John (JF): Private credit has evolved from a specialized financing channel into a significant component of institutional portfolios and the broader credit ecosystem. Its growth has been supported by structural shifts in bank lending, sustained demand for private financing, and the appeal of contractual cash flows and floating-rate income exposure. As the market has matured, however, the nature of the risks facing investors has become more complex. Current attention is appropriately focused on defaults, valuation practices, liquidity, and exposure to challenged sectors such as software. In the first quarter of 2026 the risks posed by AI to software/SAAS exposure in the credit markets drew considerable media attention. That attention has subsided however questions remain about the ultimate direction of the private credit markets.

For institutional investors, the key consideration is not simply the level of risk in private credit, but the extent to which conventional portfolio risk metrics are capturing those risks. Additionally, the term “private credit” is capturing a much wider opportunity set for investors today. Pete and Justin, we look forward to hearing your thoughts on the risks and opportunities currently available in private credit.

How are allocators thinking about alternatives portfolio construction, specifically in the private credit space, given all the secular shifts in the marketplace?

Pete (PM): Within alternatives, we view private credit as a broad opportunity set spanning direct lending, capital opportunities, and junior capital, with the flexibility to invest across the capital structure wherever we see attractive risk-adjusted returns. Within direct lending, our preference is for the lower-middle and core middle markets, where we believe investors can benefit from more favorable pricing, stronger covenant protections, and a broader universe of investment opportunities. By contrast, we have been more cautious in the upper-middle and upper markets, where increased competition, tighter pricing, and weaker lender protections can make the risk-return proposition less compelling.

Justin (JH): From an insurance portfolio management perspective, we take a holistic approach to private credit, starting with the returns we need to achieve while balancing the portfolio’s liability profile, regulatory requirements, and risk considerations. Private credit can play an important role in meeting these objectives, but we evaluate opportunities alongside our broader investment allocations rather than as a 2 standalone asset class. With exposures ranging from corporate direct lending to investment-grade private asset-based finance, it’s important to understand the underlying risks and how they interact with the rest of the portfolio. Different managers or investment structures don’t necessarily provide distinct risk exposures, so we focus on how each investment contributes to the portfolio’s overall risk-return profile and diversification.

Are there certain areas within the private credit space where you are seeing attractive opportunities?

PM: We continue to see compelling opportunities in the lower-middle and core middle markets, where the investment universe is broader and lenders can often negotiate stronger structural protections, including financial covenants and board observer rights. We are also finding attractive opportunities through GP seeding and anchor investments in direct lending strategies, where providing early capital commitments can allow us to negotiate differentiated economics, including reduced management fees, no carried interest, and ownership interests in the general partner. We do this with managers that we have had or have prior relationships with in other private debt strategies, so we are very familiar with the manager and comfortable with their credit process. These opportunities, combined with growing deal flow and the ability to work alongside sponsors on operational improvements, reinforce our conviction in the lower-middle market.

JH: Beyond traditional alternative investments, we continue to see attractive opportunities in private asset-based finance (ABF), where disciplined credit underwriting can provide access to additional spread premiums driven by differentiated sourcing, structural complexity, and relative illiquidity without necessarily compromising credit quality. However, we believe it’s important to evaluate each investment on its individual merits rather than make broad assumptions about the asset class. This includes assessing the underlying risks, additional economic considerations, and relative value compared with opportunities available in the public markets.

Dispersion is widening in the private investment markets. How are you thinking about manager selection? Are manager skills becoming more important than asset-class selection?

PM: As private credit has become increasingly competitive and the era of inexpensive financing has come to an end, we believe manager selection and differentiation are more important than ever. Operational experience and expertise are among the most important underwriting criteria of a manager, particularly in an environment where the ability to navigate distressed situations, restructure investments, and take control of businesses when necessary can meaningfully influence outcomes. We place significant emphasis on proprietary sourcing capabilities, disciplined underwriting based on sustainable cash flows, and strong covenant protections that provide early warning signs of credit deterioration and give lenders a meaningful voice when challenges arise.

JH: I view asset-class selection and manager selection as complementary rather than competing considerations. As dispersion widens, identifying attractive asset classes is only part of the equation, and a manag er’s ability to execute becomes increasingly important in determining investment outcomes. We focus on understanding a manager’s competitive advantage, whether it remains sustainable in the current market environment, and how effectively they navigate situations when investments don’t perform as expected. Equally important is maintaining underwriting discipline, particularly when deployment slows or managers face pressure to put capital to work.

There is a lot of focus on the interest rate environment. What are you thinking about regarding floating rate risk given the impact of rising rates on private credit?

PM: Floating-rate debt remains the predominant structure in lower-middle market and core middle market direct lending, and we emphasize the importance of incorporating interest rate floors to help protect lender returns in a declining-rate environment. While sharp increases in rates can pressure borrowers’ debt-service capacity, we believe the risk is more manageable today than during the initial transition from historically low rates, particularly given the generally lower leverage levels within our target market. Junior capital investments, by contrast, are typically fixed-rate and offer a different risk profile, reinforcing the importance of evaluating interest rate exposure across the broader private credit capital structure.

JH: We’ve seen considerable interest rate volatility and a steepening of the U.S. Treasury curve, creating additional challenges for borrowers navigating higher financing costs. This reinforces the importance of disciplined underwriting, including stress testing debt-service coverage ratios and refinancing assumptions, particularly as loans originated in the lower-rate environment of 2020 and 2021 approach maturity. From an insurance portfolio management perspective, floating-rate investments are not always a natural fit for asset-liability management, making hedging strategies and vintage diversification important considerations. Higher rates can also increase extension risk, where principal may ultimately be repaid but cash flows arrive later than anticipated, creating additional challenges for portfolio liquidity and liability matching.

How are you feeling about the public vs. private market risks and opportunities? To achieve more attractive yields, are you tending to choose liquidity risk over credit risk with the uptick in private credit allocations?

PM: We believe the additional spread available in private credit relative to public markets is particularly compelling today, especially as the growth of evergreen funds and private credit secondary markets has introduced greater flexibility for investors seeking liquidity. While liquidity remains an important consideration, we would consistently favor accepting a degree of illiquidity in exchange for attractive risk-adjusted returns rather than compromising on underlying credit quality. The continued development of private credit secondaries also provides opportunities for more tactical portfolio management within an inherently illiquid asset class, although we remain selective in evaluating these transactions and their underlying economics given some of the challenges we foresee if that market grows too aggressively.

JH: We take a holistic approach to evaluating public and private credit, recognizing that many of the same underlying risk factors can affect both markets. Rather than treating them as separate allocations, we focus on the exposures each brings to the broader portfolio and look to shift allocations as relative value opportunities emerge. While spreads have remained tight across public markets, private credit can offer a more stable spread premium and opportunities to enhance yield without necessarily moving down the credit quality spectrum. The key is ensuring that investors are adequately compensated for the additional complexity and illiquidity associated with private investments, rather than pursuing opportunities simply because they offer incremental yield.

Is there anything not being discussed more broadly in the market that has your attention?

PM: Our focus remains on the importance of manager selection and maintaining investment discipline as competition across private credit continues to intensify. With increased capital flowing into the asset class, we are particularly attentive to the potential deterioration of pricing and lender protections, and whether managers can continue to generate meaningful alpha through differentiated sourcing, underwriting, and active portfolio management. Ultimately, we believe the ability to remain flexible in terms of the broad options, disciplined, and selectivity will be increasingly important in distinguishing successful managers as the market evolves.

JH: While much of the attention on private credit has appropriately focused on rising defaults and potential credit losses, there are other risks that deserve consideration, particularly from an insurance investor’s perspective. Delays in capital deployment, slower-than-expected repayments, and the possibility of multiple anticipated liquidity events being disrupted simultaneously can create challenges for portfolio management, even when the underlying investments ultimately perform as expected. Cash flow predictability is particularly important for insurers, as changes in the timing of expected payments can affect liquidity and asset-liability management. Additionally, credit rating migration, even without an outright default, can increase regulatory capital requirements and affect overall portfolio efficiency

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