Morningstar DBRS' Takeaways from 2025 Credit Outlook Toronto: The Double-Edged Sword of Increased Investments in Private Markets

As part of its takeaways series, Morningstar DBRS is publishing several write-ups about pertinent topics discussed at the 2025 Credit Outlook Toronto, an industry conference that looked at what's on the horizon for the fixed-income industry. During a special featured session at the conference, Morningstar CEO Kunal Kapoor spoke about institutional investors' growing attraction to the illiquid, but high-return private market, and the convergence of operational strategies between public and private markets. "What once used to be the purview of one part of the markets, is increasingly going the other way," he noted. "For example, private debt is increasingly the way to go if you look at where bank issuances develop globally and how private debt is being issued."

These changes are partly a consequence of regulatory change, which has been driven by financial regulatory bodies and government agencies, in recent years. The opportunity to invest in the private market in the current market environment has created a high level of excitement for private instruments. This excitement for shifting investment strategies could be a consequence of a relatively recent period of good performance and, therefore, must be considered with a high degree of caution.

The allocation of deploying public or private assets for investors depends on the obligations of the investor client type. For example, different strategies would need be applied based on the maturity stage of a pension plan. This specific fund-based approach is necessary because some investors have higher requirements of cash flow than others. Long-term investments have more room to accommodate risk, but the nature of the current market creates complications. Since the early aughts, markets were in a long trend, with occasional small blips, and mostly predictable. But the levels of market risk over the past five years, especially in the public markets, have grown significantly with markets being more volatile and not following a trend.

The needs and risk tolerance of institutional investors --such as pension plans, government funds, endowment funds, and specialty funds-- exist on a spectrum and can vary wildly across client types. Risks for these investment strategies include the nature of liquidity in private markets. Time horizons are an attractive element of investing in illiquid opportunities, but these kinds of investments create a scenario where liquidity becomes a risk, too. Often times, traditional public companies are criticized for having a longer time horizon. However, the level of illiquidity can be hard to measure in private markets. "There are products that are more illiquid than you think they are, and when the time comes, that can be a problem. We need contingency planning to help with that," noted another panelist. Moreover, in the private market, leverage remains another concern, especially when it comes to the investors' level of knowledge and concern.

However, public markets are not free of risk, either. "Challenges in the public market include there's currently less public debt being issued by traditional means, there's fewer companies going public, or companies that are staying private longer," Kapoor said. A global approach to investing could curtail these challenges by balancing the markets where public debt issuance is reduced, with those where levels are sustained.

Written by Ross Dias

Note:
For more information on private credit, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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