As recently as six months ago, private credit was dominating discussions with high net worth investors as new vehicles and platforms made the asset class more broadly available. Now, some investors may be having second thoughts after experiencing firsthand the complexity of private credit: its risks, characteristics and how potential outcomes can vary widely by strategy, manager and investment structure.
So, what advice should advisors provide clients now? The right answer is not to embrace a wholesale retreat, but rather to take a selective approach to private credit. Private credit remains an attractive investment allocation despite recent headlines that, in our view, misrepresent the asset class itself.
It’s easy to understand how we got here — the industry’s success, evidenced by attractive returns from early adopters, led to an abundance of available capital. This prompted concerns about looser lending standards, untested risk assumptions and potential contagion risk, especially in the largest segment, direct lending. Direct lending has become a significant segment of private markets, with Preqin estimating approximately $1.8 trillion of invested capital across business development company (BDC) holdings and closed-end direct lending strategies as of April 2026.
While recent headlines have focused on rising defaults, redemption pressures and increased regulatory scrutiny, these developments should not automatically indicate that private credit as a whole is fundamentally impaired. Rather, they highlight the importance of understanding where risks are emerging and how you as the advisor can help investors navigate an increasingly differentiated market.
The private credit market includes lending to corporate borrowers, asset-based lending (often called lending to the “real economy”), real estate lending and a variety of small, esoteric markets. Within each of those asset classes exist investment managers of differing aptitude, resources and size.
Private credit is often discussed as a single asset class, yet the opportunity set is vast.
This diversity is frequently overlooked. Private credit is often discussed as a single asset class, yet the opportunity set is vast. As a result, performance dispersion between managers and strategies can be significantly greater than in traditional liquid fixed income markets.
Many parts of private credit continue to benefit from structural inefficiencies that are less prevalent in public markets. These inefficiencies create opportunities to earn an illiquidity premium. However, not all private credit strategies are equal, making manager selection and construction critical drivers of long-term investment success.
The Real Question Is Not Whether To Invest In Private Credit
The more important question for advisors centers around which parts of private credit offer the most attractive risk-adjusted opportunities today, and whether your clients are being adequately compensated for the risks they are taking.
Recent market developments have exposed weaknesses in some sectors, borrowers and capital structures. These challenges have attracted attention — particularly amongst advisors, investors and the financial media — but periods of stress highlight differences in underwriting quality and portfolio construction. In many cases, the lessons are less about avoiding private credit and more about investing selectively within it.
In our conversations with advisors, the solution is not to avoid putting clients into private credit but to lend differently within it. Just as direct lending is going through a more challenging period, so too did real estate lending in 2022, and other asset classes will inevitably experience their own cycles.
Prioritizing Manager Selection
Recent market events highlight the increasing importance of manager selection. Advisors should emphasize underwriting discipline, portfolio concentration limits, sector expertise, workout and restructuring capabilities, alignment of interests and deployment discipline.
The current environment may prove particularly advantageous for managers with deep sourcing networks, robust watch list processes and demonstrated experience navigating periods of market stress. Conversely, managers that prioritized asset growth over investment discipline may face greater challenges as defaults rise and competition intensifies.
Increasing dispersion of outcomes means manager selection may contribute more to long-term investment success than broad asset class allocation alone.
Diversifying Beyond Traditional Direct Lending
Illiquidity premiums still exist for investors and advisors should set expectations upfront with clients who may be willing to lean into private credit and its less trafficked, inefficient opportunities.
As part of your client conversations, you can highlight the benefits of taking a proactive approach by rotating into sectors with diversified collateral to benefit from attractive long-term tailwinds, subject to market conditions. Areas such as real asset debt and specialty finance can reduce concentration risk while enhancing long-term yields. Broadening exposure in this way can enhance long-term yields while reducing concentration risk.
Areas such as real asset debt and specialty finance can reduce concentration risk while enhancing long-term yields.
Further, diversification across these segments may help reduce reliance on any single borrower type, industry or market environment, incorporating multiple complementary sources of private credit risk and return.
It’s important to encourage clients to take a realistic view to private credit. While the asset class can offer attractive income and diversification benefits, the fundamental trade-off remains unchanged: Investors may be compensated with additional return for accepting illiquidity, complexity and less flexibility than is typically available in public markets.
Utilizing established private market investors’ experience and specialist insights can help mitigate those risks.
The Impact For You As The Intermediary
As a trusted advisor, the implications are clear. Recent headlines preset an opportunity to revisit how private credit is positioned within portfolios.
Rather than focusing solely on yield, advisors should work with clients to evaluate the role private credit plays within broader portfolio objectives, including providing income generation, diversification and long-term return enhancement. You can also ensure clients are cognizant of liquidity constraints, investment structures and the potential for periods of underperformance within specific strategies.
Whether your clients are investing in private credit for the first time or reassessing existing allocations in this new environment, investors should view recent developments as a reminder that selectivity matters. Headlines may highlight the challenges facing parts of the market, but they do not tell the whole story.
Headlines may highlight the challenges facing parts of the market, but they do not tell the whole story.
The future of private credit is unlikely to be defined by a single strategy, sector or headline. For advisors, this presents an opportunity to add value by helping clients navigate the asset class with greater clarity and discipline through a focus on manager quality, diversification, underwriting discipline and portfolio construction.
Austin Haymes is Director - Credit Research and Zoe Fujiwara is a Senior Investment Associate at WTW.
