Private Debt 2.0: Institutionalizing private credit for modern wealth portfolios 

Private debt is an asset class that has evolved rapidly over the past few years, yet many investors remain anchored in the past, relying on direct lending as their main or only exposure. While direct lending continues to serve as a core strategy, a one-dimensional approach is increasingly insufficient. A modern private debt allocation should consider moving beyond simple corporate loan exposure, embracing a broader, more diversified opportunity set – what we call Private Debt 2.0.

Before examining the opportunity, it’s important to acknowledge some of the recent narratives that have been encircling the asset class, from seeming confusion about how non-traded BDCs work, and more recently, by concerns around a potential AI-driven disruption in software.

We examined both of these in a recent thought piece called Brick by Brick, coming to the conclusion that recent developments  do not indicate widespread structural risks in private credit.

Private credit lending generally has lower leverage and is backed by longer-duration capital than bank lending, and the migration of lending from banks to private markets has arguably reduced concentration risk within the banking system.

Moreover, for those afraid of a private debt market that has grown too quickly, U.S. GDP growth actually has outpaced corporate credit growth (Figure 1), and private credit remains a fraction of outstanding total U.S. debt (Figure 2).

^{Source: Mercer Alternatives Group research, Bank for Internal Settlements via FRED as at December 8, 2025. Note: shaded areas indicate US recessions.}

Default rates are normalizing from historically low levels but remain within expected ranges. Credit spreads are below long-term averages although direct lending continues to offer a premium over public credit, with comparatively low defaults. Middle-market borrowers have continued to grow earnings, with new deals showing broadly stable leverage and coverage ratios.

That said, dispersion in investment outcomes is increasing. Headlines, such as those recently related to the software and technology-related sectors, could exacerbate this trend. Growing dispersion underscores the importance of rigorous due diligence and manager selection to mitigate downside risks in an increasingly complex investment landscape.

One of the ways wealth managers can mitigate potential risk is to explore broader exposure across the private credit spectrum, by complementing direct lending with structured credit and specialty finance, introducing additional return drivers while diversifying sources of risk, which can reduce cycle sensitivity.

A direct‑lending‑only allocation concentrates beta and can tie performance to the corporate credit cycle. Structured credit, however, extends exposure beyond traditional corporate borrowers and can offer seniority and explicit structural protections through instruments such as CLO debt and equity, portfolio financing and regulatory relief capital, which can help preserve value during downturns.

Specialty finance has typically delivered higher‑yielding, shorter‑duration, cashflow‑driven exposures with low correlation to traditional markets that reduce reliance on corporate earnings and profitability. Diversification should be multi‑dimensional, spanning strategies (direct lending, structured credit, specialty finance) and regions (North America, Europe, Asia‑Pacific).

While in the past, illiquid funds were the main avenue to access these types of opportunities, semi-liquid funds are increasingly available and can be well-suited to this modern approach. Their open-ended format, coupled with scheduled redemption windows, provides the potential for a relatively enhanced liquidity profile. By using semi-liquid funds, advisors can potentially deliver both adaptability and differentiated returns, ensuring portfolios are not only better diversified, but also better aligned with client liquidity needs.

Illustrative diversification of a semi liquid debt portfolio by asset class, manager, strategy and geography

^{Source: Mercer, 2025}

The strength of this framework lies in blending exposures with different duration profiles, performance drivers, and correlation patterns. Direct lending provides beta exposure in growth cycles; structured credit adds resilience in moderate downturns; specialty finance contributes steady, uncorrelated income streams. Together, these elements build a portfolio capable of withstanding diverse macroeconomic outcomes.

Private Debt 2.0 is about intentionally constructing diversified, portfolios that capture multiple sources of credit alpha and remain resilient across market cycles. While we do not believe there is evidence of systemic risk, it’s crucial in any market environment that wealth managers ensure they are actively monitoring — particularly in sectors exposed to AI disruption or structural repricing dynamics. 

We see a maturing asset class rather than a system on the brink. Cockroaches may exist in any market, but disciplined underwriting, robust governance and thoughtful portfolio construction can materially reduce the risk that they undermine long-term outcomes.

For wealth managers, managing client expectations around this asset class is even more pertinent given the current market sentiment, but by effectively communicating the potential benefits of private debt 2.0, they can help clients achieve more diversified and potentially resilient portfolios, and tapping into an asset class that is becoming increasingly critical in financing the future needs of the global economy.

Important notices