Strategic Asset Allocation: Private credit

This report series explores the role of private market investments within long-term strategic asset allocation. The first report in the series focuses on private credit, looking at risk/return profiles of private credit sub-strategies and conducting scenario analysis to assess potential downside risks

• Allocations are rising: Public pension funds have increased private credit allocations from ~2.9% in 2020 to ~4.0% in 2024, with some large plans targeting even higher levels

• Income, yield, and diversification drive adoption: Floating‑rate structures, higher spreads, and sector exposures distinct from public credit enhance portfolio resilience and income stability while delivering higher yields historically

• Portfolio optimization favors private credit: After unsmoothing in an attempt to uncover latent historical risk, optimization processes often assign meaningful weights to private credit, visible through efficient frontier analysis, underscoring its strategic relevance

• Forward‑looking risk tools are essential: The Aladdin platform’s forward‑looking factor framework shows that in a credit‑crunch scenario, widening spreads and declining floating‑rate coupons can have a double-hit impact on direct lending. Although wider spreads may enhance new‑deal pricing, legacy portfolios face valuation pressure