Private credit beyond the headlines: the case for investment-grade exposure
Much of today’s private credit debate centers on sub-investment-grade middle-market lending. The State Street Public & Private Credit ETF suite is designed to access a different part of the market through investment-grade corporate finance and asset-backed finance.
Private credit has become an increasingly important part of the fixed income landscape as companies and asset owners seek financing solutions that public markets are not always designed to provide. As the market has grown, so too has investor focus on the fundamentals that ultimately determine credit outcomes, including leverage, cash-flow durability, collateral, structural protections, and sources of repayment. Those considerations matter across private credit, but they can look very different depending on the underlying borrower, asset, and financing structure.
Recent headlines have focused on leverage, refinancing risk, and a small portion of the private credit market: sponsor-backed middle-market direct lending. These loans are commonly made to smaller, less mature, private equity-owned companies with below-investment-grade credit profiles. Repayment depends heavily on the future earnings of a single operating company, making leverage, business-model durability, refinancing conditions, and enterprise value central to the credit outcome.
The private credit exposures used across the State Street Public & Private Credit ETFs, including State Street IG Public & Private Credit ETF (PRIV), State Street Short Duration IG Public & Private Credit ETF (PRSD), and State Street IG Public & Private ABS ETF (PRAB), are fundamentally different. Rather than seeking exposure to sub-investment-grade middle-market lending, the suite focuses its private credit exposure on investment-grade (IG) private credit investments —including corporate finance and asset-backed finance private credit — both of which differ from middle-market direct lending in important ways discussed in this article.
Where today’s concerns are concentrated
Middle-market direct lending is generally corporate cash-flow lending. Underwriting centers on EBITDA, leverage, free cash flow, sponsor support, and the borrower’s ability to refinance or be sold. When a borrower’s competitive position weakens, including because technology disrupts its industry, lenders are directly exposed to weaker operating performance and lower enterprise value.
Software-related lending sits at the center of current stress, particularly among smaller, more leveraged borrowers. Business development companies (BDCs) have lent approximately $115 billion to software companies, representing roughly 20% of their total lending and over 80% of their technology portfolios.1 This concentration is showing up in performance — recent markdowns may indicate cyclical pressure within portions of the sub-IG lending book, and over the past year, BDCs have underperformed both broader high yield and leveraged loan markets by approximately 5.3% and 8.4%,2 respectively, underscoring how selective rather than systemic the pressure has been.
These risks may be relevant for portions of the market, but they should not automatically be applied to all private credit. The U.S. credit market is estimated to total approximately $49 trillion, split between roughly $7.4 trillion of public IG credit, $1.5 trillion of public high yield credit and $40 trillion of private credit (Figure 1). According to Apollo estimates, within that private credit total, about $38 trillion (95%) is private IG credit, while about $2 trillion (5%) is leveraged, sub-IG lending (i.e. broadly syndicated loans and direct lending) — and by comparison, high-yield bonds make up approximately 17% of the public credit market, meaning the sub-IG segment dominating headlines is proportionally smaller within private credit than within public credit.3
The private credit in PRIV, PRSD, and PRAB
The State Street Public & Private ETF Suite — PRIV, PRSD, and PRAB — consists of actively managed strategies that primarily invest in IG public and private credit securities, seeking to maximize risk-adjusted returns alongside current income. The funds combine State Street Investment Management's active sector allocation and security selection capabilities with access to select private credit opportunities that may be sourced through the private credit platform of Apollo Global Securities, Inc. (i.e., IG corporate finance and asset-backed finance).
Asset-backed and corporate finance instruments sourced by Apollo Global Securities, Inc. (each an “AOS” investment) represent approximately 22% of PRIV, 20% of PRSD, and 42% of PRAB, reflecting each fund's distinct mandate and risk/return profile (Figure 2). Together, they illustrate the breadth of the opportunity set available across the suite, though these allocations are actively managed and may vary over time based on market opportunities and portfolio construction considerations.
Among those select private credit opportunities, corporate finance consists of customized, IG credit financing, but the borrower profile is materially different from the middle market. The corporate finance segment of the private credit market generally involves large, established, and often public companies accessing private markets for tailored financing.
Corporate finance may take varied forms, including structures backed by contractual cash flows, consumer programs, infrastructure assets, or other specialized collateral, each tailored to the issuer's specific capital need, supported by issuer scale and balance sheet resources.
Asset-backed finance uses a different underwriting framework. It represents a broad category of private credit secured by mortgages, consumer loans (e.g., auto loans, credit card), hard assets (e.g., aircraft, infrastructure, equipment), or financial assets (e.g., music royalties, media rights), with repayment supported by diversified collateral pools and the contractual cash flows those assets generate. Structures may also include cash-flow waterfalls, covenants, amortization features, reserves, and ring-fenced or bankruptcy-remote collateral. These features shift the underwriting focus from a single borrower's creditworthiness toward the assets, cash flows, and transaction structure themselves.
Historical data may help illustrate certain structural characteristics of these investment types. Since the 2008-2009 Global Financial Crisis, IG public asset-backed securities and collateralized loan obligations have experienced very limited historical credit losses across multiple stress periods, including the 2020 pandemic shock and the 2023 regional banking crisis, while traditional corporate credit has remained more exposed to idiosyncratic and sector-specific risk.4 Asset-backed finance instruments have also historically exhibited low-to-moderate correlation to corporate credit performance, with 20-year spread correlations to US corporates ranging from 0.45 to 0.66 across asset types,5 suggesting the potential to diversify certain sources of corporate credit risk.
In short, corporate finance is differentiated by the quality and scale of the borrower, while asset-backed finance derives support from collateral, contractual cash flows, and structural protections. Both are forms of IG private credit, but neither should be evaluated as though it were sub-IG middle-market direct lending (Figure 3).
Figure 3: Comparing private credit underwriting frameworks
Characteristic | Middle-market direct lending | IG corporate finance | IG asset-backed finance |
Typical borrower / issuer | Smaller, sponsor-backed middle-market company | Large, established corporate issuer | Asset-backed or structured issuer |
Typical credit quality | Generally below investment grade | Investment-grade focused | Investment-grade focused |
Primary repayment source | Corporate earnings and enterprise value | Corporate earnings, balance-sheet strength, and issuer creditworthiness | Contractual cash flows, collateral, and asset performance |
Primary underwriting focus | Business performance, leverage, and sponsor support | Issuer quality, scale, market position, and financial resources | Asset quality, structure, collateral, and cash-flow design |
Source: State Street Investment Management, as of September 30, 2026; Apollo Global Management, “Asset-Backed Finance: The Next Evolution of Private Credit”, October 2023. Simplified by State Street Investment Management for illustrative purposes.
A real-world case study
Investors may reasonably ask whether a portfolio that allocates to private credit behaves differently from a traditional core bond strategy. As a core-plus bond solution that combines IG public and private credit, PRIV’s performance characteristics may provide one potential illustration, but are not representative of other historical periods or investment strategies. Since inception, PRIV has exhibited a 0.97 beta and 0.99 correlation to the Bloomberg U.S. Aggregate Bond Index, indicating that its overall risk profile has remained closely aligned with a traditional core bond benchmark.6
At the same time, PRIV's 0.70% tracking error ranks among the lowest 4% of peers in the Morningstar Intermediate Core-Plus Bond category.7 A portfolio with meaningful exposure to lower-quality middle-market loans would typically be expected to exhibit greater benchmark-relative volatility and wider performance dispersion. Instead, PRIV's experience may suggest that combining IG public credit with privately-originated corporate finance and asset-backed finance instruments may provide access to a broader investable universe spanning both traditional public bonds and select private credit opportunities while potentially preserving risk characteristics typically associated with core fixed income.
This contrast between PRIV's investment approach and private credit strategies focused primarily on middle-market lending becomes more apparent when comparing performance outcomes across the two segments. Since PRIV's inception, exchange-traded BDCs focused on private middle-market lending have underperformed PRIV by nearly 16% while exhibiting meaningfully higher volatility (Figure 4). These contrasting outcomes highlight that "private credit" is not a single asset class and that results can vary significantly depending on the underlying exposures, credit quality, and underwriting framework.
Private credit is not a monolith
Private credit merits careful scrutiny. Investors should evaluate underwriting discipline, liquidity, valuation, structural protections, borrower quality, and compensation for risk. But the analysis should begin with the exposure actually being owned.
Many of the concerns emphasized in today’s headlines are associated with sponsor-backed, sub-IG middle-market direct lending. The private credit exposures used across PRIV, PRSD, and PRAB are designed to access a different segment of the market through IG exposure, including IG corporate finance and IG asset-backed finance.
For investors evaluating private credit allocations, the most important question may not be simply whether a portfolio owns private credit, but whether investors understand the type of private credit exposure it holds.
Standard performance
| Name | Ticker | QTD (%) | YTD (%) | 1 year (%) | 3 year (%) | 5 year (%) | 10 year (%) | Since inception | Inception date | Gross Exp Ratio (%) | 30-day SEC yield (%) |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Annualized | |||||||||||
| State Street® IG Public & Private Credit ETF | PRIV (NAV) | -3.54 | -2.76 | -1.55 | - | - | - | 1.67 | 2/26/2025 | 0.55 | 5.02 |
| State Street® IG Public & Private Credit ETF | PRIV (MKT) | -3.29 | -2.45 | -1.33 | - | - | - | 1.85 | – | – | – |
| State Street® Short Duration IG Public & Private Credit ETF | PRSD (NAV) | -0.16 | 1.32 | 2.58 | - | - | - | 2.65 | 9/9/2025 | 0.45 | 4.77 |
| State Street® Short Duration IG Public & Private Credit ETF | PRSD (MKT) | -0.42 | 1.11 | 2.23 | - | - | - | 2.55 | – | – | – |
| State Street® IG Public & Private ABS ETF | PRAB (NAV) | 0.05 | - | - | - | - | - | 0.91 | 3/9/2026 | 0.39 | 4.95 |
| State Street® IG Public & Private ABS ETF | PRAB (MKT) | 0.25 | - | - | - | - | - | 1.4 | – | – | – |
| Cliffwater BDC Index | - | 2.75 | -5.6 | -3.87 | 3.01 | 4.84 | 6.74 | 6.93 | 1/1/2015 | - | - |
Source: State Street Investment Management, Bloomberg Finance L.P., as of 9/30/2026. Performance returns for periods of less than one year are not annualized. The performance data quoted represents past performance. Past performance does not guarantee future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted. All results are historical and assume the reinvestment of dividends and capital gains. Visit ssga.com for most recent month-end performance. The market price used to calculate the Market Value return is the midpoint between the highest bid and the lowest offer on the exchange on which the shares of the Fund are listed for trading, as of the time that the Fund’s NAV is calculated. If you trade your shares at another time, your return may differ. The gross expense ratio is the fund's total annual operating expenses ratio. It is gross of any fee waivers or expense reimbursements. It can be found in the fund's most recent prospectus. 30-day SEC yield: an annualized yield that is calculated by dividing the net investment income earned by the fund over the most recent 30-day period by the maximum offering price on the last day of the period. Performance of an index is not illustrative of any particular investment. It is not possible to invest directly in an index. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable.