(UBS)
CIO maintains a Neutral view on direct lending, as we see a balanced risk-return outlook in the near term.
Private credit investors have been worried about several recent developments.
- Investors have grown concerned that AI developments may disrupt legacy enterprise software companies, including those to which direct lenders have provided loans.
- Risks are rising, especially among lower-middle-market borrowers and loans that originated in 2021-22, which have seen higher defaults and non-accruals.
- Several evergreen funds have limited redemptions to protect asset values.
Late-cycle dynamics and an increasingly split market support a selective approach.
- The asset class still offers long-term yield and diversification benefits, but in the short term, we see a more balanced risk-return outlook and more moderate returns.
- Since September, we have recommended that investors consider biasing exposure toward funds focusing on senior, sponsor-backed, upper-middle-market loans in non-cyclical sectors, which are proving more durable.
Diversifying across alternative assets makes sense amid the current uncertainty.
- Investors with an overallocation to direct lending should consider broadening into diversified alternative strategies, including private infrastructure; seeking proxy hedges; or reducing exposure to high yield credit or equities in favor of quality bonds or low-correlation hedge funds to balance risks.
Investment view
CIO continues to believe a diversified allocation to direct lending can add value to a well-diversified portfolio over the longer term, but the risk-return outlook in the near term has become more balanced.
Original report – Should investors worry about private credit?, 4 May 2026.
