Crescent Capital Group, sub-advisor to the Sun Life Crescent Specialty Credit Private Pool, provides their Q1 2026 outlook for the private credit non-investment grade asset class.
By: Crescent Capital Group, sub-advisor to the Sun Life Crescent Specialty Credit Private Pool
As we head deeper into 2026, the U.S. private credit market – particularly the core and lower middle market direct lending segments – continues to demonstrate resilience and relevance. In a macro environment still defined by elevated interest rates, geopolitical uncertainty and structural shifts in capital formation, private credit remains an attractive source of risk-adjusted returns. However, success will increasingly hinge on discernment, selectivity and a disciplined approach to underwriting and manager selection, in our view.
We believe the current environment plays squarely to the strengths of the private credit asset class. With base rates still elevated relative to historical standards and volatility across public markets persisting, private credit can offer investors an attractive yield premium with reduced mark-to-market risk. Core and lower middle-market strategies in particular can continue to deliver:
These structural advantages are reinforced by a market we see as continuing to favour scaled, relationship-driven lenders capable of delivering certainty of execution to financial sponsors.
After a prolonged period of dislocation and suppressed merger-and-acquisition activity, deal volumes meaningfully rebounded in the back half of 2025, and the pipeline remained active heading into 2026. A resurgence in sponsor-backed activity, driven by ample dry powder and improved valuation alignment, is fueling growth in direct lending opportunities.
However, credit quality is increasingly bifurcated. The best-in-class borrowers, those with strong recurring revenue, cash flow visibility and defensible market positions, continue to attract competitive terms. In contrast, second-tier credits are struggling to clear without structural enhancements or pricing concessions. Sector-wise, technology, health care and services remain some of the most active and attractive verticals, benefiting from secular trends such as digitization, value-based care and outsourcing.
The secular shift in capital formation toward private credit remains intact. Private equity sponsors appear to increasingly prefer the speed, certainty and flexibility of direct lenders over traditional syndicated channels, further reinforcing the strategic role private credit plays in middle-market lending.
While fundamentals remain strong, investors must navigate an increasingly complex set of macro and geopolitical risks:
Amid this uncertainty, credit managers must invest with intention and underwrite to downside scenarios, focusing on cash generative businesses with pricing power and strong sponsors capable of supporting their portfolio companies through market dislocations.
Perhaps the most important theme for 2026 is the growing dispersion across manager performance. As beta-driven strategies come under pressure, performance is increasingly being driven by manager-specific factors: sourcing depth, underwriting discipline and portfolio construction rigor.
Recent dislocations – ranging from some highly publicized, idiosyncratic defaults to increasing non-accruals and payment-in-kind (PIK) interest income in private credit portfolios – have exposed weaknesses in risk controls, underwriting discipline, loose documentation and non-sponsored lending. The era of passive credit beta is over: we believe 2026 is a stock picker’s market. In this environment, limited partners are placing greater emphasis on:
Manager selection is no longer a check-the-box exercise – it is a key driver of risk-adjusted return in today’s maturing private credit landscape.
The opportunity set in private credit remains promising, but the path forward demands differentiated sourcing, discipline, selectivity and deep credit expertise. In a market shaped by structural tailwinds but complicated by macro risk and rising dispersion, we believe success will favour those who stay grounded in fundamentals, have invested through cycles and maintain a sharp focus on risk management.
Chris Wright
President, Crescent Capital Group
Chris Wang
Managing Director, Crescent Capital Group
Sources: Bloomberg, Private Placement Monitor, 2025–6.
Commissions, trailing commissions, sales charges, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus for details before investing. Mutual funds are generally not guaranteed, their values may change frequently and past performance may not be repeated.
Information contained in this article has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy. This article may contain forward-looking statements about the economy, and markets; their future performance, strategies or prospects. The words “may,” “could,” “should,” “would,” “suspect,” “outlook,” “believe,” “plan,” “anticipate,” “estimate,” “expect,” “intend,” “forecast,” “objective” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance and are speculative in nature and cannot be relied upon. Forward-looking statements involve inherent risks and uncertainties about general economic factors, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. You are cautioned to not place undue reliance on these statements as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement. Before making any investment decisions, you are encouraged consider these and other factors carefully.
Views and market insights are based on individual author opinions. Views expressed should not be considered an indication of trading intent of any mutual funds or ETFs managed by SLGI Asset Management Inc. These views are subject to change and are not to be considered as investment advice nor should they be considered a recommendation to buy or sell. This commentary is provided for information purposes only and is not intended to provide specific individual financial, investment, tax or legal advice.
Crescent Capital Group LP is the sub-advisor for Sun Life Crescent Specialty Credit Private Pool, and an affiliate of SLGI Asset Management Inc.; SLGI Asset Management Inc. is the registered manager.
