Institutional investors today allocate across virtually every corner of public and private markets, and private credit has emerged as a market in its own right. For Danish pension fund PenSam, which manages around DKK 200 billion, private credit is more than an alternative to traditional fixed income; it is a strategic allocation offering stable income, diversification, and attractive risk-adjusted returns.

PenSam allocates significant portion of its investment portfolio to alternatives, including a 15 percent allocation to private credit alone. A key reason for this high exposure is simply that alternatives form a significant part of the investment universe. “We invest in alternatives because that’s part of the investment universe,” says Igor Birkjær Baranovski, Chief Portfolio Manager for Private Debt at PenSam. “You can’t limit yourself to listed and liquid markets; there is a vast subset of investments outside the public markets.”

“You can’t limit yourself to listed and liquid markets; there is a vast subset of investments outside the public markets.”

Igor Birkjær Baranovski, Chief Portfolio Manager for Private Debt at PenSam.

He emphasizes that private credit is not merely a niche add-on, but a strategic allocation in its own right. For PenSam, private credit represents a market of its own, “even though it’s more opaque, it doesn’t have a benchmark, and it’s not in the public eye or widely covered,” according to Baranovski. The PenSam team defines private – or alternative – credit as any investment that is not publicly traded and has little or no liquidity.

Balancing Risk: From Senior Lending to Opportunistic Credit

The PenSam team divides the alternative credit space into low-risk and high-risk segments. As Baranovski explains, “Low risk for us is an investment-grade substitute, high risk is everything else.” The pension fund holds no investment-grade corporate bonds, substituting this allocation with commercial real estate debt, fund financing, NAV finance, and senior infrastructure financings. “Everything has to be senior with some form of hard or financial collateral.”

In the high-risk bucket, investments are also primarily senior, but typically unsecured, focusing more on EBITDA-based lending than on hard-asset lending, Baranovski explains. PenSam also maintains some exposure to riskier strategies, including “your traditional distressed debt funds, or capital solutions, opportunistic strategies that could do anything, go anywhere,” though this high-risk segment is only a portion of the allocation. “The biggest part of the private credit mandate is senior, secured, cash flow-paying.”

“The biggest part of the private credit mandate is senior, secured, cash flow-paying.”

Igor Birkjær Baranovski, Chief Portfolio Manager for Private Debt at PenSam.

For PenSam, the low-risk segment of the alternative credit allocation “plays a more income-producing, stabilizing effect in the portfolio,” according to Baranovski. Allocation decisions, whether to low-risk strategies or to higher-risk, more opportunistic strategies, are still guided by the standard risk-reward analysis for each bucket and its sub-strategies. However, Baranovski stresses that “there is an opportune time to invest more in the low-risk mandates.” 

Over the years, PenSam has allocated heavily to senior secured direct lending, focusing on the traditional European mid-market, according to Baranovski. He notes that spreads in direct lending have compressed, as they have across fixed-income credit more broadly. “Those markets are not immune to spreads going in and out,” he explains, adding, “even though we still think there is alpha in that space, the absolute returns and margins have come in.”

Despite this compression, Baranovski sees attractive niches within the private credit market. In the low-risk segment, he highlights commercial real estate debt and, increasingly, structured credit opportunities, fund financing and NAV lending. “Those kinds of strategies, we see a good risk-return proposition there,” he notes, emphasizing the areas where the team continues to identify compelling opportunities.

Industry Evolution and the “Institutionalization”

Looking at the evolution of the private credit industry over the past several years, Baranovski notes that it has faced multiple external shocks, including the Covid-19 pandemic, the return of inflation, a higher interest rate environment, Russia’s war in Ukraine, and tariff uncertainty. “It’s not been a benign credit environment or macro environment,” he says. “There have been more shocks over the last five years than in the previous ten.”

“The industry is now going through a shakeout, not only among investors but also among GPs, who need to be very clear about how they formulate a credit strategy, a credit policy, and how they differentiate themselves.”

Igor Birkjær Baranovski, Chief Portfolio Manager for Private Debt at PenSam.

The private credit industry has also undergone what Baranovski describes as an “institutionalization” process. “The industry is now going through a shakeout, not only among investors but also among GPs, who need to be very clear about how they formulate a credit strategy, a credit policy, and how they differentiate themselves,” he explains. “They can’t just raise the kind of funds they did three or four years ago. Investors have become more professional and more familiar with the asset class.” Because there are clear economies of scale in private credit, Baranovski encourages greater differentiation among managers, including the largest ones, and stresses the importance of articulating a distinct value proposition for investors. 

What Differentiates the Best Managers

Although PenSam ranks among the largest institutional investors in the Nordics, it remains relatively small on a global scale. This perspective shapes its approach to manager selection. “We are not invested with the biggest GPs raising mega, multi-billion funds, because we’re too small of an LP compared to some of the others,” explains Baranovski. “We try to find managers where our capital is meaningful for them, and they are equally meaningful for us.”

While PenSam does not necessarily seek out the largest players in private credit, the team still aims to partner with established, high-quality managers. “We see value in that strategic or partnership mentality, where we’re not just a transactional investor or LP number 100-something,” says Baranovski.

“We try to find managers where our capital is meaningful for them, and they are equally meaningful for us. We see value in that strategic or partnership mentality, where we’re not just a transactional investor or LP number 100-something.”

Igor Birkjær Baranovski, Chief Portfolio Manager for Private Debt at PenSam.

Baranovski and his team value managers who communicate openly, share data transparently, and invest in building robust data platforms of their own. “Structuring and analyzing data internally is important,” he explains, “but equally important is sharing it with investors, not just in polished LPAC sessions or presentations, but by providing access to raw portfolio data so that we can form our own opinions,” he adds. “That really differentiates managers in this opaque asset class.”

For PenSam, private credit managers must also demonstrate the skill and experience to navigate default situations and restructurings effectively. “We’ve seen, especially on the corporate direct lending side, more and more companies coming into trouble,” observes Baranovski. “The GPs need to show both the willingness and skill to handle these challenges, leading companies through restructurings or, even short of default, working with the company and sponsor to find solutions.”

The Next Chapter: From Scale to Specialization

Having been active in private credit for many years, Baranovski notes that the institutionalization of the asset class has turned direct lending into a far more standardized product than it was a decade ago. This evolution has brought with it more conventional fee structures, as alpha opportunities have compressed. While Baranovski still finds the risk-reward profile of corporate direct lending attractive, he sees greater value in structured financing, NAV lending, and strategies focused on providing financing solutions to GPs. “We see potential in somewhat riskier commercial real estate transactions that are value-add or ground-up developments, but still backed by hard assets,” he explains. “We also see opportunities in infrastructure debt, particularly junior financing of either existing assets or new project developments.”

“We’ve seen that, as a result of consolidation, managers are getting larger and those economies of scale are also benefiting LPs. At the same time, we expect to see more niche strategies coming to market.”

Igor Birkjær Baranovski, Chief Portfolio Manager for Private Debt at PenSam.

“We’ve seen that, as a result of consolidation, managers are getting larger and those economies of scale are also benefiting LPs,” concludes Baranovski. “At the same time, we expect to see more niche strategies coming to market.” He points out that as the structural trends in banking and financial regulation show no signs of reversing, more capital and financing needs are being pushed into the alternative space rather than the public markets. As Baranovski suggests, private credit is evolving beyond its mainstream direct lending roots into a broader ecosystem of specialized strategies, each catering to different needs.