Private Credit: Risk, Redemptions and a Reality Check
March 31, 2026
Don’t Chase Distress: Credit Strategies That May Offer More Than Distressed Debt
Today’s market environment, with its periods of macro uncertainty and lower base rates, has triggered a familiar pattern: limited partners gravitating toward higher returning credit strategies, like distressed credit, in search of higher expected returns than senior credit. While the instinct is understandable, experience tells us that capturing the full benefit of distressed credit investing is far more challenging than it appears.
We believe it is worth reframing the conversation. In our experience, LPs can achieve distressed-like returns through other credit strategies – without relying on the same degree of timing or execution risk.
Why distressed credit can disappoint
Historically, distressed credit’s best results seem to come when you least expect them. As noted in the chart below, the strongest vintage year returns were often realized during periods when relatively little capital was allocated to the strategy – for example, in the early 2000s. In contrast, distressed credit has been comparatively weak following the kind of market dislocations that allocators might expect to produce the most compelling opportunities.
Why? In part because of an influx of capital. When there are exogenous shocks to the market, like the global financial crisis of 2008 or the European sovereign debt crisis of the early 2010s, capital has rapidly flowed into distressed strategies in anticipation of a looming default cycle. More often than not, this capital has resulted in heightened competition for deals, which has put pressure on pricing and limited the ultimate return potential for those vintages.
Distressed debt fundraising versus vintage year returns
Source: Preqin. As of September 30, 2025.
Risk can also be hard to control. Distressed strategies typically involve acquiring debt at a discount in situations characterized by elevated leverage or operational underperformance. Achieving target returns often requires a series of successful interventions: operational turnaround, balance sheet restructuring, and a favorable exit environment. Each of these steps introduces execution risk, and the cumulative effect can materially impact outcomes.
Even when long-term average returns appear attractive, they can mask significant volatility across vintages. Periods of outsized gains may be offset by years of underperformance, resulting in an experience that can be difficult for LPs to underwrite and incorporate into a broader portfolio.
Credit alternatives: Higher-quality deals and risk-adjusted Returns
There are compelling credit alternatives that can allow allocators to capture distressed-like returns with less overall risk. In our view, the most effective strategies include:
- An opportunistic approach to performing credit – particularly in the junior segment of the capital structure.
- Accessing distressed assets through a credit secondaries allocation.
Opportunistic credit strategies
We believe that performing credit can deliver superior all in, risk adjusted returns relative to distressed credit, and with a more consistent return profile. This outcome is often driven by specific segments of the market falling out of favor at different points in the credit cycle, like in 2023 when the Broadly Syndicated Loan (BSL) market effectively shut down and first lien senior credit spreads widened to as much as 600 basis points. It is also the case that the junior credit market has consistently offered low to mid teens yields, driven by demand for bespoke financing solutions to satisfy a borrower’s capital needs. This can take the form of second lien cash-pay credit, or fixed rate credit that pays its interest in kind (PIK), to manage near term cash flow pressures from higher senior loan interest expense.
We find these opportunities extremely compelling for investors, who get to focus on quality businesses with capital structures designed to support ongoing operations rather than recovery. These businesses are typically well capitalized with less leverage than distressed debt, and returns are primarily driven by contractual income. In addition, investors can often negotiate structural features such as call protection and longer-duration income streams, which can manage risk while locking in attractive returns over multi-year periods.
Managers who employ a flexible approach that focuses on high quality businesses give investors access to the segment of the capital structure that can present the best risk-adjusted return – be it senior credit, junior credit or even a small allocation to equity. As a result, the investor can benefit from a more consistent opportunity set and a way to mitigate the cyclicality of the distressed market.
Credit secondaries
By acquiring seasoned portfolios rather than committing to blind pool strategies, allocators can gain targeted exposure to stressed assets while mitigating the cyclicality and cash flow uncertainty typically associated with distressed investing. The secondary market also provides far more visibility into cash flow expectations and credit performance histories, introducing a degree of vintage selectivity that is difficult to achieve in primary allocations.
Secondaries are backward-looking – underwritten on existing portfolios with observable performance. As a result, investors are better positioned to identify relative value across vintages and market conditions, effectively using historical insight as a tool for more effective market timing.
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Conclusion
This is not to suggest that distressed investing lacks merit. However, for many LPs, past experience has highlighted the challenges of achieving positive outcomes consistently – and the comparative benefits of pursuing elevated yields alongside stronger capital structures. By working with an experienced manager like HarbourVest, LPs can use performing credit and credit secondaries to construct a more repeatable framework for return generation, focusing on durable businesses, conservative underwriting, and contractual income.
Disclosure
HarbourVest Partners, LLC is a registered investment adviser under the Investment Advisers Act of 1940. This material is solely for informational purposes and should not be viewed as a current or past recommendation or an offer to sell or the solicitation to buy securities or adopt any investment strategy. The opinions expressed herein represent the current, good faith views of the author(s) at the time of publication, are not definitive investment advice, and should not be relied upon as such. This material has been developed internally and/or obtained from sources believed to be reliable; however, HarbourVest does not guarantee the accuracy, adequacy, or completeness of such information. There is no assurance that any events or projections will occur, and outcomes may be significantly different than the opinions shown here. This information, including any projections concerning financial market performance, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. The information contained herein must be kept strictly confidential and may not be reproduced or redistributed in any format without the express written approval of HarbourVest.
Nothing herein should be construed as a solicitation, offer, recommendation, representation of suitability, legal advice, tax advice, or endorsement of any security or investment and should not be relied upon by you in evaluating the merits of investing in HarbourVest funds or any other investment decision.
An investment in the private markets involves high degree of risk, and therefore, should be undertaken only by prospective investors capable of evaluating the risks of the Fund and bearing the risks such an investment represents. The following is a summary of only some of the risks of investing in private markets.
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