Alternative Credit outlook

_{Important Notice: The information has been established on the basis of data, projections, forecasts, anticipations and hypotheses which are subjective. This analysis and conclusions are the expression of an opinion, based on available data at a specific date. Due to the subjective aspect of these analyses, the effective evolution of the economic variables and values of the financial markets could be significantly different from the projections, forecast, anticipations and hypotheses which are communicated in this Material. For illustrative purposes only.}

This combination of moderate growth, stable inflation and accommodative monetary policy is particularly favourable for alternative assets.

Europe’s strategic reawakening: a structural investment opportunity

One of the most striking themes is Europe’s push towards strategic autonomy. Recent political developments have forced the region to reassess long-standing dependencies on external trade, energy imports and defence arrangements. The result is a multi-year structural transformation of the European economy.

The European Commission’s proposed 2028–2034 budget, amounting to nearly €2 trillion, reflects this ambition. Planned investments include a more than fivefold increase in defence and space spending and a doubling of infrastructure investment.

The investments, which are estimated at €750–800 billion per year, are likely to have a lasting impact on growth potential. Early evidence suggests this effect may be underestimated. Germany’s defence and infrastructure programmes alone could lift annual GDP growth by more than 1% over the coming years, with positive spillovers across France, Italy and other industrial hubs.

For investors, Europe’s transformation translates into a long-dated pipeline of opportunities across infrastructure, clean energy, defence, and technology — sectors where private capital will play a central role.

Liquidity is returning — and it matters most for credit

Liquidity conditions are improving faster than many anticipated, particularly within credit markets. Public credit performed strongly in 2025, supported by abundant liquidity and a renewed search for income. This trend is extending into private markets.

Private credit assets under management continue to grow, with dry powder levels remaining elevated even as deployment accelerates. Importantly, this expansion is not limited to corporate direct lending. Private credit now spans corporate, consumer and real-asset financing, representing an addressable universe approaching $40 trillion — comparable in size and diversity to public bond markets.

This breadth enhances diversification and positions private credit as a critical funding channel for the real economy. As banks remain constrained by capital requirements, private lenders are increasingly financing growth, M&A and infrastructure projects.

Credit markets: strong fundamentals, but rising dispersion

Despite lingering uncertainty, credit fundamentals remain solid. Default rates on leveraged loans have stayed low across the US and Europe, supported by resilient earnings and improved interest coverage ratios. That said, signs of stress are emerging.

Restructurings and distressed exchanges are rising, particularly in the US, and loan downgrades continue to outpace upgrades. Performance dispersion across sectors is increasing — a reflection of the ongoing K-shaped economy. Industries exposed to tariffs, weaker consumer demand or government spending cuts, such as retail and building materials, are under pressure.

This bifurcation underscores the importance of credit selection. Recent high-profile defaults in private credit have fuelled concerns about systemic risk, but the evidence points to idiosyncratic issues rather than structural weaknesses. Earnings data from business development companies show improving operating metrics, stable leverage and attractive income generation.

Looking ahead, private credit remains well positioned, but returns will increasingly be driven by manager skill, underwriting discipline and sector expertise rather than broad beta.

Private Equity and M&A: a gradual reawakening

After two subdued years, the outlook for Private Equity is improving. Elevated rates and macro uncertainty weighed heavily on deal activity, delaying exits and suppressing valuations. However, conditions are turning.

Central bank easing is reducing financing constraints, while private credit is increasingly capable of supporting large and complex transactions. M&A volumes in the US rebounded sharply in the second half of 2025, and Europe is following with a lag. IPO markets are also showing early signs of life.

Valuations in Europe are particularly compelling. Private Equity transactions are occurring at EBITDA multiples near ten-year lows, and the valuation gap versus the US appears excessive given the narrowing growth differential. As confidence returns, 2026 should mark a meaningful uptick in deal activity, supporting both exits and new investment opportunities.

Artificial intelligence: a capital-intensive supercycle

Artificial intelligence is reshaping not only productivity and business models, but also capital markets. Investment in AI infrastructure has surged, accounting for a substantial share of recent US GDP growth. Hyperscalers have quadrupled capital expenditure in recent years, approaching $400 billion annually, with projections suggesting nearly $3 trillion of investment over the next five years.

This scale of funding cannot be met by balance sheets alone. Public bond markets, private credit and structured financing solutions are increasingly central to funding data centres and related infrastructure. Recent mega-deals illustrate this shift, but they also highlight the importance of selectivity as issuance volumes rise and technological risks remain.

For alternative investors, AI represents both an opportunity and a test of discipline — offering exposure to long-term growth, but requiring careful structuring and risk assessment.

What could derail the outlook?

Despite a constructive baseline, risks remain. Asset valuations are elevated, equity indices are at record highs and credit spreads are tight. This leaves limited margin for disappointment. A sharp slowdown in growth, renewed inflationary pressures or a sudden rise in interest rates would challenge real assets and infrastructure in particular.

Geopolitical shocks and policy missteps also remain wildcards. In this environment, resilience will come not from avoiding risk, but from diversification, income generation and selectivity.

Portfolio implications: income, selectivity and private markets

Against this backdrop, we believe portfolios should continue to diversify by increasing exposure to private assets, particularly in sectors where growth and funding are increasingly driven by private capital. Credit remains attractive as a core allocation, offering income and downside protection in an uncertain world.