Private credit: The Red Thread – Private Markets

Public credit markets have generated positive total returns in 2024. Over the course of the third and fourth quarters, the pace of spread tightening has accelerated and spreads in many market segments are trading at/near the tightest levels in 20 years. For reference, the US Investment Grade Corporate Bond spread is currently 83bps (20-year tight) and the US High Yield Corporate Bond spread is 293bps (3rd percentile) as of 15 October 2024. While the credit markets are increasingly pricing in a soft landing, public credit has become more asymmetric. At the current valuations, public credit is vulnerable to a correction in the event that there is a deceleration in the economy or a macro-level shock to markets.

As a result of the peak asymmetry of public credit markets coupled with the relatively high base rates, private credit should offer investors a more consistent source of stable income and returns compared to public credit markets. While certain segments of private credit have also experienced some spread tightening, we believe that private credit offers a more favorable return profile compared to public credit on a forward-looking basis. In particular, we’re targeting short duration, asset-backed private credit with a specific focus on asset classes that have a favorable fundamental outlook across most market environments. Furthermore, we prefer the asset-backed segment of the market as these assets have a shorter duration profile and are also generally less competitive and have not experienced the same degree of spread tightening over the past 18 months.

Private credit sector performance outlook¹

¹ Source: UBS Asset Management (UBS-AM), November 2024. Assessment informs top-down perspectives as well as bottom-up strategy and manager selection. UBS-AM will weigh the perceived relative attractiveness of these strategies using a scale of “underweight”, “neutral weight” and “overweight” ratings. These ratings are the opinion of UBS-AM and may not necessarily provide an accurate reflection of the ultimate success or potential return of a given strategy. Past / expected performance is not a guarantee for future results.