Leaving PIMCO.com

You are now leaving the PIMCO website.

Skip to Main Content
Economic and Market Commentary

Quick Takes: The Power of Diversification in Private Credit

Learn why diversified private credit exposure is key to enhancing returns, reducing risk and positioning for the longer term.

Text on screen: PIMCO

Text on screen: PIMCO Quick Takes: The Power of Diversification in Private Credit

Text on screen: PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized.

Text on screen: Max Gelb, Product Strategist, Client Solutions & Analytics

Gelb: As the saying goes, diversification may be the only free lunch in finance. But diversification is underused in private credit.

In just the past five years, private credit assets have more than doubled to over $1.3 trillion dollars. However, the majority of investments focus on corporate strategies. We’re constructive on private corporate credit, but believe that private credit portfolios can be enhanced by non-corporate exposures.

FULL PAGE GRAPHIC: TITLE – Diversified private credit is more attractive than a single-sector approach

The half circle graphic shows the myriad sectors and subsectors within the private credit universe. From left to right it reads as follows: Residential Real Estate – Self-employed, Re-performing, Bridge loans; Commercial Real Estate  – Transitional, Developmental, REIT debt; Specialty Finance  – Niche sectors, Asset lending, Consumer; Corporate Lending  – Direct lending, Mezzanine and Distressed debt.  

In fact, over the next five years a big portion of the returns we forecast for diversified private credit comes from residential and commercial real estate debt and specialty finance.

Another reason to diversify across private credit sectors is to reduce risk. The risk factors for asset-backed, real estate, and consumer debt differ from those for corporate lending. And that can reduce estimated volatility in a well-balanced portfolio

Recent stress in the banking sector has made the case for diversifying into non-corporate private credit even stronger. Historically, US regional banks were major providers of real estate debt and specialty finance.

FULL PAGE GRAPHIC: TITLE – Non-corporate opportunities are enhanced by banking sector stress

The graphic shows two charts. The chart on the left is titled Regional bank balance sheets are dominated by non-corporate risk…The subtitle is Small and medium-size banks’ share ($ value) of all outstanding bank loans, by type. The first bar shows Total Loans with a 38% share at $4.62 trillion. The second bar shows Commercial and industrial with a 28% share at $782 billion. The third bar shows Residential Real Estate with a 37% share at $1.45 trillion. The fourth bar shows Commercial Real Estate with a 67% share at $1.25 trillion, representing the biggest share of total outstanding bank loans. The fifth bar shows Credit cards with a 27% share at $165 billion. Lastly, the sixth bar shows Auto loans with a 15% share at $91 billion. The chart on the right is titled …However, private credit dry powder is concentrated in corporate lending. The chart subtitle is Private credit industry dry powder breakdown; Total dry powder equals $569 billion. Dry powder represents capital which has been committed but not yet called into private credit strategies. The first bar shows Direct Lending with a share of 37% at $213 billion. The second bar shows Mezzanine with a 12% share at $68 billion. The third bar shows Distressed with a 16% share at $90 billion. The first three bars are comprised of largely corporate strategies. The fourth bar shows Special Situations with a 14% share at $79 billion. The fifth bar shows Real Estate with a 14% share at $77 billion. Lastly, the sixth bar shows Infrastructure with a 6% share at $36 billion. The chart excludes 1% of dry powder in Venture debt.

As these banks offload this risk and limit new originations, private investors are likely to gain more access to attractive real estate and specialty finance loans. Yet most of the capital that has been committed to private debt funds will focus on corporate lending. It may fail to capture the full opportunity.

That makes the power of diversification even more appealing.

Text on screen: For more insights and information, visit pimco.com

Text on screen: PIMCO

Disclosure


Past performance is not a guarantee or a reliable indicator of future results.

Private credit involves an investment in non-publically traded securities which may be subject to illiquidity risk.  Portfolios that invest in private credit may be leveraged and may engage in speculative investment practices that increase the risk of investment loss. Alternatives involve a high degree of risk and prospective investors are advised that these strategies are appropriate only for persons of adequate financial means who have no need for liquidity with respect to their investment and who can bear the economic risk, including the possible complete loss, of their investment. Diversification does not ensure against loss.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Europe Ltd (Company No. 2604517, 11 Baker Street, London W1U 3AH, United Kingdom) is authorised and regulated by the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to retail investors, who should not rely on this communication but contact their financial adviser. | PIMCO Europe GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Europe GmbH Italian Branch (Company No. 10005170963, Corso Vittorio Emanuele II, 37/Piano 5, 20122 Milano, Italy), PIMCO Europe GmbH Irish Branch (Company No. 909462, 57B Harcourt Street Dublin D02 F721, Ireland), PIMCO Europe GmbH UK Branch (Company No. FC037712, 11 Baker Street, London W1U 3AH, UK), PIMCO Europe GmbH Spanish Branch (N.I.F. W2765338E, Paseo de la Castellana 43, Oficina 05-111, 28046 Madrid, Spain) and PIMCO Europe GmbH French Branch (Company No. 918745621 R.C.S. Paris, 50–52 Boulevard Haussmann, 75009 Paris, France) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 15 of the German Securities Institutions Act (WpIG). The Italian Branch, Irish Branch, UK Branch, Spanish Branch and French Branch are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società e la Borsa (CONSOB) (Giovanni Battista Martini, 3 - 00198 Rome) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of Ireland (New Wapping Street, North Wall Quay, Dublin 1 D01 F7X3) in accordance with Regulation 43 of the European Union (Markets in Financial Instruments) Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN); (4) Spanish Branch: the Comisión Nacional del Mercado de Valores (CNMV) (Edison, 4, 28006 Madrid) in accordance with obligations stipulated in articles 168 and  203  to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively and (5) French Branch: ACPR/Banque de France (4 Place de Budapest, CS 92459, 75436 Paris Cedex 09) in accordance with Art. 35 of Directive 2014/65/EU on markets in financial instruments and under the surveillance of ACPR and AMF. The services provided by PIMCO Europe GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. | PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2, Brandschenkestrasse 41 Zurich 8002, Switzerland). The services provided by PIMCO (Schweiz) GmbH are not available to retail investors, who should not rely on this communication but contact their financial adviser. | PIMCO Asia Pte Ltd (Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. PIMCO Asia Limited is registered as a cross-border discretionary investment manager with the Financial Supervisory Commission of Korea (Registration No. 08-02-307). The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Investment Management (Shanghai) Limited. Office address: Suite 7204, Shanghai Tower, 479 Lujiazui Ring Road, Pudong, Shanghai 200120, China (Unified social credit code: 91310115MA1K41MU72) is registered with Asset Management Association of China as Private Fund Manager (Registration No. P1071502, Type: Other). | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862. This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. | PIMCO Japan Ltd, Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association, The Investment Trusts Association, Japan and Type II Financial Instruments Firms Association. All investments contain risk. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Taiwan Limited is an independently operated and managed company. The reference number of business license of the company approved by the competent authority is (112) Jin Guan Tou Gu Xin Zi No. 012. The registered address of the company is 40F., No.68, Sec. 5, Zhongxiao East Rd., Xinyi District, Taipei City 110, Taiwan (R.O.C.), and the telephone number is +886 2 8729-5500. | PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | PIMCO Latin America Av. Brigadeiro Faria Lima 3477, Torre A, 5° andar São Paulo, Brazil 04538-133. | No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America LLC in the United States and throughout the world. ©2023, PIMCO.

CMR2023-0601-2934129

Featured Participants

Tell us a little about you to help us personalize the site to your needs.

Terms and Conditions

Please read and acknowledge the following terms and conditions:
{{!-- Populated by JSON --}}
Select Your Location

Americas

  • The flag of Canada Canada

Asia Pacific

Europe, Middle East & Africa

Back to top