Why Investors Are Turning to Opportunistic Credit

LPs seeking diversified private debt portfolios and PE-like returns are increasingly turning to opportunistic credit. But what is it?

For some, it’s a flexible mandate to exploit credit dislocations across asset classes, geographies, and capital structures.

For others, it’s a post-pandemic rebrand of distressed debt, now layered with real estate rescue capital, rescue financings, or even venture debt. The strategy has become a catch-all for credit investments that don’t fit neatly into traditional direct lending, high-yield, or special situations buckets.

For all, the hallmark of the strategy is adaptability and the ability to quickly exploit market inefficiencies, asset mispricing and funding gaps. Unlike narrowly defined direct credit strategies, opportunistic credit managers are not tethered to strict mandates or single asset classes.

“We look for volatility and scarcity of capital,” PIMCO executive vice president Neil Reiner told the Ventura County Employees Retirement Association recently. “We participate in junior capital or mezzanine opportunities or in opportunities that traditional direct lenders are unable to evaluate or invest.”

PIMCO’s Credit Opportunities Fund IV raised $2.1 billion in commitments and closed last year.

Reiner says high interest rates and “the uncertainty in the macro period is enhancing” opportunities. PIMCO aims for a 15 percent IRR and a 1.5 multiple on invested capital.

For some GPs, the strategy even encompasses the small but growing credit secondaries niche. Three firms recently announced raising a combined $11.5 billion for opportunistic strategies that include secondaries:

• On Wednesday, Pantheon announced it had closed Pantheon Credit Opportunities III and related vehicles with $2.2 billion in commitments, surpassing its target by more than 2.5x. The London firm expects the bulk of the fund to invest in private credit secondaries.
• On Thursday, Fidelity Investments announced that its Credit Opportunities Fund II had raised an oversubscribed $729 million to invest in secondaries as well. The fund also targets stressed, distressed and restructured debt.
• Apollo (NYSE: APO) recently closed one of the largest opportunistic credit funds, raising $8.5 billion in commitments for its second fund dedicated to the strategy plus related separately managed accounts and co-investments. Apollo’s Accord+ Fund II raised $4.8 billion and will also invest secondaries.

“Private credit secondaries are entering a new phase of maturity and growth, driven by increased dealflow, heightened liquidity needs and greater buyer and GP-led activity,” says Pantheon private credit head Rakesh (Rick) Jain.

More than three dozen firms raising new funds totaling more than $50 billion combined responded to the MWRA Employees’ Retirement System call for an opportunistic credit investment. The $710 million pension plan is expected to commit later this year.

Ares (NYSE: ARES) has raised at least $4.6 billion toward a $7 billion target for Ares Special Opportunities Fund III.

“We believe it’s the largest fund of its kind in the market,” Ares CEO Michael Arougheti said during a May earnings call where the LP commitments were disclosed.

Six of the biggest funds currently in the market: 

Four of those five funds expect to close by the end of the year. Blue Torch has set a 2026 deadline.

In the wake of pandemic-era losses and a more stringent regulatory environment, banks have been forced to retreat from riskier or non-core lending activities. New capital requirements and stricter lending standards have pushed many financial institutions to pull back, especially from complex or transitional deals.

As a result, alternative credit providers are swooping in to offer creative, flexible financing solutions previously supplied by conventional banks. LPs with growing private credit sophistication have started to diversify into other strategies.

This adaptability—ranging from distressed debt to complex, bespoke financings—enables them to capitalize on emerging opportunities as market conditions shift.

“Opportunistic credit investments employ higher return and higher risk strategies by providing companies with a broader set of capital solutions relative to lending-only strategies,” says Cambridge Associates Senior Investment Director Buck Reynolds. “We believe they have the potential to deliver even higher returns during periods of market stress when traditional capital sources are less widely available.”