The way institutional investors are thinking about their credit portfolios is changing. It’s clear that interest rates and inflation are going to be higher for longer, which will continue to put pressure on input costs and the cost of capital for companies. Geopolitical and economic uncertainty are also having an impact.
Historically, institutions with long-range target allocations have avoided making significant allocation changes outside of their periodic asset studies, but sources say that bigger moves within credit portfolios could be coming, as investors look for ways to diversify.
Data from Goldman Sachs’ 2026 Global Alternatives Survey: The LP View, shows that institutional investors are still investing heavily in alternatives but they are asking more questions and getting much more selective about which opportunities and strategies they pursue. That is especially true in private credit where limited partners reported a significant increase in negative sentiment toward the asset class. Twenty-nine percent of respondents had a worsening view of private credit in 2025, a figure that grew to 33% in the 2026 survey—the biggest increase of any alternative asset class.
Respondents to the survey said that when it comes to private credit, their biggest concerns were manager quality, crowding and headline risk. Respondents also noted that the expansion of private credit into evergreen funds that are focused on appealing to the private wealth channel is starting to distort pricing in the most crowded segments of the market—likedirect lending—andinstitutions are looking for ways to position around that.
Traditional Fixed Income Under Pressure
Alongside concerns about private credit, institutional investors are also realizing significant gains from the listed equities side of the portfolio. Historically, these conditions would lead to a rotation into traditional fixed income, but that strategy comes with its own set of questions at the moment. Over the past five years, investors have experienced more interest-rate volatility than they are used to and it is impacting everything, including U.S. Treasuries. Allocators have had the best luck with short-duration bonds, but are starting to consider adding more duration.
“We came into the year shorter duration and have stayed there because the yield curve has been relatively flat and continues to get flatter broadly with current interest rate expectations, so I think it is a little bit of a wait and see,” says Edward Ng, head of the Americas OCIO for Endowments, Foundations and Healthcare, Multi-Asset Strategies and Solutions, BlackRock. “Going forward, I think the direction of travel will be longer duration. Absolute yields have reset into an interesting range that makes sense for a long-term CPI plus five portfolios that didn’t make sense three years ago.”
Ng says that choosing opportunistic fixed income strategies that are open on duration, or adding diversifiers like emerging markets or high yield where appropriate are options that will be better positioned to navigate ongoing volatility.
Private Credit With a Twist
Ng adds that private credit also remains attractive, but the way investors are thinking through their allocations is starting to change. There is a bigger focus on adding diversifiers to complement direct lending which makes up the bulk of private credit allocations.
Zia Uddin, president at Monroe Capital agrees. He says, ten years ago investors could invest broadly across the market in private credit and get a basic beta-like exposure. But that strategy is proving less effective. There is a greater dispersion of returns among managers as interest rates put pressure on companies, prompting them to amend financing arrangements.
“We’re seeing folks rotate out of upper-market private credit and into lower middle market private credit alongside venture and into other types of credit like asset-backed finance or real estate,” he says adding that a lot of upper-market private credit loans have gotten so large deals are starting to price similarly to listed credit, creating an almost beta-like exposure similar to the broadly syndicated loan market. Investors may find opportunities for better returns by diversifying into other segments. “There are more inefficiencies in these other parts of the market and that can generate alpha.”
Over the past few months there has been a significant repricing within many direct lending funds, sources say. Moving into 2027, allocators will have to think through the impact of that repricing and what it might mean for performance of their holdings.
“We’ve pushed, and I think the broader industry is pushing, for more transparency on marks. That’s raised some difficult questions at some asset managers that have left marks where they were at while others that have repriced pretty significantly,” says Elijah Reese, head of investment management research and strategy for institutional investing at Aon.
Reese says that historically, investors have bifurcated their exposures between investment-grade and below-investment-grade credit, according to their needs or goals. Now he is working with clients on understanding the connection points within the credit spectrum. As the lines have blurred in credit, understanding what you own at a granular level is important. Investors could find that they have more exposure in one area than they thought or could discover correlation risk they weren’t aware of previously.
“The aspect of this that doesn’t get talked about as much is that there is a lot of strategy overlap among managers. You can have an [asset-based financing] strategy that is investment grade and an ABF strategy that is below investment grade, run by the same manager potentially,” he explains. “So then you have to go through the due diligence to understand the underlying exposures and if the lines in your portfolio are starting to blur. We’re seeing more blurring now that credit markets have grown more complex.”
Uncertainty Reigns
Investors responding to the Goldman survey also reported growing uncertainty over the state of the economy. Financial sponsors are paying close attention as well. Rising rates, persistent inflation, and higher input costs mean that companies will have to have sustained revenue growth if they want to meet their debt service obligations on money they have borrowed. “People talk about EBITDA,” Monroe’s Uddin says. “But EBITDA is not real cash flow. Cash flow is what gets you through the maturity wall coming up in 2027-2028.”
Cash flow requires economic strength and not everyone is convinced it will be there when needed. Damien Dwin, president and CEO at Lafayette Square, a middle market business development company, anticipates a down economy over the next 18 months. “We are seeing early indications that a recession has already taken place,” he says. “We think the smallest borrowers are already facing incredible challenges.”
Dwin argues that recent repricing is indicative of a larger trend. “The direction of travel is very clear. We’re looking at higher base rates, credit spreads that are widening, and will certainly go wider in calendar ‘27. We have a dynamic where the equity market has asymmetric risk.”
Dwin expects that allocators will be forced to take a hard look at their exposures and will likely get more conservative in their allocations over time. “People are talking about zombie funds, but you could see zombie LPs who get stuck in opaque investments because the underlying investment case has changed rapidly.”
BlackRock’s Ng is not quite as negative on the future, but he is taking a measured approach. “We’re continuing to pace into private markets with individual client needs front of mind,” he says. “As an allocator, you have to ask [general partners] about how they are doing their underwriting and what the exit strategy is. If the cost of capital for your future buyer has gone up, can you sell at the same price?”
These questions are also relevant for the big push into digital infrastructure. Hyperscalers and their advocates point out that these companies were not big participants in the debt markets before generative AI, so even though those companies are borrowing significantly now, they’re starting from a lower base with an investment-grade balance sheet. Still, the rapid evolution in compute, business models, token spend and power needs we have already seen in the digital infrastructure space makes it hard to do the kind of long-term modeling institutional investors are used to doing when they make their investment decisions.
Aon’s Reese says it is going to be important for investors to pay very close attention to their covenants and have a clear sense of their investment goals. “A lot of these investments have really tight covenants, but it’s not universal. We’re trying to keep our focus on short-and medium-term investments to mitigate some of the issues with concentration as well as challenges with longer term forecasting,” he says.
Tags: Credit, fixed income strategies, Portfolio Management, Private Credit