Key takeaways
- As rising inflation pushes equities and investment-grade bonds into closer correlation, classic portfolio and diversification methods are becoming less reliable, prompting institutional investors to look beyond traditional asset classes for genuine portfolio stability.
- APAC private credit is structurally distinct from its US and EU counterparts: predominantly bilateral and non-sponsored, lending to high-growth mid-market corporates. This makes it attractive even to portfolios already holding US and EU private credit.
- This asset class also has low correlation to global equities and bonds with high Sharpe ratios. Portfolio modelling shows that an allocation to APAC private credit shifts the efficient frontier up and to the left, improving risk-adjusted returns.
Rising inflation and an increasing correlation between global equities and investment-grade (IG) bond returns are challenging institutional investors’ traditional approach to diversification. Previously common and reliable approaches to portfolio construction – focused on allocation to equities and bonds – are resulting in less diversified and more volatile returns. Against this backdrop, the question of where investors can find genuine diversification becomes more pressing.
One area drawing greater attention for diversification is in the debt space, with private credit often seen as a strong diversifier given its high Sharpe ratios and low correlation to the equity market.
Specifically, the APAC private credit market remains structurally under-allocated,[1] with historically strong risk-adjusted returns driven by a complexity premium rather than higher underwriting risk. More importantly, with its low correlation to northern hemisphere developed markets, APAC private credit represents a lower risk entry point to developing markets exposure while being a meaningful complement to global portfolios.
Why the classic portfolio is under strain
In developing the Modern Portfolio Theory (MPT) in 1952, Harry Markowitz mathematically proved the benefits of diversification, demonstrating how investors could minimise overall portfolio risk by combining non-perfectly correlated assets.
Over time, these mathematical principles were simplified into a widely adopted investment approach, with asset managers and financial advisers popularising the quintessential 60/40 balanced portfolio in the 1990s – occurring at a time when inflation and the correlation between equities and bonds was low. With the correlation between equities and bonds now significantly higher than in previous decades, the balanced portfolio model is under strain.
The fundamental case for APAC private credit
As we explored in “The opportunities in Asia-Pacific private credit”, current public market volatility and geopolitical risks have shifted investors’ focus to diversification, with geographical breadth and public/private market exposure emerging as two key important levers. APAC private credit is one of the few areas that delivers both, with most global portfolios underweight in the region.
For full details, including how APAC private credit is structurally different from US and European private credit and all disclaimers applicable, please refer to the complete article.
[1] IFM Investors (2026), ‘The opportunities in Asia-Pacific private credit’
Hiran Wanigasekera
Hiran is an Executive Director and Co-Head of IFM Investors' APAC Diversified Credit capability. He responsible for joint management of key credit portfolios, credit product strategies and managing the day-to-day running of debt portfolios. Hiran has worked across a wide range of credit sectors and industries including bank lending, corporate credit and structured investments.
Hong Ern Lee
Hong Ern is responsible for managing IFM Investors’ diversified credit investments in Asia, including sourcing, underwriting and structuring of private credit transactions spanning direct lending, special situations, securitizations and asset-backed lending.
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