TL;DR: Stress fractures in private credit markets are prompting Asia-Pacific family offices to reassess their fixed income allocations. Publicly traded bond funds are regaining favour as liquidity premiums compress and default risks in direct lending rise. Principals should review concentration in illiquid credit before the next redemption cycle.

Private Credit's Stress Fractures Open a Window for Public Bond Markets

Private credit has been one of the most aggressively marketed asset classes to Asia-Pacific family offices over the past four years, with regional allocations to direct lending and private debt estimated to have grown from under 5% of alternative portfolios in 2020 to north of 14% by end-2024, according to data compiled by Preqin. That expansion was predicated on a benign rate environment, compressed default rates, and the promise of illiquidity premiums that public markets could not match. Those assumptions are now being tested. A combination of slowing deal activity, rising payment-in-kind (PIK) toggle usage among borrowers, and a handful of high-profile covenant breaches in the United States and Europe has reminded institutional allocators that private credit is not a one-way trade — and that the opacity which once felt like a feature can quickly become a liability.

For family offices in Singapore, Hong Kong, and the broader APAC region, the timing is consequential. Many principals committed capital to vintage 2021 and 2022 direct lending vehicles at the peak of risk appetite, locking up funds for five to seven years with limited secondary market options. As those portfolios season, net asset value marks are coming under scrutiny, and the gap between reported valuations and what secondary buyers are willing to pay has widened to discounts of 10–20% on some mid-market direct lending funds, according to intermediaries active in the Singapore and Hong Kong secondary markets.

Why Publicly Traded Bond Funds Are Regaining Credibility

The renewed interest in investment-grade and high-yield bond funds is not simply a flight to safety — it is a recalibration of the risk-reward equation. With the US Federal Reserve holding rates at elevated levels through the first half of 2025 and the Bank of Japan's gradual policy normalisation adding complexity to Asian credit spreads, publicly traded bond funds now offer all-in yields that, in many segments, are within 80–120 basis points of what comparable private credit vehicles were marketing eighteen months ago. That spread compression fundamentally changes the calculus for family office CIOs who must justify the illiquidity premium to their investment committees and, increasingly, to next-generation principals who are asking harder questions about portfolio construction.

Liquidity is the other dimension. A family office managing USD 500 million in assets — a common threshold for single-family offices operating under the Monetary Authority of Singapore's Variable Capital Company (VCC) framework or Hong Kong's Open-ended Fund Company (OFC) structure — needs to be able to rebalance across asset classes without triggering a multi-quarter redemption process. Publicly listed bond funds, including exchange-traded credit vehicles and actively managed UCITS funds domiciled in Luxembourg or Ireland and distributed into Singapore and Hong Kong, offer daily or weekly liquidity that private credit structures simply cannot replicate. In a period of geopolitical uncertainty, trade tariff volatility, and potential currency stress across emerging Asian markets, that optionality carries real value.

What the Data Is Telling APAC Allocators Right Now

Several leading asset managers have reported meaningful inflows into their Asian credit and global investment-grade bond strategies in the first quarter of 2025. BlackRock's Asia-Pacific fixed income platform and Pimco's regional distribution network have both noted increased enquiries from family office channels, particularly from multi-family offices (MFOs) operating out of Singapore's financial district and Hong Kong's Central. Meanwhile, the JP Morgan Asia Credit Index (JACI) has delivered a year-to-date total return of approximately 3.4% through April 2025, outperforming many private credit vehicles on a risk-adjusted basis when accounting for the illiquidity discount embedded in secondary valuations.

The stress in private credit is not uniform. Senior secured direct lending to large-cap borrowers with strong covenant packages remains relatively resilient. The vulnerability is concentrated in the middle market — loans of USD 50–200 million to borrowers with EBITDA below USD 25 million — where documentation standards were loosened aggressively during the 2020–2022 origination boom. Family offices that gained exposure through fund-of-funds structures or co-investment vehicles in this segment face the greatest mark-to-market risk and should be engaging their managers proactively to understand the underlying borrower health before annual valuations are finalised.

Strategic Implications for Family Office Principals

The strategic takeaway for principals is not to abandon private credit wholesale. The asset class still offers diversification benefits, access to borrowers outside public markets, and, in the right structures, genuine yield enhancement. The lesson is one of balance and governance. Family offices that built private credit allocations exceeding 20% of their fixed income book without a corresponding liquidity buffer are now navigating a structural mismatch that is difficult to unwind quickly. For those approaching new commitments, the bar for illiquidity premium should be higher: managers should be able to demonstrate a minimum 150–200 basis point net yield advantage over comparable public market alternatives to justify the lock-up, the valuation opacity, and the operational complexity of private structures.

Principals operating through Singapore VCC or Hong Kong OFC frameworks should also engage their legal and compliance advisors on the disclosure implications of material NAV adjustments in private credit sleeves, particularly where these vehicles are held alongside family members who are not directly involved in day-to-day investment decisions. The MAS and SFC have both signalled increased scrutiny of valuation practices in private markets, and proactive governance documentation will be essential in the event of any investor disputes. The current environment is a reminder that the most durable family office portfolios are built not on the highest-returning asset class of the previous cycle, but on a structure disciplined enough to survive the next one.

🍾 Evaluating whisky casks as an alternative allocation? Whisky Cask Club works with family offices across APAC on structured cask portfolios.

Frequently Asked Questions

What is driving the current stress in private credit markets?

The primary drivers include rising use of payment-in-kind (PIK) toggle provisions by borrowers under cash flow pressure, loosened documentation standards from the 2020–2022 origination boom, and a higher-for-longer interest rate environment that is straining leveraged borrowers in the middle market. Covenant breaches and secondary market discounts of 10–20% on some direct lending funds are early indicators of broader valuation pressure.

How does the illiquidity premium for private credit compare to public bond yields today?

The gap has compressed significantly. In many investment-grade and high-yield segments, publicly traded bond funds now offer all-in yields within 80–120 basis points of comparable private credit vehicles. This compression makes it harder for managers to justify the lock-up period, valuation opacity, and operational complexity associated with private structures.

What allocation threshold should family offices use as a governance benchmark for private credit?

While there is no universal standard, family offices where private credit exceeds 20% of the total fixed income book without a corresponding liquid buffer are most exposed to structural mismatch risk. A prudent benchmark is to require a minimum 150–200 basis point net yield advantage over public market alternatives before committing new capital to illiquid credit vehicles.

How do Singapore VCC and Hong Kong OFC structures affect private credit governance obligations?

Both the MAS and SFC have increased scrutiny of valuation practices in private markets. Family offices using VCC or OFC frameworks should ensure their governance documentation addresses how material NAV adjustments in private credit sleeves are disclosed to all relevant family members and investment committee participants, particularly where passive family stakeholders are involved.

Are there segments of private credit that remain attractive despite the current stress?

Yes. Senior secured direct lending to large-cap borrowers with strong covenant packages and EBITDA above USD 25 million has shown relative resilience. The stress is concentrated in the middle market — loans of USD 50–200 million to smaller borrowers — where documentation was weakest during the origination boom. Selective exposure with rigorous manager due diligence remains viable for sophisticated family office allocators.