Alternative credit: Diversifying the drivers of risk and return

The alternative credit universe has grown dramatically in recent years. For institutional investors in Apac, this expansion represents genuine opportunity, but also increasing complexity.

The challenge lies in understanding the distinct risk and return drivers across a wide range of asset classes, and constructing portfolios that diversify risk. This is the focus for global institutional investors, with 46% prioritising diversification within alternative credit over the next five years, according to Nuveen’s 2026 EQuilibrium survey.

Portfolios heavily concentrated in buyout-backed lending, for example, have been exposed to a single disruption: the potential impact of AI on software businesses. This is the type of risk accumulation that diversification is designed to prevent.

As investors examine their credit allocations, three asset classes stand out for Apac allocators seeking durable, well-diversified exposure: direct lending across the US and Europe; energy infrastructure credit (EIC); and real estate debt.

Direct lending: quality and diversification over concentration

Volatility picked up in the first half of 2026 amid growing concerns around AI disruption in software and rising geopolitical tensions. Uncertainty will likely remain a feature for the rest of the year as investors navigate the US midterm elections and a maturing economic cycle. In this environment, an allocation to direct lending can enhance risk-adjusted returns and provide attractive yields, while delivering diversification that works both within a portfolio and across it.

Within the portfolio, concentration risk can come in many forms: industry, sponsor, position size and geography. While AI’s growth and its disruption potential for disruption has caught investor attention today, it could be a different sector or industry group tomorrow. That is why avoiding concentrated positions in any single sector or borrower is crucial.

This is where the US core middle market (companies with $10 to $100 million of EBITDA) can offer a structural advantage. As the largest segment among private companies, it represents the widest and most diverse opportunity set.

In Europe, the market benefits from long-term structural growth drivers, including the retrenchment of traditional bank lending and sustained institutional demand for floating-rate income. Allocations to European and multi-regional private credit strategies increased materially in 2025 and are expected to keep growing, as investors value the diversification benefits of European exposure¹, including differentiated sector composition and economic drivers relative to other markets.

Allocations to European and multi-regional strategies are increasing

Energy infrastructure credit: a structurally different profile

Infrastructure debt offers a structurally different profile from direct lending. It is backed by physical, essential assets, with contracted cash flows, low historical default and loss rates and different correlations to broader equity and corporate debt indices.²

The capital requirements for energy and digital infrastructure have expanded dramatically. Global data centre capital expenditure is projected to reach $6.4 trillion in cumulative spending over the next five years, driven by hyperscaler buildouts supporting AI workloads.³

Across the renewables, conventional power, traditional energy and digital sectors, private debt investment has surged from an annualised average of approximately $150 billion between 2018 and 2024, to over $410 billion across 2025 and 2026. Approximately $755 billion in private debt is maturing across these sectors over the next six years, creating a significant wave of refinancing demand.⁴

Consensus expects hyperscaler capex to accelerate ($ billions, % year-on-year growth)

Energy infrastructure credit continues to fund at spreads in excess of 500 to 600 basis points, with first-lien security and strong structural protections. The illiquidity and complexity premiums available to disciplined underwriters has not decreased in step with public markets.⁵

Real estate debt: global diversification for resilient income

A globally diversified commercial real estate debt strategy can improve portfolio resilience and enhance returns by applying the most appropriate leverage based on underlying risk, rather than applying a uniform approach across regions.

In the US, investors benefit from lower execution risk, allowing prudent use of leverage to enhance returns. Australia’s relatively nascent non-bank lender market offers attractive development lending where stronger underlying returns reduce reliance on leverage. Europe offers a specific focus on ‘brown-to-green’ strategies that modernise and increase the energy efficiency of existing properties.

Together, these complementary regional strategies create a cohesive and compelling global investment opportunity, according to Nuveen Real Estate research.

Explore the research. The different forms of alternative credit offer investors exposure to a variety of return drivers and risks. Understanding these is crucial to creating diversified portfolios and improving chances of achieving long-term investment objectives. Nuveen’s latest Alternative Credit Insights discusses the differences within the opportunity set. Read the full report at nuveen.com/alternativecredit

_{Sources - 
1 - With Intelligence; Global Private Credit Outlook 2026.
2 - Moody’s Investor Services, S&P Global.
3 - With Intelligence; Global Private Credit Outlook 2026.
4 - InfraLogic
5 - Based on Nuveen investments}

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