23 Jul 2025
From the Field By Richard Coghlan, Ph.D. , David Clewell, CFA®
Key Insights
In an uncertain environment, multi‑asset (MA) solutions are well‑suited for investors seeking capital growth, downside risk management and a steady income. However, the investment landscape in 2025 appears particularly tricky, with elevated trade and geopolitical tensions, macroeconomic risks, and unease about rising global debt. This confluence of factors could potentially cause typical cross‑asset class correlations to break down.
Against this backdrop, as MA investors we are casting a wider net, seeking to augment our positioning in traditional equity and fixed income with alternative investments to help manage volatility, enhance diversification and potentially improve risk‑adjusted returns. In particular, we have begun allocating to private credit, given the potential to capture attractive yields and gain exposure to unique companies not found in public markets. In the rest of this article, we delve deeper into why and how we integrate private credit into a global income‑focused MA portfolio focused on investors seeking daily liquidity.
Private credit primarily refers to non‑bank entities providing loans to private businesses. It developed as a financing solution for companies viewed as either too risky for commercial banks, or too small to tap the public markets. Private debt markets took off after the 2008 Global Financial Crisis as banking industry reforms resulted in many commercial lenders reducing their exposure to riskier borrowers. As of June 2024, assets under management within private credit vehicles amounted to over US$1.3 trillion1 (Figure 1).
Private credit market has grown
(Fig. 1) Assets under management at private credit vehicles
Source: Preqin and BDC Collateral via LSEG.
*Data for 2024 are as of Q2.
Investors with varied liquidity, regulatory and time horizon needs can choose from a number of different vehicles to gain exposure to private credit. The classic way is via limited partnership (LP) funds, but these tend to involve substantial capital commitments, long lock‑up periods, and are usually restricted to institutional or accredited investors. Investors can also gain exposure through business development companies (BDCs), which invest in debt or equity of privately held small and medium‑sized enterprises and then distribute the interest earned on their loans back to shareholders as dividends (Figure 2). BDCs may be publicly traded on stock exchanges, or non‑traded, which offer only limited liquidity as valuations are determined periodically (often quarterly), while investors may only be able to redeem their shares at specific times.
BDCs focus on private small and mid-sized companies
(Fig. 2) How BDCs work
The popularity of private credit increased amid growing appetite for alternative solutions with the potential for more attractive yields. Similar to traditional fixed income instruments, such as government and corporate bonds, private credit investors receive regular coupon payments, but the income on offer is usually higher to compensate for liquidity risks and additional complexity of private investments. Further, private credit is usually at or near the top of a company’s capital structure, giving investors better protection in times of market stress.
Allocating to private credit also provides additional diversification by expanding the opportunity set. Investors can gain exposure to companies with exciting prospects that may not be available in public markets.
Naturally, liquidity is a key concern for private credit investors, given the lack of a secondary market. In addition, private credit often involves lending to smaller businesses with lower credit ratings and a higher risk of default, especially during economic downturns. However, the risk is mitigated by the flexibility of private credit agreements as borrowers in distressed situations can work out arrangements with lenders to avoid default. Innovative provisions, such as payment‑in‑kind bonds, can be used to help companies work through near‑term challenges and regain long‑term operating strength.
As mentioned above, investors have various options for private credit exposure. But for a flexible MA strategy, we think listed business development companies (BDCs) represent the ideal vehicle, particularly for a portfolio with a focus on sustainable income generation and managing drawdowns.
In our view, there are several major benefits of taking exposure to private credit via listed BDCs:
1. High income: A major attraction of BDCs is their high dividend payouts (Figure 3), which have ranged between 8% and 20% over the last decade.2 This feature makes them an appealing option for income‑focused investors. Moreover, frequent payouts also distinguish BDCs from private equity or private credit under LP funds, which may not provide regular distributions.3
Allocating to private credit can enhance portfolio yield
(Fig. 3) Asset class yield
Past performance is no guarantee or a reliable indicator of future results. Source: Bloomberg L.P. Analysis by T. Rowe Price. *Dividend 12 Month Yield – Gross; **Yield to Worst; ^Mid Price. Private Credit refers to S&P Business Development Companies Index; Global High Yield Bonds refers to Bloomberg Global High Yield Index; Cash refers to U.S. Treasury Yield Curve Rate Treasury Note Constant Maturity 3 Month; Global Investment Grade Bonds refers to Bloomberg Global Aggregate - Corporate Index; Global REITs refers to FTSE EPRA Nareit Developed Index; High Dividend Equity refers to MSCI ACWI High Dividend Yield Index; Global Government Bonds refers to Bloomberg Global Aggregate Government - Treasuries Index; Option Writing refers to the MSCI ACWI Net Total Returns USD Index; Global Growth Equity refers to MSCI World Index Growth Index.
BDCs are not without risk. Being publicly traded means listed BDCs may be more sensitive to economic conditions, market volatility, and investor sentiment, especially relative to traditional private credit. Similar to private credit more broadly, credit risk is another concern. A BDC is only as strong as its underlying assets and underperformance of any of these businesses could result in substantial losses for investors.
Therefore, we believe that a selective, bottom‑up approach is essential for listed BDCs. Hence, when choosing BDCs, we focus on credit quality and quality of management, aiming to exclude entities that we think are likely to struggle growing their loan book or maintaining appropriate lending standards. Consistent with our collaborative investment culture, we discuss the allocations with our equity and fixed income analysts, who have coverage responsibilities of specific BDCs and experience within the industry.
We complement security selection with our dynamic strategic asset allocation approach. Here, the ability to easily buy and sell shares of listed BDCs is helpful as it allows us to tactically adjust allocation levels based on our expectations for market conditions and the evolving business cycle. For instance, we expect to reduce our exposure as we get closer to a recession (Figure 4).
Alternative income allocation can be reduced in volatile markets
(Fig. 4) Illustrative allocation to private credit through the business cycle
For illustrative purposes only. It does not reflect the actual returns of any portfolio/strategy and does not guarantee future results.
We view investing in listed BDCs as similar with buying real estate investment trusts (REITs)4 for real estate.
Nonetheless, BDCs often extend financing to a wide range of companies across sectors, in contrast to REITs’ exclusive focus on property assets. This not only improves diversification to manage risks, but also opens up opportunities for capital appreciation through exposure to companies operating in higher‑growth areas and industries.
Today, we believe there are compelling reasons for accessing private credit via listed BDCs within MA portfolios for income‑seeking investors with daily liquidity requirements. These assets provide a MA income portfolio with exposure to attractive opportunities in the private credit market, while adding a further layer of diversification beyond public stocks and bonds. Listed BDCs offer similar benefits to traditional private credit, but in a much more liquid form. Attractive dividend yields and regular payouts may make it a good option for income‑focused investors. Although investors still need to watch for market, credit and interest rate risks, this underpins our belief in the importance of combining careful bottom‑up credit selection with thoughtful asset allocation.
1 Source: U.S. Federal Reserve, Bank Lending to Private Credit: Size, Characteristics, and Financial Stability Implications (https://www.federalreserve.gov/econres/notes/feds‑notes/bank‑lending‑to‑private‑credit‑size‑characteristics‑and‑financial‑stability‑implications‑20250523.html).
2 Source: Bloomberg. Based on historical dividend yield of BDCs over the past 10 years.
3 Distribution payments from a BDC are not guaranteed. The issuer may pay distributions from the sale of assets, offering proceeds, or borrowings.
4 Real estate investment trusts (REITs) is a company that owns, finances, or manages a portfolio of income-generating real estate, allowing investors to earn dividends from real estate without having to physically buy or manage properties.
Additional Disclosures
CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.
Risks Disclosure
Some or all alternative investments may not be suitable for certain investors. Alternative investments are typically speculative and involve a substantial degree of risk. In addition, the fees and expenses charged may be higher than the fees and expenses of other investment alternatives, which will reduce profits. As interest rates rise, bond prices generally fall. Diversification cannot assure a profit or protect against loss in a declining market.
A business development company (“BDC”) is a special closed-end investment vehicle that is regulated under the 1940 Act and used to facilitate capital formation by smaller U.S. companies. BDCs are subject to certain restrictions applicable to investment companies under the 1940 Act. BDCs must have at least 70% of its assets in the type of “qualifying” assets listed in Section 55(a) of the 1940 Act, which are generally privately-offered securities issued by U.S. private companies or U.S. publicly-traded companies with market capitalizations less than $250 million. BDCs may also invest up to 30% of its portfolio in “non-qualifying” portfolio investments, such as investments in non-U.S. companies. BDCs may be exchange-traded, public non-traded or privately placed. investments are illiquid and there are restrictions on withdrawal. An investment in a non-exchange traded BDC is suitable only for certain sophisticated investors that have no need for immediate liquidity in respect of their investment and who can accept the risks associated with investing in illiquid investments. a non-traded BDC’s shares are illiquid investments for which there is not a secondary market. Liquidity for these shares will be limited to participation in the non-traded BDC’s share repurchase program, which it has no obligation to maintain.
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