Private credit is a growing asset class, and a modest allocation to semi-liquid credit strategies could enhance a portfolio's return profile compared to traditional public stock and bond portfolios. The strategy uses exposure to potentially high-yielding and illiquid assets to seek to generate enhanced returns.
Financial professionals and investors who are interested in learning more about private credit need to consider how they use fixed income and where private credit might fit in their portfolios.
Understanding the Core Potential Benefits
Like publicly traded fixed income, private credit aims to offer income and diversification.
Private credit has the potential to offer consistent source of income generation, and data shows that private credit, particularly the direct-lending component, has provided approximately 3% excess yield relative to high-yield bonds1. This incremental yield comes from taking on illiquidity risk and other factors associated with the asset class.
Owning private credit allows investors to diversify the equity portion of their portfolios and pursue exposure to companies and loan structures not typically available in public markets, mostly with middle-market and private companies (companies typically with annual revenues between $10 million and $1 billion). Some private credit investments are also backed by various types of collateral, from pools of credit receivables such as mortgages and auto loans to specific assets such as aircraft and leasing equipment.
Historically, private credit has had a lower correlation to U.S. equities — about 67% — compared to high-yield bonds at roughly 86%2.
Where Does That Yield Come From?
Private credit’s higher yields reflect that investors should be compensated for two types of risk exposures — specifically, illiquidity and credit risk.
These loans are illiquid because they lack a secondary market and involve bespoke, complex structures with lower transparency levels, so investors need to be compensated. For investors with excess liquidity capacity, this illiquidity premium can help monetize that surplus.
Private credit carries credit risk because direct lending typically receives no coverage from credit-rating agencies, unlike public high-yield bonds. Instead, active managers evaluate borrower creditworthiness and operating cash flows. In the capital structure, these direct-lending loans tend to be senior secured positions, so investors have priority in repayment over junior debt holders.
Additionally, these loans are also typically backed by some collateral.
How to Allocate Private Credit
Like any investment, financial professionals must evaluate clients’ risk capacity, cash flow needs, and time horizon if they are considering private credit allocations. Using a 4% spending rate and five-year horizon across 5,000 simulations, an analysis by Capital Group shows that these portfolios could potentially accommodate up to 65% in semi-liquid investments while still achieving a 4% annual spending rate. That doesn’t mean advisors should allocate that much; rather, it shows that for a typical 5% withdrawal rate, the semi-liquid nature of private credit may not be a deal breaker3.
The Bottom Line
Depending on clients’ objectives, time horizon and risk tolerance, private credit can be a potential addition to a portfolio by offering incremental yield and diversification benefits.
To learn more about how private market investments are offering more opportunities for financial professionals and investors, visit Capital Group’s Public-Private+ Solutions website: capitalgroup.com/plus
Footnotes:
1Using Cliffwater Direct Lending Index yield to worst and Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index to represent Direct Lending and U.S high yield bonds as of June 30, 2025.
2Based on 10-year correlation of the Cliffwater Direct Lending Index (used to represent private credit) to the S&P 500 Index and the 10-year correlation of the Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index (used to represent U.S. high yield) to the S&P 500 Index.
3Methodology: Simulated monthly return data for global equities, US fixed income, and private market assets that capture the mean, variance, skew and excess kurtosis of each asset class from 3/31/2004 – 3/31/2024. Global equities are represented by MSCI ACWI Index and U.S. fixed income is represented by Bloomberg U.S. Aggregate Bond Index. Private market asset classes are provided by Cambridge Associates Indices and composed of equal weighting private equity, private credit, and private real estate. Simulated 5000 paths, each over a 60-month horizon. The public portfolio rebalances on a quarterly frequency, and the private market portfolio rebalances on an annual frequency. Private market assets are assumed to have a 5% liquidation capacity. The spending amount is the spending rate as a percentage of the initial portfolio balance. The withdrawals are taken from public assets on a quarterly basis. The success rate is measured as the public portfolio balance being greater than or equal to three times the annual spending rate over a 60-month horizon. The illustrated feasibility range is the average across public and private portfolio allocations ranging from 0% to 100% in 10% increments.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Past results are not predictive of results in future periods.
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