage relative value strategies. Growth areas include asset-based finance, which provides funding to the global economy through residential mortgage loans, consumer loans, and non-consumer loans, often secured by real assets. Real estate credit is another increasingly dynamic sector.
We believe that a relative value approach is even more important at a time of increasing interaction between public and private credit, evident in the overlap of asset types available in each market, in the dynamics of fund flows, and in the growing interest in private asset trading platforms. According to a limited and zero-sum view of this interaction, private credit could take market share from public credit. We have a broader view. Today more than ever, investors can choose from the entire credit spectrum to find the investments they believe offer the best potential for risk-adjusted return.
A more versatile toolkit
Today we believe that public and private markets are not rivals, but rather complementary tools in an investor's toolbox. Managers who operate exclusively in public or private markets tend to promote only their own approach. On the contrary, active managers who have access to both markets can offer unbiased opinions and pursue opportunities based on their relative attractiveness at a given time.
Where are the potential opportunities today? We believe that asset-based finance is particularly interesting, as are some sectors of real estate credit. We prefer a mix of fixed and variable rate assets. We believe that high-quality consumer-linked private credit is more interesting than most forms of corporate credit, thanks to a combination of stricter credit standards, lower initial leverage levels, and favorable valuations.
In our opinion, the days of passive exposure to the "wild west" of this market are over. Now, in a more mature and complex market, it is important to be selective and agile. Having a keen eye for value and time-tested active management strategies can help unlock the full potential of private credit.
