While private credit has surged in popularity, the investment grade corner of the market is quietly transforming how institutions invest — offering stable returns, complex deal structures, and growing opportunities across sectors like renewables and digital infrastructure.
Private credit has grown dramatically in recent years, evolving far beyond its direct lending roots. In a recent episode of the ABF Journal podcast, Editor-in-Chief Rita Garwood spoke with Ed Wood and Ross McAdam of (L&G) Asset Management. The discussion explored what’s fueling the growth of investment grade private credit, why it remains underappreciated by many, and how it’s reshaping institutional portfolios globally.
Rita Garwood: What drove the explosive growth of private credit over the last 15+-plus years?
Ed Wood: Post-GFC and post-Basel III, banks pulled back from lending—especially leveraged loans and direct lending. This opened the door for institutions to step in. Private credit players brought more flexible financial structures than banks typically offered. This growth was further fueled by insurers and pension funds seeking long-duration, tailored investments.
Ross McAdam: Exactly. We’ve also seen more “bank-like” assets being financed privately as banks move to asset-light models, focusing on advisory and distribution. Our clients are stepping into these safer, more structured spaces with enhanced yield.
Garwood: Is investment grade private credit still under the radar?
Wood: It might seem that way to some, but not within the insurance world. It’s in high demand there—especially among U.S. life insurers, foreign insurers, and reinsurance firms. Where it’s growing fast is with fully-funded pension plans seeking stable, low-risk returns.
McAdam: It’s not that it’s unknown; it’s just not a fit for everyone. High-net-worth investors and underfunded pensions are chasing higher yields elsewhere. But for capital-regulated investors, the risk-adjusted return in this space is compelling.
Garwood : Who issues in the private investment grade market, and why?
Wood: There are three primary issuer types:
- Privately held companies – They want confidentiality and can’t access the public bond markets.
- Foreign companies – Especially those raising USD without SEC filing status.
- Public issuers – Those wanting bespoke deals (e.g., small sizes, unusual structures) not suited to public markets.
The public bond market excels at scale. But for nuanced or complex deals, it becomes inefficient—making private credit more attractive.
Garwood: What is the “complexity premium,” and how does it differ from a liquidity premium?
Wood: We prefer the term “complexity premium.” These deals require time, structuring, and expertise—whether it’s a project finance structure or asset-backed security. We’re compensated for that work, not just the perceived illiquidity.
McAdam: Right. In fact, some deals end up with similar risk profiles to public market instruments, but we earn 60–80 basis points more just for doing the work public investors can’t or won’t do.
Garwood: How did the Silicon Valley Bank collapse affect the landscape?
McAdam: It’s part of a longer trend: banks have limited capacity to lend due to regulatory changes. They’re still active—but more selectively, often partnering with institutions like us to distribute risk or offload assets.
Wood: We’re also seeing more direct partnerships with banks—not just intermediated deals, but helping them manage balance sheet risk directly.
Garwood: How do investors assess risk in IG private credit vs. public bonds?
McAdam: Most private IG investments are rated, giving us a baseline. But ratings don’t cover everything. We apply our own views—especially on issues like regulatory or geopolitical risk. That extra diligence is part of our value-add.
Wood: And for insurers, ratings matter for capital charges. So we think in terms of capital-adjusted return. Also, private deals often come with more transparency and direct access to management than public bonds.
Garwood: How important are covenant packages in downside protection?
McAdam: Crucial. They give us a seat at the table when performance deteriorates, allowing for renegotiation or structure changes. They’re essential for protecting capital and potentially enhancing returns.
Wood: They also make borderline investment-grade credits more attractive by helping manage risk of downgrade. Strong covenants can change the entire risk-return view.
Garwood: How is IG private credit supporting the global industrial renaissance—like AI infrastructure and renewables?
McAdam: It’s been happening for over a decade. In Europe, we financed solar and offshore wind early on. Now in the U.S., private credit is backing long-dated digital infrastructure projects like data centers and fiber.
We’re seeing securitizations backed by these assets and more project finance solutions. The demand is high, and insurance capital is well-suited to support it.
Garwood: Where do you see the most exciting growth in non-traditional IG private credit?
McAdam: Alternative asset-backed securities and fund finance. We’re seeing music royalties, structured settlements, digital infra, and more. Fund finance is evolving too—offering solutions to private equity sponsors and insurers alike.
Wood: It’s cyclical. Ten to twenty years ago, the innovation was in project finance for LNG, gas, renewables. Now it’s alternatives. The market constantly finds new areas to expand into.
Garwood: Will private credit become a mainstream allocation across portfolios?
Wood: For insurers, it already is. Pension funds are next. Retail access is limited by regulation, so for now it remains institutional. It’s growing, but will probably always have a defined niche because of its return profile.
Garwood: If you had to bust one myth about private credit, what would it be?
Wood: That all private credit is the same. People think “private credit” means leveraged, risky direct lending. But investment grade private credit is a completely different animal—lower losses, strong covenants, and long-term stability.
Garwood: Final thoughts?
McAdam: It’s a space where we can deliver real value—especially on a risk-adjusted basis.
Wood: It’s constantly evolving. That keeps it interesting and full of opportunity, both for investors and for us as asset managers.