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A diversified offence in private credit as the best defence

Amid elevated uncertainty, investors are increasingly being drawn to private credit as a resilient asset class that can deliver attractive risk-adjusted returns, diversification, and income stability.
30 October 2025
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    HSBC AM – Scott McClurg

    In this interview, Scott McClurg, HSBC Asset Management’s Global Head of Private Credit highlights growing investor interest in private credit, driven by the asset class’ attractive risk-adjusted returns and diversification benefits. Direct lending and infrastructure debt are key strategies, with opportunities in lower-mid market companies and regional growth engines. For institutional investors, in particular, private credit offers benefits that warrant detailed consideration.

    Q. What do you mean by “multiple engines” within private credit?

    Scott McClurg: Amid elevated uncertainty, investors are increasingly being drawn to private credit as a resilient asset class that can deliver attractive risk-adjusted returns, diversification, and income stability. The global private credit market is projected to grow to $3 trillion by 2028, driven by lower interest rates, declining default risk and solid economic strength1.

    Investment opportunities vary across sub-asset class and region. Direct lending is the largest private credit sub-category and involves providing loans to predominantly private equity-backed companies. Direct lending offers higher yields than public credit markets (+200-300bps), driven by illiquidity premiums and customised terms. These returns are comparable to equity returns, with credit-like risk. Loans also feature floating rate structures that adjust with benchmark rates, providing an important natural hedge when rates are elevated.

    Infrastructure debt is another private credit strategy, involving financing of essential projects such as transportation, energy transition, and digitalisation. At HSBC, our approach focuses on originating, structuring, and negotiating often bespoke bilateral transactions backed by infrastructure assets that benefit from long-term cashflow visibility and resilience across the business cycle. With a focus on lower-mid-market assets in developed countries, and working with well-regarded institutions, investors can benefit from opportunities that deliver annual returns of 8-10 per cent+, with a favourable positioning in the capital structure.

    Investors can also access different regional engines of growth. For example, in the UK, Europe, and North America, the focus is renewable energy projects and digital infrastructure, driven respectively by the energy transition and growth of AI. In Asia, growing demand for transportation, urban development, and logistics infrastructure, is underpinning rapid economic growth and urbanisation.

    Q. Where do you see opportunities in direct lending?

    SM: While news headlines are full of big-name private credit deals, we believe the most attractive opportunities are in the often-overlooked lower-mid market space. These are growing companies with EBITDA of EUR 5-30 million that are often market leaders in niche sectors with loyal customer bases and proven cashflow resilience.

    There has been a liquidity shortfall in the mid-market space as some banks continue to reduce their presence. This allows investors to step in and provide tailored financing solutions to companies.

    Companies in this space are smaller and nimbler with simpler capital structures. They have largely domestic operations and customer bases, so are less affected by global factors, such as the US tariffs. Consequently, they tend to show greater resilience through economic cycles. Many small-medium size companies are also in sectors with thematic tailwinds, including healthcare, IT and software, and financial services.

    In a recent Mercer survey of 57 asset managers globally, 74 per cent of respondents indicated the lower- or mid-market contained the most attractive private debt opportunities in terms of potential risk-adjusted returns2.

    Lower-mid market deals typically face less competition among lenders, meaning deals are usually more competitive on pricing than the upper market. The ability to negotiate robust leverage and interest-coverage covenants also results in better documentary controls.

    Manager selection and selective credit due diligence are especially important in lower-mid market lending. Transactions are often relationship driven, which is where HSBC as one of the world’s largest banks excels, having access to proprietary deal flow sourced directly from the bank’s longstanding client relationships. Tight integration with HSBC Bank provides HSBC Asset Management with early visibility into financing needs across private companies and infrastructure sponsors and access to off-market transactions with attractive terms in key growth markets.

    Q. How does a “diversified offence” look for private credit in 2025 and beyond? How can correlation risk across the different private credit 'engines' be managed?

    SM: Diversification is paramount for institutional investors when accessing private credit. Intra-asset class diversification balances the higher-risk, higher-reward profile of direct lending with the more defensive attributes of infrastructure debt.

    Diversification across sectors and geographies can also mitigate correlation risk. At HSBC, we have launched direct lending strategies in UK and Europe, with Asia and US expansion in development, enabling clients to access different regional return drivers and sources of diversification. Incorporating assets with varying maturities and credit qualities can further enhance portfolio resilience and support consistent income generation.

    Importantly, a private credit allocation can provide diversification within a wider portfolio of stocks and bonds due to low correlation to public markets. Direct lending exhibits lower mark-to-market volatility as loans are typically held to maturity. It also offers downside protection through covenants, collateral, and close borrower relationships.

    Regular stress testing and scenario analysis are vital tools in assessing potential correlation impacts. These analyses allow us to simulate adverse market conditions and evaluate how different assets might behave.

    Furthermore, at HSBC, we maintain a robust risk management framework, including continuous monitoring of asset correlations. By staying informed, we can swiftly adapt our approach to changing conditions.

    Q. Where do you see interest for private credit?

    SM: The surge in interest in private credit in recent years has been driven primarily by institutional investors seeking higher yields than public fixed income returns (c200-400bps), driven by an illiquidity premium that long-term investors can harvest.

    For pension funds, endowments and family offices, private credit’s diversification benefits and resilience are also attractive. Private credit historical loss rates are lower than leveraged loans during crises such as the COVID pandemic3.

    For insurers, certain private credit strategies, including investment grade infrastructure debt and senior secured loans can qualify for lower Solvency Capital Requirements arising from lower volatility and strong covenants. Furthermore, infrastructure debt and certain direct lending deals offer longer-term fixed or inflation-linked cashflows that provide good liability matching. Under the Solvency II Matching Adjustment mechanism, insurers can recognise part of the illiquidity premium in their discount rate, boosting return-on-capital ratios.

    The rise of semi-liquid evergreen funds is further enhancing private credit’s appeal among both institutional and non-institutional investors by offering (among other things) improved liquidity and continuous capital deployment.

    Note:
    1. Private Credit 2025
    2. Private Markets in Motion
    3. Private Credit Market: 2024 Outlook & Opportunities | Morgan Stanley
    Information/analysis provided is by HSBC Asset Management

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