Alternative Fixed Income: Growth of Private Markets
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Article Type
Research
Topic
Alternative Fixed Income
Published
June 11, 2025
Read time
5 mins
Authors
Daniel Torres
Gertjan Medendorp
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In recent years, alternative fixed income, particularly private debt, has become an important part of institutional investor portfolios, offering pension funds and insurance companies access to high-yield opportunities in markets such as direct lending to consumers via residential mortgages or via large pools of consumer debt. With private debt assets under management (AUM) projected to reach $600 billion in Europe by 20291, this asset class is gaining traction for its unique risk-return profile and diversification benefits. In this article, we explore the key factors driving the appeal of private debt for long-term investors and the dynamics fueling its growth.

 

Private debt forecasts the largest growth in IRR within European private markets

Private debt has delivered robust historical performance, with an internal rate of return (IRR) of 7.47% from 2020 to 2023 Looking ahead, its IRR is expected to reach 11.81% by 2029, outpacing other private market strategies.2 In addition, the compound rate of growth for private credit over the last decade has been close to 14% in Europe and 18% in the United Kingdom, surpassing that of private equity and real assets.3

 

This growth reflects increasing demand from borrowers and investors,fueled by tighter bank lending standards and the need for flexible financing solutions.

 

A search for yield, diversification, and sustainability

Over the past decade, institutional investors sought higher yields in a low-interest-rate environment, turning to private debt as an alternative to traditional fixed-income assets. Even as interest rates rose and markets adapted to a "higher-for-longer" reality, private debt still poised for growth. Private debt provides access to alternative borrower groups, diversifying the fixed income portfolio further than sovereign and corporate bonds, and its diverse range of spread, risks, duration, and liquidity profiles allows for tailored strategies to meet different institutional investor needs. Private debt can also align with sustainable investing goals. It supports projects tied to the Sustainable Development Goals (SDGs) that lack access to public capital markets, offering both attractive returns and greater downside protection. Additionally, private market strategies mitigate environmental, social, and governance (ESG) risks, ensuring investments preserve value while advancing sustainability.

 

Resilience and low volatility

Compared to public credit, private credit has demonstrated greater resilience and lower price volatility. During periods of economic stress, such as the COVID-19 pandemic or monetary policy tightening cycles, private credit funds have maintained stable valuations. Part of this stability stems from the additional safety measures and credit enhancement features in the form of covenants or credit insurance/guarantees embedded within these assets.

 

Benefits for Institutional Investors

Private debt investments are particularly attractive to investors like pension funds and insurance companies.  offering diversification, a constant income stream, the opportunity for downside protection, and enhanced sustainability characteristics, private market investments can be a stable, income-generating asset for institutional investors with medium and particularly long-term liabilities. As private debt continues to reshape institutional portfolios, its appeal lies in its ability to deliver attractive risk-adjusted returns, diversification, and access to alternative risk drivers like direct lending and consumer debt. Driven by structural shifts in capital markets and investor demand for yield, private debt is poised to remain a vital component of long-term investment strategies.

 

1Preqin, 2024 “Future of Alternatives 2029
2Preqin, 2024 “Alternatives in Europe 2024
3European Central Bank, 2024 “Private markets, public risk? Financial stability
implications of alternative funding sources.

Important Information

Authors

Daniel Torres
Senior Investment Solutions Consultant

Daniel Torres is an Senior Investment Solutions Consultant in the Fixed Income, LDI and Investment Solutions team.

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Gertjan Medendorp
Investment Strategist

Gertjan Medendorp CFA, is a senior investment strategist within the Fiduciary Services & Investment Solutions team.

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