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Latest results from Nuveen’s EQuilibrium survey point to an expansion into niche areas of private fixed income.

Investors look to private markets for new opportunities

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Born from necessity, for borrowers seeking financing and for investors seeking alternative income streams, the alternative credit market has blossomed. Now, the market contains a number of asset classes which provide diversification for investors, and a similar growth story could be seen across these options.

New pathways to alternative credit

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The catalyst for the alternative credit market arguably came over a decade ago when the 2008 Global Financial Crisis brought about a sea change in bank lending. The advent of tighter regulations meant borrowers had to look elsewhere for financing, with more considering alternative credit as a result. This has brought about an evolution in the alternative credit market, but the 15-plus year trajectory shows this as anything but a “right place, right time” sentiment. Growth has been sustained during this time, with the AUM in global private debt strategies swelling from $232bn in 2007 to $1.9trn in 2023. Momentum has been brought to this market, allowing it to become more sophisticated with a growing number of firms innovating to gain market share in this space.

A carbon credit is a certificate representing one metric ton of carbon dioxide equivalent that is either prevented from being emitted into the atmosphere or removed from the atmosphere

New pathways to alternative credit

With over 15 years having passed since the Global Financial Crisis, alternative credit is now functioning in a very different environment. Though this is good news in general for investors, it has also been interesting to see how alternative credit investments specifically have fared against a changing interest rate backdrop. Though still relatively higher than since the Global Financial Crisis, interest rates have returned to normal historical levels. Segments of the alternative credit market are younger than others, so and questions remain over how some will cope under changing market conditions, with some having demonstrated resilience in spite of this. Various alternative credit sectors have shown low correlation with US equities – such as real estate debt and private placements (BBB-rated corporates) that have correlations of 0.4 and 0.6, respectively.

New market, new risks

Alternative credit encompasses many asset classes but three in particular, all rapidly growing and posing attractive opportunities for investors, merit greater attention: direct lending, collateralised loan obligations (CLOs) and real estate debt. The direct lending market continues to present opportunities across senior and junior loans. This is the case in the US and major European markets where falling rate environments could provide ample opportunities. In the former, private debt investors should benefit from higher all-in yields for longer, which, although lower than during peak interest rates, are still close to historic highs. With businesses having proven they can withstand and expand in a volatile rate environment; there is the potential for highly favourable risk-adjusted returns in 2025. And in the latter, direct lending has traditionally focused on defensive sectors, meaning a lack of European economic growth shouldn’t be a significant headwind.

Alternative credit strategies in focus

CLOs boomed in 2024 despite falling loan issuance, as demand was driven by robust reset and refinancing activity. In the US, broadly syndicated CLO issuance volumes totalled $429bn in 2024, breaking the previous record of $381bn in 2021. The long-term, non-marked-to-market nature of CLOs has complemented current market dynamics. Liabilities pushed tighter last year and will likely continue trending in that direction to provide attractive financing for CLO equity in 2025. Real estate debt is now being buoyed by a recent level of certainty that commercial real estate, in the US at least, hasn’t had in recent years. Uncertainty over inflation and rate cuts has led to valuations in many real estate sectors being suppressed, but the worst seems to have passed of this environment. Having now returned to historical norms for interest rates, higher bases mean real estate debt investors should be well-placed to achieve higher returns in exchange for taking less risk. A risk-off tone will likely persist in commercial real estate debt for some time, with the onus being placed on quality from a debt perspective.

The growth of alternative credit

Global private debt AUM by strategy ($ billions)

Credit sectors can provide equity beta and reduced inflation sensitivity

15-year period ending 31 Dec 2023

There is also the changing nature of the industry. The retreat of bank debt has led to greater interest from private lenders and a growing number of firms operating in this space. Though this benefits borrowers who are presented with more choice, there is a risk of underwriting standards being compromised as lenders fight for business. These risks underline the importance of methodical investment processes and allows those firms with proven track records and strong discipline to rise above. A plethora of lenders has also enabled greater innovation and the market to blossom, with a catalogue of asset classes available to further support portfolio diversification.

Source: Bloomberg, ICE BofA, JPMorgan, S&P, Cliffwater Direct, and Gilberto Levy as of 31 Dec 2023. Data for direct lending is from 31 Mar 2023. Data for CLO BB-rated is only available from 30 Jun 2014. Representative indexes: U.S. equities: S&P 500 Index; Global equities: MSCI ACWI exUSA Index (ND); Direct lending: CDLI Total Return Index; Real estate debt: Gilberto Levy G1; Private placements – BBB-rated corporates: ICE BofA BBB U.S. Corporate Index; Senior loans:S&P LSTA Leveraged Loan Index; CLOs BB-rated debt: JPMorgan U.S. CLO Index – BB rated. Performance data shown represents past performance and does not predict or guaranteefuture results. It is not possible to invest directly in an index.

Source: Preqin as of November 2024.

115

160

232

299

350

404

426

475

426

543

604

683

808

927

1,061

1,194

1,417

1,713

1,827

1,713

1,926

U.S. equities

Global equities

Direct lending

1.0

Real estate debt

U.S. equities

Inflation

Private placements - BBB-rated corporates

Senior loans

CLOs BB-rated debt

0.9

0.7

0.4

0.6

0.7

0.1

0.2

0.4

0.1

0.0

0.4

-0.1

Correlation

1 of 2

2 of 2

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Over the past five years, the annual EQuilibrium survey of global institutional investors has chronicled a period of significant change, marked by economic shifts, geopolitical uncertainty and the evolution of private markets. In 2025, institutional investors are adapting with greater agility, giving them more flexibility to pursue growth opportunities. In this new environment, we see three themes becoming increasingly apparent:

Latest results from Nuveen’s EQuilibrium survey point to an expansion into niche areas of private fixed income.

Investors look to private markets for new opportunities

Private fixed income is gaining momentum. In 2024, investment grade public fixed income was the most popular planned allocation. However, in 2025 private fixed income was the most popular planned allocation, with 44% of global respondents planning to allocate. Investors have also shown an increasing appetite to diversify within their private allocations, such as private asset-backed securities, net asset value lending and energy infrastructure credit. This shift towards private fixed income is reflective of the continued move towards private markets more broadly. Allocations across private markets are growing, with 92% of respondents holding both private credit and private equity in portfolios. This figure has increased each year since 2021. In the 2025 survey, 66% of all respondents planned to expand their private market allocations over the next five years. This number jumped to 71% for UK-based responses. Private credit remains top of mind for investors, with respondents from the UK and US showing the most interest with 52% and 60% respectively (and UK pensions at 50%).

Embracing private markets

UK-based results show private equity and private infrastructure as other top areas of interest, with more than half (51%) of all UK respondents planning on increasing their allocations to both private equity and private infrastructure in the next two years. Allocations differ with UK pensions as 39% plan to increase allocations to private equity and 48% to private infrastructure. Infrastructure has grown increasingly popular among investors in recent years, driven in part by the asset class’s long term opportunity in the transition to a low carbon economy. The trend remains important to UK investors, with 70% of all UK survey responses saying they factor in the energy transition when making investment decisions. This number rose to 76% for UK-based pension funds. The survey results illustrate how this move into private markets is changing the structure of investment teams. Investors who have larger portions of their portfolios dedicated to alternatives are more likely to have specialised private investment decision-making groups. Those with alternative allocations below 20%, for example, are twice as likely to manage private infrastructure debt in their general fixed income team compared with investors with higher alternatives allocations. But, overall, most institutions believe their expansion into private markets is enhancing their investment knowledge and decision-making capabilities.

Environmental goals remain a priority

Respondents showed a shift in sentiment regarding the energy transition, with 61% globally agreeing that a switch to a low carbon economy is inevitable, down from 79% in 2022. However, UK investors remain more optimistic, with 75% of all UK respondents saying a transition to low carbon is certain. Again, this number was higher for UK pension funds, with 78% agreeing to the statement. This shift reflects a growing pragmatism surrounding the energy transition, underlined by the 73% of all surveyed investors who believe that meeting the growing demand for power will require both renewable and fossil fuel energy. In the UK, 69% of surveyed responses agreed brown and green energy will be needed, though this number jumped to 83% for those answering on behalf of UK pensions. A growing area of interest for institutional investors is nature-based investment strategies, though this approach remains in its infancy for many. In the UK, 55% of surveyed investors agreed that nature loss is within the top-five of economic risks, (compared to 45% globally).

“Investors have also shown an increasing appetite to diversify within their private allocations, such as private asset-backed securities, net asset value lending and energy infrastructure credit”

800 global institutional investors representing $19tn in assets were surveyed in October and November 2024. Of this total, 110 were UK institutional investors, 63 of which were from UK pension plans. Only investment decision makers were included.

For more information on Nuveen visit our website or to access deeper insights from our survey, click here.

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Geopolitical uncertainty remains Investors are shifting to private fixed income Environmental targets remain important but investment sentiment is becoming more pragmatic, particularly on the energy transition

While the threat is recognised, only 37% of all UK-based respondents say they are increasingly focused on nature-related themes in portfolios, underlining how tackling nature loss still very much in the educational phase for investors. Most institutions are prioritising clean energy and carbon reduction, either as part of net zero goals or to capture compelling risk-return opportunities. Overall, 44% of institutions have net zero commitments while another 25% plan to in the coming 12 months. Even among the roughly 30% who do not intend to set net zero commitments, the majority (64%) say they are still investing in clean energy strategies or reducing carbon in their portfolios. There is higher uptake in the UK, where 62% of respondents (67% UK pensions) have commitments in place, and a further 24% (17% UK Pensions) are planning to make commitments in the next 12 months.

Perceptions of uncertainty related to geopolitical tensions and monetary and fiscal policy have eased only slightly, while uncertainty levels surrounding capital markets and economic growth declined compared with the 2024 survey. Reflecting ongoing geopolitical concerns, institutions are:

Geopolitical concerns remain high

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Assessing the adaptability of companies and sectors to changing regulations Evaluating direct and indirect country exposures, including supply chains Adjusting sector exposures with both defensive and opportunistic strategies Reevaluating overall portfolio diversification to mitigate risk

“Most institutions are prioritising clean energy and carbon reduction, either as part of net zero goals or to capture compelling risk-return opportunities”

For more information on Nuveen visit our website or to access deeper insights from our survey, tap here.

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