Private Credit vs Distressed Debt: Where Global Investors Find Scale in 2026

As global markets navigate a late-cycle environment marked by higher-for-longer rates, uneven growth, and shifting capital flows, investors are reassessing where the most attractive risk-adjusted opportunities lie within private markets. Two strategies consistently feature in these conversations: private credit/direct lending and distressed debt.

While both offer compelling return potential, the broader, more scalable opportunity set today sits firmly with private credit, with distressed strategies best approached as a targeted, higher-skill satellite allocation rather than a core exposure.

The Big Picture: Cycle Dynamics and Capital Flows

Global private credit has evolved from a niche alternative to a structural pillar of institutional portfolios. Assets under management are already estimated at USD 2–3 trillion, with projections pointing to USD 2.8–5 trillion by 2028–2029, underpinned by double-digit growth and sustained inflows from pensions, sovereign wealth funds, insurers, and family offices.

In contrast, distressed and special situations capital has been raised in anticipation of a sharp default cycle. Yet the expected “wave” of distress has been more muted than forecast, as economic growth has held up and default rates remain largely contained outside specific geographies and sectors.

The result: private credit offers depth and continuity, while distressed debt remains episodic and highly vintage-dependent.

Why Private Credit Looks Compelling Today

1. Structural Demand Meets Bank Retrenchment

Direct lending to upper-mid and mid-market borrowers continues to benefit from banks’ reduced risk appetite, driven by post-GFC regulation and ongoing balance-sheet pressures, most notably in the US and Europe. This has created a durable supply-demand imbalance that private capital is well positioned to fill.

2. Attractive Income in a Higher-Rate World

Even as policy rates begin to edge lower, base rates remain elevated relative to the past decade. This has kept all-in coupons attractive, while realized default rates in private credit have, so far, stayed below those in broadly syndicated loans and high yield, particularly when distressed exchanges are included.

3. A Broad, Global Opportunity Set

Private credit is no longer just about sponsor-backed LBO loans. Key opportunity clusters include:

• Senior secured and unitranche direct lending in the US and Europe, supported by strong documentation and financial covenants.
• GP/LP solutions, including NAV lending, preferred equity, continuation vehicles, and private credit secondaries, as demand for liquidity from both GPs and LPs rises.
• Asset-backed and speciality finance, spanning equipment leasing, trade finance, consumer credit, and niche real-asset-backed strategies, expanding the opportunity set beyond traditional corporate lending.
  
  

Together, these segments offer scale, diversification, and resilience across market conditions.

Where Distressed Debt Becomes Interesting

Distressed strategies can deliver some of the highest IRRs within private debt, often in the low-teens or better. However, these returns come with greater complexity, including legal, restructuring, and timing risk, and outcomes are highly manager-skill dependent.

Key Hotspots to Watch

• Europe, where weaker growth, lingering inflation pressures, and political uncertainty have created refinancing stress for COVID-era leveraged borrowers opening up restructuring and loan-to-own opportunities.
• Emerging markets, where volatility, reform cycles, and political risk can widen spreads despite relatively strong underlying fundamentals in select corporates and sovereign-adjacent credits.
  
  

In markets such as India, evolving insolvency and securitization frameworks through mechanisms like IBC and SARFAESIare creating a more formal pipeline of stressed and distressed assets. These developments allow private credit providers to fund turnarounds, acquire distressed loans from banks, or provide structured rescue capital.

Private Credit vs Distressed Debt: A Snapshot

Practical Positioning: An Institutional View

For global allocators, a pragmatic stance in the current environment is to:

• Anchor portfolios with private credit diversified across the US, Europe, and selective EM/Asiacombining direct lending with asset-backed and specialty finance to deliver scalable, income-driven returns.
  
  
• Add a smaller, opportunistic sleeve to distressed and special situations, focused on experienced managers in Europe and select emerging markets, to capture cyclical spikes in distress and potential upside.
  
  

This balanced approach allows investors to participate in structural growth today while retaining exposure to cyclical dislocations tomorrow.

Global Banking & Markets

At Global Banking & Markets, we sit at the intersection of capital, strategy, and market insight. We help investors, issuers, and sponsors navigate complex credit cycles across private credit, distressed assets, structured finance, and global capital markets.

Our platform combines:

• Deep market intelligence across developed and emerging markets
• Access to differentiated deal flow and structure
  
• Expertise across the full credit spectrum, from scalable direct lending to complex restructurings

Whether you are building a resilient private credit allocation, exploring distressed opportunities, or seeking strategic capital solutions in a shifting global environment, Global Banking & Markets is your partner in identifying opportunity, managing risk, and delivering long-term value.