How Pimco’s Dan Ivascyn Is Navigating the Private Debt Market

Individual investors are hearing lots about the charms of private investments—the allure of forgoing liquidity for higher returns or a wider range of options. Yet they’re wary of wading into new territory that’s not without risk. Consider the recent bankruptcy of auto-parts maker First Brands, which raised questions about private lending. Yet private investments seem destined to grow because companies are staying private for longer, shrinking the number of public securities, and private credit has grown since the global financial crisis.

We checked in with Dan Ivascyn, who oversees Pimco Flexible Credit Income PFLEX, a semi-liquid fund that can hold both private and public investments, and which allows investors periodic withdrawals. That lets the fund own illiquid securities that require a longer holding period, unlike exchange-traded funds and mutual funds, which must be able to cash out investors each day.

Pimco Flexible Credit Income is top-ranked among semiliquids, with a Silver rating. Ivascyn, Pimco’s chief investment officer, is also a past winner of Morningstar Manager of the Year. We asked him where he sees opportunities. He shared why he’s concerned about the popularity of private market debt, gave examples of where private-market investing can be more profitable, and discussed why consumer lending and commercial real estate are favorite themes. This conversation has been edited and condensed for time and clarity.

Leslie Norton: What can individuals get from private markets that they can’t from public markets?

Dan Ivascyn: An expanded opportunity set. The right way to think about the distinction is just that things are very, very liquid at one end of the spectrum and perfectly illiquid at the other. An investor gives up outright liquidity or liquidity certainty. In theory, when you give up something, you should get something in return. Liquidity is a form of flexibility, of positive optionality. By giving up liquidity, you could pick up more yield, better transaction terms, or more investment control. That’s the premise.

Norton: How about an example?

Ivascyn: I could buy a diversified portfolio of mortgage assets in the public markets, or proactively go to a small bank that we know does an incredibly good job in terms of underwriting and buy a pool of mortgages where the credit quality is much better than what we could find on the public side. So with one you get more yield, and with the other you get better credit quality at the same yield.

Norton: What’s different and similar about investing in the private versus public debt markets?

Ivascyn: The extra yield you pick up for similar risk along the liquidity spectrum, or between the public and the private markets, tends to adjust over time. Some periods, you get paid a lot more yield for buying the private equivalent, and other times very little. When a lot of money is pouring into the private markets, like today, you have this perverse situation where you’re not picking up additional spread, better structure, or better credit quality. It’s important for a manager to look across the spectrum—the liquidity spectrum first, then the credit quality spectrum.

In both the private and public markets, the analysis is very similar; it’s good old-fashioned credit underwriting. On the private side, you benefit from being more proactive in leveraging existing resources. It’s great to be a $2 trillion AUM global asset manager and leverage multidecade relationships to source and customize risk. In public markets, you can’t customize. We’ve done many very large private transactions in a customized framework.

The other difference is controlling outcomes. With private transactions, you can be active in controlling how mortgages are serviced. You can work with a corporate borrower. Or if that borrower had a period of financial stress, you can customize solutions more effectively than in the public markets.

How Private Debt’s Popularity Raises Risk

Norton: How has their popularity affected the private markets?

Ivascyn: In the last few years, there’s been tremendous money pouring into private strategies. Because of the massive fight for market share in this space, at times you don’t get the credit terms you’d expect in an asset, and you simply have to say, no, we’re not going to commit to purchasing a highly illiquid asset without these favorable characteristics. Throughout my 30-plus year career in this industry, I’ve seen this issue. Money pours in, and typically the value proposition erodes. Also, stock markets have gone up, economic growth has been positive, and credit spreads have tightened a lot. In that environment, you tend to see a compression in terms of what you get paid for liquidity and how much you can earn from riskier credit things.

Norton: Can it last?

Ivascyn: Whether you’re looking at traditional private credit, like midmarket direct lending, or even investment-grade, they tend to be riskier from a credit perspective. Certainly midmarket direct lending, as the largest segment of the private markets, will see the growth slow when you finally have a sustained period of economic weakness.

It’s hard to predict the timing of recessions. You saw this dynamic in the private equity markets, where lots of money poured in, and then the big drawdowns of 2022 led to some challenges. You saw it in the commercial real estate post-covid shock, which led to a material slowing of the growth in the private, real estate-related markets.

Norton: Please tell us more about Pimco Flexible Credit Income.

Ivascyn: We launched our first illiquid strategy at Pimco in the mid 1990s, now called PCM Fund PCM. We’ve had a series of closed-end funds able to own substantial amounts of less liquid risk. Interval funds are similar to closed-ends. One trades on an exchange, while the interval funds don’t trade and you don’t get the same price discovery, but the investment management style is very similar.

So Pimco Flexible Credit Income has a deep relative value approach. We don’t think explicitly about whether a position is public or private. We do our own credit rating analysis. We look for fundamentally strong sectors and avoid sectors that will be fundamentally weak. There are liquidity and credit continuums. The less liquid an asset is, or the higher the economic sensitivity or credit sensitivity, the more you want to be paid.

Pimco Flexible Credit Income can invest across the range of liquidity profiles and credit profiles. We can own non-US, we can own asset-backed, we can own corporate credit risk. We can have macro overlays to help enhance returns. We can hedge where necessary. We tend to be more diversified and flexible than what you typically see within the interval fund space, or even the closed-end space.

Why Ivascyn Likes Consumer Lending and Some Commercial Real Estate

Norton: What’s a favorite theme?

Ivascyn: Consumer lending is very attractive versus lending to unsecured corporate entities. Regulators don’t like bailing out the same sectors twice. During the global financial crisis, lots of problems were caused by excessive lending to consumers and banks taking excessive risk. We were very defensive toward consumer lending in the years leading up to the financial crisis—and Bill Gross deserves all the credit—because consumers were overleveraged, and with financial engineering, there was lending to a bigger, weaker segment of the consumer cohort. All that unwound during the financial crisis, and there was massive regulation of consumer lending.

Not surprisingly, over the last 15-plus years, you’ve seen limited credit extension to households, record amounts of borrower equity, and significant deleveraging. So that’s a key theme we try to target.

Norton: You say you avoid fundamentally weak sectors in favor of the fundamentally strong ones.

Ivascyn: We prioritize sectors with the most significant fundamental strengths. We’re selective about the others. In our Pimco Flexible Credit Income strategy, we have material overweights to consumer lending, asset-backed, asset-based lending, versus our longer-term balanced allocation, and relative to many other market participants. We have some exposure to corporate risk but it tends to be very company or deal specific. We don’t have a lot of midmarket direct lending, a sector where you’re beginning to see some fundamental deterioration, as the sector’s become very crowded and underwriting standards have deteriorated.

Within the asset-backed umbrella, we prefer consumer lending versus lending to commercial entities, all else equal. But we like both because when spreads are tight it’s good to have true security backing you, rather than a promise to pay.

Norton: What else do you like?

Ivascyn: We increasingly like opportunities within the commercial real estate space. That sector faced a significant shock coming out of covid, wherein you have strong fundamentals longer-term but a lot of challenged capital structures over the short term.

For example, housing in the United States over the long run should be a very stable sector. It doesn’t mean prices can’t go down a bit, but we haven’t built enough housing units relative to household formation since the financial crisis. So today, you see a situation in which residential home prices are going higher and multifamily prices going down because of temporary overbuilding—in the Sun Belt, as an example. So, we’re finding a lot of situations where the real estate’s very attractive but the cap structure is overleveraged. That gives us a unique opportunity to lend against stable collateral to borrowers in a stressed position. So I’d throw that into the second category.

Norton: Is there a category where you prefer the more liquid sector?

Ivascyn: Lower-quality corporate spreads are tight, whether you’re talking about the public high-yield markets, bank loan markets, or the midmarket direct lending segments of the private credit markets, and underwriting standards have deteriorated. In corporate credit, though, the good old-fashioned high-yield corporate bond space has better fundamentals, improving liquidity and underwriting quality.

Ivascyn Is Shunning These Private Debt Sectors

Norton: Where are you being defensive?

Ivascyn: Lending to lower-quality or more economically sensitive borrowers. Midmarket direct lending and the senior secured bank loan space are two examples. Both sectors are floating rate. If inflation remained elevated and central banks or the Federal Reserve couldn’t take rates lower, you’d continue to see a lot of strain. Many borrowed back when the fed-funds rate was at or near zero. A lot of those borrowers tend to be old-economy companies or smaller companies that have less financial flexibility. They are feeling the brunt of the tariff policy. In a related point, many older-economy leveraged companies have inherently weaker credit fundamentals and are more likely to be disrupted by AI technology.

These areas were exceptional performers since the financial crisis. They’re floating rate, didn’t have the same volatility as other credit products in 2022, and in the private midmarket direct lending space, those assets aren’t marked to market in any meaningful sense. They create the illusion of stability, which led to a bit of complacency. We’re not being alarmist; we just find that area much less interesting.

Norton: How should investors use this fund? What should it displace from a portfolio?

Ivascyn: It’s a high-yielding strategy. It’s less liquid but also a bit more aggressive in terms of credit exposure than other strategies like Pimco Income PIMIX. You could see it as a complement that is a good diversifier and source of additional incremental returns. Or if you think equity valuations are quite stretched, as we do, Pimco Flexible Credit Income has a double-digit yield and more consistent cash flow. It could be an equity-type surrogate, or an alternative to what you’re doing within a more narrow, high-yield, or bank-loan-type strategy.

Norton: Mom and Pop haven’t thought much about this space.

Ivascyn: Our industry likes to make things seem simple. This isn’t simple. It’s about a client’s willingness to give up liquidity for a higher return or a more resilient profile. Sometimes people think they have more flexibility to lock up their liquidity than they do. These structures are called semiliquids for a reason. The second piece relates to how much credit risk or economic sensitivity you can take. People like a higher-quality personal portfolio because when the economy weakens, it typically means your own personal situation weakens. The credit risks in these strategies are complicated. The PFLEX strategy will give you a higher return potential versus high-quality bonds. But it’s going to have more risk.