Apollo believes Investment Grade Private Credit (Private IG) is a growing part of the credit market that has the potential to generate attractive risk-adjusted returns but has been overlooked because it doesn’t fit neatly into the current asset allocation framework. Investing in Private IG offers, in our view, several potential advantages, including higher spread premia, lower historical losses, enhanced seniority and downside protection and greater diversification within an investment portfolio. We also believe that the critical need to guarantee retirement income should create opportunities for investors to access Private IG in a prudent way to enhance the return potential of their fixed income portfolios.
Key Takeaways
- Investment Grade Private Credit is a growing part of the credit market that has evolved over the past 15 years from predominantly corporate private placements to a much broader investable universe that spans both asset-backed finance and bespoke corporate financing solutions, with an estimated addressable market of $40 trillion.
- We believe Investment Grade Private Credit offers attractive risk-adjusted returns but has been overlooked because it doesn’t fit neatly into the current asset allocation framework, which has not kept up with the pace of innovation in credit markets.
- The conventional assumption that private investments inherently carry more risk than public investments-in terms of liquidity, transparency, regulation, and issuer quality – is growing increasingly outmoded, in our view. The clearest rebuttal to this assertion is the decision by many of the largest issuers of public investment grade bonds to diversify their capital sources by tapping the private credit markets. We believe that the two markets are converging and increasingly carry similar risk profiles.
- In our view, Investment Grade Private Credit offers several attractive characteristics, including higher spread premia, lower historical losses, enhanced seniority and downside protection, as well as greater diversification within an investment portfolio.
We believe that a key pillar of growth for Investment Grade Private Credit is the critical need to support retirement income. As retirement portfolios are often weighted toward fixed income, enhancing the return profile of a retirement fixed income portfolio with Investment Grade Private Credit can play an important role in helping to address the financial challenges facing future retirees.
The information herein is provided for educational purposes only and should not be construed as financial or investment advice, nor should any information in this document be relied on when making an investment decision. Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change. Please see the end of this document for important disclosure information.
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