Perspectives

After reconfiguring the landscape of finance and investing over the past few years, private credit may be poised for even greater gains heading into 2026. Once a niche corner of the market, private corporate credit now plays a major role in how companies raise capital and how investors—both institutional and individual—access a wider range of strategies. These strategies offer greater diversification, uncorrelated performance compared to volatile public markets, and premium net-investment returns, especially as interest rates begin to trend lower.

Macro Resilience Despite Uncertainty

We believe private corporate credit is entering 2026 from a position of strength. Our portfolio companies, for example, continue to show remarkable resilience, with annualized double-digit earnings growth in U.S. holdings. “There's a narrative around the challenging economic environment, but we're not seeing it in the performance,” said Michael Smith, Co-Head of the Ares Credit Group. “Actually, the economy's performing pretty well, and we're seeing strong earnings and revenue growth from our portfolio companies.”

Some concerns linger. Inflation remains stickier than hoped,¹ the U.S. labor market shows signs of softening,² and the longer-term economic impacts of recent seesaw tariff policies remain unclear.³ For Ares’ portfolio companies, most of which focus on middle-market, service-oriented, and asset-light businesses with limited exposure to international supply chains, the tariff issue appears manageable thus far.

Interest-rate dynamics present a more nuanced picture. Some market commentators have warned that falling rates could hurt private credit returns, given the floating-rate terms for most loans that adjust periodically to benchmark rates, usually SOFR.⁴ However, private credit industry executives call that view too simplistic as it’s important to look at the premiums that this space can provide, including levers in our portfolios to maintain premiums. “It’s not just base rate,” Smith explained, “it’s base rate plus spread, plus fees, plus call protection, and other factors.”

“Over the past 20 years, the premium has shrunk and expanded over time, but the premium is still there,” he added. “Even as rates go up and down, you still maintain a premium for the customization.”

Indeed, private credit has delivered remarkably consistent returns that typically sit 200 to 400 basis points above liquid-credit alternatives, such as bank loans and high-yield securities, across multiple rate cycles and economic conditions. The asset class sits closer to the wide end of yields and in the middle of a typical yield profile currently, putting us at historical norms. “Generally, central banks cut rates in response to weakening economic conditions, which means that your credit spreads tend to widen out,” said Mitch Goldstein, Co-Head of Ares Credit Group.

“We’ve seen the private credit market evolve through numerous cycles over 30 years. Maintaining discipline when it comes to credit selection is fundamental to our investment process—and the longevity of our success,” said Goldstein.

The biggest change is how quickly the industry has matured, as investors have grown more comfortable and confident about the private credit opportunity over the past few years.⁵ Contrary to the media narrative, the industry is fairly mature and has been cycle-tested over the last 30 years.

“They’ve had time now to see private credit strategies in action, how they perform—even as the macro and market environments have gone through some hairpin turns with inflation, policy shifts, and geopolitical uncertainty,” said Goldstein. “Credit markets are open. Bid-ask spreads between buyers and sellers for M&A are narrowing as multiples have increased and financing costs have declined with interest rates. As a result, the market is reporting stronger new transaction activity, and the potential for lower short-term rates should encourage private equity sponsors to take advantage of improved financing conditions.”

Out of the Void

The growth of private credit has always been about necessity and the attractiveness of the capital for companies increasing their access to capital and allowing investors to get better, more stable returns. It initially filled the void left by retreating banks after the 2008 financial crisis. A company seeking a $50 million loan couldn’t attract the interest of large banks, so private credit firms stepped in to serve stranded middle-market clients. That corporate demand for financing has only accelerated over the past two decades as bank consolidation, tighter regulations, and less appetite for risk continued to drive traditional banks out of the markets they once dominated.

“We’ve seen a seismic shift in how companies are financed,” said Goldstein. “It used to be in the domain of the banks. That has shifted in a major way toward institutions like Ares.” As private credit gained market share and managers were able to significantly scale their fundraising, the size of these credit transactions naturally increased. Today, private credit deals regularly top billions of dollars.

The addition of individual investors through semi-liquid investment vehicles has played a significant role in private credit’s recent growth. “Private credit now offers individual investors access to robust income-generating assets that were previously available only through pension funds and to the ultra-wealthy, and that continues to be a game changer for everyone in this business,” said Smith. “As traditional 60/40 portfolios of public stocks and bonds struggle to deliver consistent returns in volatile markets, private credit has emerged as a compelling option.”

Benefits of Private Credit

For corporate borrowers, private credit may offer speed, confidentiality, and less uncertainty. When public debt markets freeze—for example, during the Federal Reserve’s aggressive 2022–2023 rate-hike cycle to beat back inflation—private credit keeps flowing. In the second quarter of 2025, Ares had the largest amount of private credit “dry powder”—committed investor capital totaling $150 billion—waiting to be deployed.

This capital provides crucial liquidity that is the lifeblood of every business. When companies need financing, private lenders can move quickly and originate directly without waiting for macro and market conditions to improve and free up financing from public sources. Recent volatility has only accelerated this trend. At the same time, private credit investors benefit from managers committing capital during credit cycles as competition for lending declines significantly, leading to more attractive lending terms and pricing.

“The advent of the private credit industry was predicated on private equity firms and the companies they buy desiring more customized credit solutions,” said Smith. “Private equity partners would come to us and say, ‘We want to accelerate growth of our portfolio company, we want to increase CapEx, we want to not pay back the loan through amortization and cash flow sweeps but instead reinvest that into the business.’ Providing flexible and patient capital allowed them to effectuate their business model for dynamic companies, and they were willing to pay a premium relative to traditional bank loans for that type of capital. All of that still holds true today, even in a more competitive environment.”

Ares deployed record amounts of capital in 2024 and through Q3 2025, even as public markets gyrated. “We’re seeing more large companies approach groups like Ares for financing,” said Smith.

One of private credit’s most important—and least understood—advantages is proactive management and control, borne of our role as self-originating lenders. “As a private creditor, you can control your downside,” explained Goldstein. “For example, we take a patient, opportunistic approach toward deploying private credit.”

“It’s not like high-yield debt or bank loans, where borrowers are in a hurry to raise capital, but have to wait several months to get it,” Goldstein said. Downside protection is also critical. “We have established rigorous, in-depth, and repeatable due-diligence processes across our investment strategies designed to identify attractive risk-adjusted return opportunities.”

In Ares’ direct lending portfolio, loans sit at roughly 45% loan-to-value on average. “We focus on structuring loans with appropriate risk/return characteristics, including economics, terms (loan-to-value, leverage, protections and covenants), and position in the capital structure,” said Smith. That makes the sponsors who hold the other 55% in equity highly motivated to work with the lender to protect their investment.

Indeed, experienced private credit managers have an extensive monitoring process that leverages deep relationships with the management of its borrowers. As the market has grown, so have competitors that don’t have the same incumbency, scale and due diligence standards as firms like Ares.

“We think manager selection is incredibly important,” said Kipp deVeer, Ares’ Co-President. “Our strategy is the same as it's been for 20 years. We're just performing at significantly more scale. We've continued to build the best origination team that allows us to see the best deal flow. That allows us to generate what we think are fewer losses and better performance over time. We do believe that as the asset class has grown larger, the advantages that we built remain very sustainable.”

LTM Realized Loss Rates Across BDCs

TTM Net Realized Loss Rate (as a % of total portfolio at cost)

The numbers bear this out: Ares’ historical annualized net realized losses in corporate direct lending have consistently run less than 1 basis point in the U.S., much lower than the annual losses in public credit markets over a 20-year period, precisely because of this control and the patience to help work through problem loans rather than being forced to sell into a distressed market.

Underpinning that, we have built in-house portfolio management and workout teams dedicated to helping leadership teams resolve issues when they arise. “If you’re an investor in public bonds, all you can do is hope and wait if a problem crops up, or sell at a loss, which accounts for the volatility in public bond markets. But a private creditor can be proactive and help create positive outcomes,” Goldstein said.

Average Equity Contributions in LBOs

(includes rollover equity)

Taking Things Global

While U.S. private credit is maturing, Europe still presents enormous growth potential.⁷ European private credit is roughly a decade behind the U.S. in development, with significantly less market penetration despite a massive need for alternative financing.

Several tailwinds are converging. “The European Central Bank has been very accommodative on rates and, generally, lower rates are good for economic activity,” said Blair Jacobson, Ares Co-President. More significantly, the Draghi Report,⁸ released in late 2024, outlined ways to make Europe more competitive internationally and urged deregulation for the first time in a meaningful way.

“From a European perspective, we’re seeing lots of opportunities there,” said Jacobson. “Private credit is less penetrated in a European context than in the U.S., and we see that penetration continuing.”

Private credit has also made significant headway into Asian markets in recent years. Corporate borrowers in the region generally lack access to broadly syndicated loans or high-yield bond markets. Historically, they have had to rely on traditional bank loans, requiring substantial collateral to back up debt. More recently, many borrowers have welcomed private credit as a compelling financing option.

“The market is smaller compared with the U.S. and even Europe, but that’s where we see real growth opportunity for private lenders,” said Jacobson. In 2026 and the near-term, Ares sees deployment opportunities for Asia-based scaled businesses looking to expand their global footprint and market share.

“There are good opportunities to take advantage of movements in the markets or fundamental or technical events that allow you to find good risk-adjusted returns in different parts of the world,” said Smith. “There's less competition and the competitors are small—they’re mostly financing companies under $100 million EBITDA, and that’s where we see premiums too.”

The Push into Private Wealth

Perhaps no aspect of private credit’s evolution matters more to individual investors than its rapid expansion into wealth management channels. Just five years ago, private credit investment was largely the domain of pension funds, sovereign wealth funds, insurance companies, and other institutional investors, with the exception of publicly traded business development companies (BDCs) like Ares Capital Corporation (ARCC). Today, U.S. financial advisors are increasingly recommending private credit funds to their high net worth and mass affluent clients—individuals with $500,000 to $3 million or more in investable assets.

The pitch to individual investors mirrors the institutional case. Public markets have become less diverse, with the bulk of value concentrated in just a few mega-cap technology names. Meanwhile, the performance of stocks and bonds, once reliably hedged against each other, is more correlated than ever. In 2022, for example, the traditional 60/40 portfolios of stocks and bonds simultaneously delivered negative returns.⁹ Investors in search of broader opportunity sets with more diverse uncorrelated outcomes have been drawn to private markets, where many of the most dynamic and innovative companies can be found today. And because private markets offer plenty of liquidity for growth, those companies often end up staying private for longer.

“Today, if you want more sophisticated portfolios with durable income and long-term performance that are uncorrelated to public markets, then you have to consider investing in private market assets, like private equity, tax-advantaged real assets, and, of course, private credit,” said Goldstein.

The newer semi-liquid private market funds designed to lower the minimum investment threshold and liquidity hurdle for individual investors have attracted a steady stream of billions of dollars in new capital into the industry, particularly into private credit. “We don’t see any signs of a slowdown in new capital from the private wealth channel. In fact, the exact opposite is expected,” said Smith.

The 401(k) Future

Further ahead, workplace retirement plans are potentially evolving to provide greater investor access to private credit. A recent executive order encouraged U.S. regulators to explore allowing 401(k) individual retirement savings plans to invest in private markets.¹⁰ After all, if defined-benefit pension plans, which typically allocate 20%–30% of their long-term portfolios to private markets, can benefit from these investments, why shouldn’t long-term defined-contribution plans for individual investors enjoy a similar type of access for their retirement portfolios?

“Since direct-contribution plans are now the primary source of individual retirement savings, we believe it is important that participants have access to the highest performing asset classes,” said Smith.

Australia offers a proof of concept: private markets comprise nearly a quarter of assets in that country’s retirement savings vehicles.¹¹

Significant hurdles remain. Plan sponsors face litigation risk under current fiduciary duty standards that emphasize cost minimization rather than net returns. More detailed regulatory changes would be required. None of this happens overnight. “We have a long way to go before 401(k) investing in private markets can become a reality,” said Smith. 2026 could bring more clarity to the roadmap, timeline, and possibilities ahead.

Expanding the Playbook

Meanwhile, opportunities abound in the private credit space to expand beyond its traditional core corporate direct lending business into even larger total addressable markets, including asset-based finance, secondaries, real estate and infrastructure debt and beyond. The market for asset-based finance—lending secured by diversified portfolios of cash flowing assets such as mortgages, corporate and consumer loans, and equipment finance—is viewed as a $28 trillion market which ranges from private assets to investment grade rated securities. Ares has also partnered with banks on Significant Risk Transfers (SRTs) and portfolio purchases, helping banks manage their balance sheets while maintaining client relationships despite regulatory constraints.

Secondary markets for private credit stakes have become particularly active.¹² More institutional investors seeking to rebalance their portfolios or gain liquidity are looking for alternative exits, and private credit asset managers can provide the capital to make those deals happen in a way that balances the priorities of existing general and limited partners as well as new investors.

Perhaps most intriguingly, the Sports, Media, and Entertainment sector has emerged as a major focus. Since 2016, professional sports team valuations have increased substantially, with low correlation to other asset classes.¹³ The major drivers? Scarcity (limited number of teams), emotional connection with a loyal fan base (consistent viewership), and the growing value of global media rights (more ways to watch from anywhere) that yield reliable long-term contractual revenues.

“Sports assets are differentiated in that there is significant value around unscripted live content, and the value of that content is only increasing,” said deVeer. Ares believes this investment theme also extends to youth and amateur sports, analytics providers, and music catalogs—all benefiting from similar demand drivers.

Banking on Regulatory Changes

Bank consolidation and de-banking trends have been going on for more than 30 years,¹⁴ and we don’t expect those to stop. Despite less burdensome Basel rules,¹⁵ banks are still looking to optimize their return-on-equity, risk-weighted assets, and capital changes. They still have to manage asset-liability mismatches and the potential for deposits to leave the system.

At Ares, we continue to demonstrate our ability to be a great partner and help banks with capital needs while maintaining their client relationships. We’ve done this through SRTs, loan portfolio purchases, sublines, and more.

Meanwhile, regulators seem focused on reducing banks’ supplementary leverage ratio reserve requirements to help them own more U.S. Treasury Bonds. They could also ease regulations on smaller banks to get capital to small businesses (not a market most private creditors target) and cut the amount of paperwork and general administrative costs involved in doing business.

A Maturing Asset Class

Going into 2026, we believe the private credit industry’s growth trajectory remains strong. Demographic trends favor income-generating assets as populations age. The structural retreat of bank lending and holding middle-market loans and certain types of assets shows no signs of reversing, despite regulatory relief. Increasingly, companies continue to look for attractive and flexible financing options, a trend that has gained momentum in the past couple of years.

Uncertainties regarding macroeconomic, monetary, and trade policies as well as geopolitical events remain. However, private credit is first and foremost a defensively positioned investment strategy. It is, in many ways, designed to thrive, especially under more challenging conditions, whether in 2026 or beyond.

Over time, we believe the private credit industry will continue to mature and thrive. It will no longer be seen as an alternative investment, but as a standard tool that helps investors of all sizes protect their capital and achieve strong returns while enabling companies to access the funding they need to grow, innovate, and improve profitability.