Ashley Manning-Brown: The question is no longer simply whether to allocate to private credit. It is what kind of private credit best fits the next phase of the cycle.
Higher financing costs, fewer deals and a challenging exit environment are prompting investors to scrutinise where superior risk-adjusted returns and downside protection can still be found.
Concern is focused on asset-light but highly leveraged deals financed by large private equity houses, which invest both equity and provide debt to other sponsor-led transactions.
Senior, secured asset-backed private credit opportunities, particularly real estate, have emerged as a preferred alternative, offering investors secured exposure to tangible assets and a differentiated risk from corporate cashflows.
A convergence of forces
The rise of private credit over the past decade has been driven by a convergence of structural and market forces.
In the wake of the global financial crisis, tighter bank regulation constrained traditional lending, creating a financing gap that non-bank lenders stepped in to fill.
At the same time, persistently low interest rates pushed institutional investors to seek yield beyond public fixed income, making illiquid private credit strategies increasingly attractive.
Private equity's rapid expansion further accelerated demand for flexible, bespoke financing solutions that banks were less willing or able to provide, embedding private credit into the buyout ecosystem.
Together, regulatory change, yield scarcity, investor demand for income and diversification, and strong sponsor-led deal activity transformed private credit from a niche alternative into a core institutional asset class.
From 2009 to 2023, global private credit assets grew nearly tenfold to around $2trn (£1.5trn), with direct lending at the heart of that rise.
The growth of private credit has been driven by direct lending to corporates, supporting private equity sponsored businesses.
This symbiosis proved mutually beneficial in the environment of stable markets, growing M&A activity and increased investor allocations to both private equity and private credit.
But weaknesses have emerged in the current economic environment, and commentators now worry that the positive symbiosis represents a systemic risk.
Institutional investors are now asking the hard questions about what exactly sits beneath their private credit allocations – how robust are the underlying loan covenants, what is the quality of the cashflow, what back-leverage is in place, how differentiated are the returns, and what exactly are the underlying risks.
The point is not that private credit is broken. Far from it. But in parts of the corporate market, it is becoming crowded, highly competitive and, at times, insufficiently differentiated from the private equity cycle it was meant to complement.
Moving beyond corporate direct lending
That is one reason investor attention is broadening beyond corporate direct lending.
Since 2023, higher rates, slower sponsor activity and tighter borrower fundamentals have all pushed allocators to look more closely at asset-backed and specialist credit strategies. Real estate debt has emerged as one of the clearest beneficiaries of that trend.
In McKinsey's 2025 LP Survey, 63% of respondents expressed an interest in investing in real estate debt in 2025, up from 56% in the prior year, evidence of growing investor appetite for more defensive, asset-backed private credit exposure.
The attraction is straightforward. Real estate debt is secured against tangible assets with an identifiable value that can be underwritten with greater visibility than corporate earnings.
For senior lenders, conservative loan-to-value ratios ensure an equity buffer, while security over physical assets offers a clearer enforcement path in downside scenarios than is available in sponsor-led corporate structures. A loan book invested across, say, 25 underlying loans and thereby secured on 25 separate real estate assets is inherently lower risk, compared to a concentrated corporate lending book.
The distinction with corporate private credit is increasingly important. Corporate direct lending is primarily underwritten against business cashflows and assumptions about enterprise value. Real estate debt, by contrast, is underwritten against asset value, project feasibility, rental income and exit visibility.
Corporate private credit is also more exposed to the rhythm of M&A and buyout markets, whereas real estate debt is supported by a more structural financing need.
And while competition has compressed spreads in many sponsor-led deals, real estate debt can still offer attractive pricing alongside stronger collateralisation, particularly where specialist underwriting is needed.
In portfolio terms this gives investors something meaningfully different – differentiated returns, with security over real assets rather than simply another route into private equity-linked risk.
A growth market
Europe is the growth market for real estate debt – private markets currently provide around 25% of commercial real estate debt needs compared to more than 50% in the US.
Bank retrenchment from real estate lending since the global financial crisis (GFC) is not just a cyclical pause; it is the product of long-term regulatory and capital constraints, especially for development finance.
Over the past decade, outstanding bank lending to SME property developers has fallen sharply, and banks' share of the real estate development market has dropped materially from pre-crisis levels.
The result is a sizeable funding gap at a time when demand remains acute, both to refinance the wall of maturing debt facilities and to fund the new commercial and residential real estate assets the continent needs. That creates a structural opening for specialist non-bank lenders and the institutional capital providers that support them.
This risk is differentiated from the corporate M&A/private equity cycle and can be targeted to sectors with strong fundamentals: residential, logistics, infrastructure, health services and energy-efficient asset financing.
As borrowers refinance loans originated in a lower-rate environment, they are facing tighter underwriting standards, lower leverage and higher pricing. For disciplined lenders with dry powder and specialist origination capability, that can create attractive entry points that are harder to find in the more crowded parts of the corporate lending market.
For institutional allocators, private credit should not be treated as a monolith. They should separate corporate direct lending from asset-backed strategies and, within real estate debt, distinguish between senior, mezzanine, development and transitional lending.
None of this means investors should treat real estate debt as a uniform safe haven. Strategy selection still matters enormously, as do manager quality, sector focus and underwriting discipline.
For institutional investors looking across private markets today, the question is no longer simply whether to allocate to private credit. It is what kind of private credit best fits the next phase of the cycle.
On that measure, real estate debt stands apart – not as a niche alternative, but as one of the few areas where investors can still find compelling returns, genuine downside protection and differentiated exposure within a single allocation.
Ashley Manning-Brown is head of UK investor solutions at Pluto Finance
