What are the key takeaways from this All the Credit episode?

Key insights include: **Private Credit Growth Asymmetry:** High yield bond markets have remained flat or slightly smaller over the past decade, while private credit markets have expanded to three and a half times their previous size. This shift requires moving away from siloed allocation approaches toward integrated public-private portfolio management that treats credit as a continuum rather than binary categories, enabling more levers for alpha generation.; **Illiquidity Premium Framework:** The illiquidity premium is not a static 150 basis points but varies based on total portfolio composition. Moving from zero to one percent private allocation requires different premium considerations than moving from 99 to 100 percent. The premium matters most in below investment grade corporate credit and asset-based finance, where structural differences and collateral subordination provide better diversification than comparing similar public and private companies.; **Volatility Mapping Methodology:** Private assets create artificially high Sharpe ratios due to stale pricing and lack of secondary market trading. PGIM maps private investment grade corporates to triple-B public indices and uses listed BDC structures as gateways to understand true private asset volatility. This prevents optimizers from incorrectly allocating 100 percent to assets with understated volatility, creating more honest portfolio construction.

What did Greg Peters and Tom Mccartan discuss on All the Credit?

PGIM's Greg Peters and Tom McCartan explain how to construct portfolios combining public and private credit assets. They address challenges in valuation, liquidity assessment, and asset allocation frameworks. The discussion covers illiquidity premiums, volatility measurement issues, and why private credit markets have grown three and a half times larger while high yield bonds remain unchanged over the past decade. Key topics include: **Private Credit Growth Asymmetry:** High yield bond markets have remained flat or slightly smaller over the past decade, while private credit markets have expanded to three and a half times their previous size. This shift requires moving away from siloed allocation approaches toward integrated public-private portfolio management that treats credit as a continuum rather than binary categories, enabling more levers for alpha generation.; **Illiquidity Premium Framework:** The illiquidity premium is not a static 150 basis points but varies based on total portfolio composition. Moving from zero to one percent private allocation requires different premium considerations than moving from 99 to 100 percent. The premium matters most in below investment grade corporate credit and asset-based finance, where structural differences and collateral subordination provide better diversification than comparing similar public and private companies..

How long is this episode of All the Credit?

This episode is 31 minutes long. SignalCast provides an AI-generated summary so you can get the key insights in about 3 minutes.

All the Credit

Credit Markets in Transition: Public–Private Credit Portfolios

February 5, 2026

31 min episode · 2 min read

Greg Peters,Tom Mccartan

Episode

31 min

Read time

2 min

Topics

Investing, Fundraising & VC, Leadership

AI-Generated Summary

Published Feb 8, 2026

Key Takeaways

✓Private Credit Growth Asymmetry: High yield bond markets have remained flat or slightly smaller over the past decade, while private credit markets have expanded to three and a half times their previous size. This shift requires moving away from siloed allocation approaches toward integrated public-private portfolio management that treats credit as a continuum rather than binary categories, enabling more levers for alpha generation.
✓Illiquidity Premium Framework: The illiquidity premium is not a static 150 basis points but varies based on total portfolio composition. Moving from zero to one percent private allocation requires different premium considerations than moving from 99 to 100 percent. The premium matters most in below investment grade corporate credit and asset-based finance, where structural differences and collateral subordination provide better diversification than comparing similar public and private companies.
✓Volatility Mapping Methodology: Private assets create artificially high Sharpe ratios due to stale pricing and lack of secondary market trading. PGIM maps private investment grade corporates to triple-B public indices and uses listed BDC structures as gateways to understand true private asset volatility. This prevents optimizers from incorrectly allocating 100 percent to assets with understated volatility, creating more honest portfolio construction.
✓Three-by-Three Asset Allocation Matrix: Portfolio construction uses a framework with three levels each of illiquidity tolerance and risk tolerance. Low liquidity needs with high risk tolerance can support up to 70 percent private allocation. Investment grade portfolios sit at low risk, fully below investment grade at high risk, with blended approaches in between. This customized framework incorporates client liability needs rather than generic mean-variance optimization.
✓Cash Flow Self-Liquidation Advantage: Private credit generates continuous liquidity through amortizations, prepayments, coupons, and maturities, unlike private equity which locks capital without cash flow. This self-liquidating nature enables tactical rebalancing and offsets the J-curve effect by allowing public market positions to replicate risk during private investment ramp periods. The dynamic cash generation provides more flexibility than investors typically perceive when comparing private credit to private equity.

What It Covers

PGIM's Greg Peters and Tom McCartan explain how to construct portfolios combining public and private credit assets. They address challenges in valuation, liquidity assessment, and asset allocation frameworks. The discussion covers illiquidity premiums, volatility measurement issues, and why private credit markets have grown three and a half times larger while high yield bonds remain unchanged over the past decade.

Key Questions Answered

•Private Credit Growth Asymmetry: High yield bond markets have remained flat or slightly smaller over the past decade, while private credit markets have expanded to three and a half times their previous size. This shift requires moving away from siloed allocation approaches toward integrated public-private portfolio management that treats credit as a continuum rather than binary categories, enabling more levers for alpha generation.
•Illiquidity Premium Framework: The illiquidity premium is not a static 150 basis points but varies based on total portfolio composition. Moving from zero to one percent private allocation requires different premium considerations than moving from 99 to 100 percent. The premium matters most in below investment grade corporate credit and asset-based finance, where structural differences and collateral subordination provide better diversification than comparing similar public and private companies.
•Volatility Mapping Methodology: Private assets create artificially high Sharpe ratios due to stale pricing and lack of secondary market trading. PGIM maps private investment grade corporates to triple-B public indices and uses listed BDC structures as gateways to understand true private asset volatility. This prevents optimizers from incorrectly allocating 100 percent to assets with understated volatility, creating more honest portfolio construction.
•Three-by-Three Asset Allocation Matrix: Portfolio construction uses a framework with three levels each of illiquidity tolerance and risk tolerance. Low liquidity needs with high risk tolerance can support up to 70 percent private allocation. Investment grade portfolios sit at low risk, fully below investment grade at high risk, with blended approaches in between. This customized framework incorporates client liability needs rather than generic mean-variance optimization.
•Cash Flow Self-Liquidation Advantage: Private credit generates continuous liquidity through amortizations, prepayments, coupons, and maturities, unlike private equity which locks capital without cash flow. This self-liquidating nature enables tactical rebalancing and offsets the J-curve effect by allowing public market positions to replicate risk during private investment ramp periods. The dynamic cash generation provides more flexibility than investors typically perceive when comparing private credit to private equity.

Notable Moment

Peters uses the Schrodinger's cat analogy to describe how increased secondary market trading in private credit will force convergence between perceived and actual risk-return profiles, similar to how bank loans evolved from niche to core credit markets 25 years ago. The opening of price discovery may reveal mismatches between current valuations and true market risk assessments.

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Episode Transcript

You're listening to All the Credit, a monthly podcast series brought to you by PGIM, an active global investment manager. Welcome to All the Credit. I'm Brian Barnhurst, global head of credit research, PGIM public fixed income. The growth scale and sophistication of private corporate and securitized credit asset classes has necessitated an evolution in approach to construction and management of multi asset portfolios. We've highlighted this topic in recent podcasts on asset based finance and direct lending to name a few, and now take a deeper look at how private instruments can enhance multi asset portfolio characteristics and outcomes. I'm very fortunate to be joined by co chief investment officer and head of multi sector investment, Greg Peters, and senior multi sector portfolio manager, Tom McCartan. Greg, Tom, excited to have you on the podcast. Thanks. Great to be here. Thanks for having me, Brian. Compared with only a few years ago, fixed income investors now have far more options and access to private corporate and securitized credit. Naturally, investors are increasingly asking, how do we combine and optimize liquidity, yield, return, and durability within a single portfolio? Greg? Thanks, Brian. That would zoom out first. So there's been tremendous growth in the credit markets the past ten years, but the growth has been really on the private side, not the public side. As an example, you look at the high yield bond market, it's virtually unchanged, actually a little smaller over the past decade. At the same time, private credit is three and a half times larger. Right? So that's where the credit is in the overall system. And the way investors have kind of prosecuted that opportunity was very much in a set allocation siloed approach. And so if you wanted access to, let's say, middle market direct lending, you would have a middle market direct lending fund, and that allocation was set. I think the world is rapidly shifting into this multidimensional, multi asset realm where publics and privates will be managed together. And we think of it less of a binary public private demarcation and more of a continuum. And so what we're doing and what we're looking to do is to build portfolios that incorporate both public credit and private credit and optimize around that. We think it leads to better outcomes, more levers to pull, and ultimately higher alpha. It's one of the more interesting topics to discuss internally, Tom. It also aligns with the way in which we're calibrated around relative value and risk considerations. I think that's right, Brian. If you think about what Greg was talking about there and in terms of combining these different opportunities into single portfolios, it's naturally leading you into an asset allocation framework. And once you do that, that's gonna be an exercise in trying to compare these different assets on a relative value basis. And therein, the challenges start to emerge because the big differences in the public and private asset classes is that …

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