Conference Presentation, Panel
Credit Outlook | Global Conference 2025
Milken InstituteMichael Milken, Lee Kruter, Drew McKnight, Purnima Puri, James Reynolds, Christian Stracke
- Macro Shift in Credit Demand: Rising interest rates have enabled pension funds, sovereign wealth funds, insurance companies, and family offices to meet return assumptions (historically 5–7%) through high-grade and non-investment-grade corporate debt, driving a surge in capital allocation to the credit sector.
- Banking System Retrenchment: The 2023 regional bank crisis caused a fundamental shift from "originate-to-hold" to "originate-to-distribute," driven by interest rate volatility creating asset-liability mismatches on bank balance sheets.
- Lending Volume Contraction: Bank lending has collapsed in nominal terms and as a share of GDP since 2023, with regional banks significantly reducing exposure to residential mortgages, consumer loans, and equipment financing.
- Shift to Alternative Lending: While traditional loans have declined, banks are expanding into loan-on-loans, NAV lines, and subscription facilities, creating a massive opportunity for asset managers to fill the void in the credit supply chain.
- Regional Value Disparities: Goldman Sachs (James DiCarlo) notes that European private credit offers higher yields and less competition than the saturated US market, while Asia (specifically India, Japan, and Southeast Asia) is emerging as a high-growth region with limited active players.
- Portfolio Risk Mitigation: HPS (Drew) emphasizes a defensive strategy focusing on three pillars: high-quality businesses with diverse liquidity options, robust legal structuring for downside protection, and increased exposure to European markets.
- Asset-Based Credit Activity: Fortress (Drew) is actively deploying over $5 billion in asset-based credit and consumer finance, utilizing highly structured portfolios that withstand stress scenarios (2x–3x the Global Financial Crisis) while shortening duration through credit events.
- Private Equity Capital Solutions: Fortress and others are targeting private equity secondaries and capital structure solutions to provide liquidity for funds unable to exit via IPOs or M&A, anticipating a prolonged period of capital constraints for LPs.
- Valuation Extremes: GoldenTree (Lee) identifies mortgage-backed non-QM and CLO sub-tranches as undervalued assets trading at spreads in the 30th percentile despite recessionary risks, contrasting with high-yield corporate debt trading at the 75th percentile.
- Recovery Rate Focus: Investors are shifting risk analysis from default probabilities to recovery rates, as liability management transactions increasingly prevent defaults, making the zero-recovery scenario the primary risk to hedge against.
- Argentina and Latin America: PIMCO (Christian) views Latin America as a strategic opportunity, citing favorable tariff treatment from the US administration, IMF financing, and the emergence of deep local capital markets for semi-liquid and bespoke transactions.
- Non-IG Private Credit Outlook: Goldman Sachs (James) forecasts continued growth in non-investment-grade private credit, driven by a $2 trillion debt maturity wall over the next four to five years and a pivot toward hybrid capital structures for private equity-owned assets.
- Data Center Investment: The panel unanimously identifies data centers and their energy infrastructure as a trillion-dollar opportunity, with PIMCO and others investing in construction, development in Tier 2 markets, and mobile gas turbines for power generation.
- Infrastructure and Energy Transition: Investment grade credit is increasingly flowing into energy transition and digitalization, offering premiums over public markets for insurance companies seeking stable, long-term yields.
- Europe as Growth Market: GoldenTree (Lee) highlights Europe as a potential growth outperformer relative to the US due to lower energy prices, anticipated fiscal expansion in Germany, and a more accommodative ECB policy environment.
- Middle East Expansion: Fortress is preparing to enter the Gulf region, specifically Saudi Arabia, with plans to launch asset-based credit transactions aligned with Vision 2030, capitalizing on evolving rule of law and enforcement mechanisms.
- Liquidity Transformation: PIMCO (Christian) notes a radical transformation in credit market liquidity, where technology and "all-to-all" platforms allow investment-grade bonds to be traded in seconds, compared to weeks or months in the past.
- Market Scale Context: Goldman Sachs (James) contextualizes the private credit market size, noting it remains only 3% of the $26 trillion asset-based finance market and 12% of the non-investment-grade corporate market, indicating significant room for growth.
- Regulatory and Structural Risks: The panelists stress that private credit has not yet been fully tested through a major default cycle, making the infrastructure and staffing depth of investment teams (origination vs. workout capabilities) a critical due diligence factor.
- Tax Efficiency Drivers: The growth in demand for high-grade credit is being fueled by the sale of tax-free annuities (growing to hundreds of billions), which require investment-grade allocations for tax-advantaged compounding.
- Forward-Looking Structure Innovation: The panel anticipates a global spread of US-style financial engineering and capital structure knowledge, enabling new instruments to unlock value in AI infrastructure, real estate, and emerging markets.