Private credit: Attractive risk-adjusted return potential in the new year

The private credit market continued to grow in 2025 and delivered strong returns. Can investors expect more of the same in 2026? We asked our experts for their outlooks in three key areas of the private credit market: senior secured loans and collateralized loan obligations, direct lending, and distressed credit and special situations. One thing they all had in common: They see the potential for compelling risk-adjusted returns. 

SSLs and CLOs: A compelling case for loans in 2026

Kevin Egan, Senior Portfolio Manager and Co-Head of Credit Research, and
Michael Craig, Senior Portfolio Manager and Head of European Senior Loans 

We anticipate another year of above-average returns in the broadly syndicated loan market. Like our Strategy & Insights team in their 2026 Annual Investment Outlook, we broadly see a benign risk environment, declining inflation, and a US pivot in monetary policy toward lower interest rates. Historically, loans have retained investor capital well during easing cycles — excluding exogenous shocks like COVID — highlighting their value as a core holding across market environments. Lower rates are expected to reduce issuer interest expense, strengthening fundamentals and mitigating default risk. Even if policy rates decline to the current terminal rate expectation of approximately 3% US and 2% EU, we anticipate loan coupons would remain above historical averages, preserving income potential.

The broadly syndicated loan market has absorbed tariff-related volatility with limited stress, and investors continue to rotate into high-quality, defensive credits. While isolated defaults underscore the importance of credit selection, they appear idiosyncratic rather than systemic. Despite short-term outflows, investor appetite remains intact, and our loan outlook is constructive. Overall, we believe loans could remain a compelling source of steady income and attractive risk-adjusted returns in 2026.

Direct lending:  Federal Reserve rate cuts could revive deal momentum

Ron Kantowitz, Managing Director, Invesco Senior Secured Management

The direct lending market will enter 2026 with cautious optimism. Despite muted transaction volume in in 2025, all-in yields remain attractive, particularly in the core middle market. A persistent gap between buyer and seller expectations, amplified by macroeconomic uncertainty, continued to suppress new sponsor-backed deals. However, refinancing activity, add-on acquisitions, and incremental capital deployments provided steady deal flow. Looking ahead, potential rate cuts from the Federal Reserve could lower borrowing costs and revive deal momentum. 

With significant private equity dry powder and a backlog of portfolio companies poised for exit, we anticipate a meaningful uptick in transaction volume once markets stabilize. 

As clarity improves around interest rates, recession risk, and global tensions, direct lending is well-positioned to capitalize on renewed sponsor activity and deliver compelling risk-adjusted returns.

Distressed credit and special situations: A broader opportunity set

Paul Triggiani, Head of Distressed Credit and Special Situations

Persistent global macroeconomic uncertainty, shifting US fiscal and monetary policy, and early signs of volatility in stressed credit markets suggest that 2026 will bring a broader set of opportunities in special situations investing. We are seeing growing interest in new money and super-senior transactions, often tied to amendments and extensions of existing credit agreements. Capital solutions deals are also increasing in both volume and quality — largely driven by longer private equity holding periods and persistently high base rates. We expect continued growth in these liquidity- and performance-enhancing structures throughout 2026. 

Meanwhile, stress is emerging in loans trading below par. While par credit remains well bid, pressure is building in specific sectors and issuers due to both macro and company-specific factors. These dynamics are likely to persist and, in our view, can offer attractive risk-adjusted return potential for investors in this space.

Private credit investment strategies

Invesco Private Credit is one of the world’s largest and longest-tenured private credit managers, catering to a wide range of client objectives and risk tolerances.

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