Aegon AM: Institutional investors embrace private credit for future growth

14 november 2025

By Jord Hermanns, CFA Portfolio Manager, Jacob Vijverberg, CFA Head of Asset Allocation, Frank Meijer, Head of Alternative Fixed Income & ABS

The alternative fixed income market is changing, and private credit is at the center of this shift. 

Nowadays, private credit encompasses a broad and diverse range of private market asset classes with risk return and maturity profiles across the spectrum. The asset class has grown significantly in recent years and is expected to expand at an even faster pace in the coming period. This growth is driven by several factors - most notably the search for yield in a low-interest rate environment, diversification benefits, and impact investment opportunities.

The market faced headwinds as rising interest rates slowed deal activity. But conditions are improving. Over the next four years, private debt is forecast to grow at double-digit rates.

This outlook reflects better borrowing conditions, strong demand supported by the illiquidity premium, and attractive credit quality. In addition, interest in impact investing, particularly in Europe, is adding another layer of growth to the market.

Policy-driven investment and relative value dynamics support a positive outlook for direct lending.

Economic conditions in Europe remain challenging. Subdued growth, high energy prices, and geopolitical uncertainty continue to put pressure on small and medium-sized enterprises, which are typically more riskaverse.

Even so, there are signs of improvement in certain markets, including Spain, Greece, and Poland. The Netherlands also offers attractive opportunities, supported by a more mature market structure.

Demand for mid-cap loans has been steady in recent years, and valuations in this segment remain appealing compared to listed corporates, even in the face of tightening spreads in both Europe and the United States.

Looking ahead, several factors support a positive outlook for direct lending. European spending programs aimed at the energy transition, along with Germany’s infrastructure and defense initiatives, are expected to drive additional activity.

From a relative perspective, spreads on lower-rated investment grade and high-yield bonds remain compressed, making direct lending more attractive for investors willing to accept illiquidity, as it still offers a meaningful spread pickup.

Spreads on Dutch mortgages remain attractive and consumer fundamentals remain strong

Spreads on Dutch mortgages remain attractive and relatively stable at around 130 to 150 basis points. Dutch borrowers are currently well positioned, supporting a strong housing market. Several structural factors support this outlook: the strong financial position of the Dutch consumer, tight labor market conditions, and reduced loan-to-value ratios.

In addition, persistent housing shortages continue to underpin demand for residential property. Together, these elements provide a solid foundation for the asset class going forward.

Despite broader macro headwinds, the outlook for ABS looks stable. The asset class continues to offer both diversification and spread advantage over corporate bonds.

ABS are generally less sensitive to market volatility and shifts in sentiment compared to corporate bonds. From a fundamental perspective, consumers started the year in a relatively strong position: unemployment has been low, household net worth continues to be solid, and in Europe, savings rates are high with less uncertainty around the path of interest rates.

However, certain risks remain. Trade tariffs, if maintained, and weak economic growth in Europe could put pressure on both consumers and corporations. Corporate defaults are expected to rise toward the end of the year and maintain an upward trajectory into 2026. While some deterioration in underlying exposures of ABS and CLOs is likely, structural protections such as excess spread and subordination should help absorb potential losses.

Spreads are unlikely to tighten much further from current levels, meaning income (coupons) will likely be the main driver of returns. From a relative value perspective, ABS continues to offer attractive spreads compared to similarly rated corporate bonds

Energy transition drives infrastructure debt demand, offering broad renewable investment options and a spread pickup compared to traditional corporate credit

Infrastructure debt is gaining prominence as an asset class, supported by structural trends and government initiatives in relation to the energy transition. Governments are increasingly calling on private investors to increase their investments in infrastructure projects to finance the massive task ahead.

In Europe, both the EU and national governments have committed to the energy transition in line with the Paris climate agreement, creating a growing pipeline of renewable energy and cleantech projects. Government support takes various shapes including adaptation of rules and regulations and energy price stability through subsidy and/or CFD regimes.

The outlook for renewable infrastructure debt is also improving; While the industry faced some headwinds in recent years due to inflation and rising interest rates, we currently observe positive momentum backed by long-term fundamentals and policy support, especially in Europe and the UK.

For investors, Infrastructure debt offers a spread pickup compared to traditional corporate credit while offering unique opportunities to contribute to the energy transition in a transparent and scalable manner.

Investment opportunities are diverse, ranging from renewable energy and circular economy projects to clean transport, energy efficiency, and emerging sectors such as e-mobility, green hydrogen, and energy storage.

Emerging opportunity in fund finance

With the rapid growth in private market investment funds in recent years, a large market for fund finance has developed. Capital call finance is the largest part of the fund finance universe and targets the

financing of private market funds during the investment period. It is a very large market estimated to be around $800bn+ in size of loans outstanding, albeit to date primarily provided by banks.

Institutional investors have shown growing interest in capital call finance in recent years due to its attractive characteristics: a return of Euribor +200 basis points, strong AA/A credit profile, and short maturities - typically up to 12 months.

One key feature of capital call finance loans is the strong backing of the loans by the fund investors whose commitments to the fund are eventually drawn down to repay the capital call loan facilities. This means that even in a potential period of corrections in markets like private equity, the performance of this asset class is expected to remain stable.

Given these attractive features, capital call finance is expected to appeal to a rapidly growing number of institutional investors who can benefit from attractive spread pick up versus public markets without the need to accept additional illiquidity in the portfolio.