Nordic wealth manager Formue has long prided itself on delivering institutional-grade investment solutions to high-net-worth individuals. As global economic conditions shift, Formue sees an important role for private credit in client portfolios – especially in a world that is becoming more volatile, uncertain, and inflation-prone.

From Globalization to Geopolitical Fragmentation

“We believe we’ve entered a new economic era,” says Edvard Jansen, Portfolio Manager of Hedge Funds and Private Credit at Formue. That new era, according to Formue, is no longer defined by globalization, low and declining interest rates, and low and predictable inflation. Instead, it is shaped by “rising geopolitical tensions, demographic shifts, climate and defense-related investments, and disruptive technological change.”

These forces are fracturing the previous economic consensus and upending the low-inflation environment. “Everything else equal, geopolitical tensions, deglobalization and tariffs are creating uncertainty,” Jansen explains. “And uncertainty creates volatility – and likely more inflation volatility.” Although certain structural shifts – such as AI-induced productivity gains – might put downward pressure on inflation, Jansen believes that the broader trend points toward a “higher-for-longer” and volatile inflationary backdrop, making inflation protection increasingly important.

Private Credit: Floating-Rate Yield and Structural Resilience

In a world of higher inflation and interest rate normalization, investors are still trying to figure out how best to protect their portfolios against inflation. Private credit, in Jansen’s view, offers compelling risk-adjusted returns and protection against inflation. “We see private credit as a powerful blend of attractive yield with build-in inflation protection, due to the floating-rate nature of most loans,” says Jansen.

“We see private credit as a powerful blend of attractive yield with build-in inflation protection, due to the floating-rate nature of most loans.”

However, not all private credit strategies are created equal and some can perform well even in a lower interest rate environment. “If you’re not in the extremely commoditized parts of private credit such as some segments of direct lending, you can negotiate structural features like rate floors and make-whole,” notes Jansen. “These provide a cushion even if inflation and interest rates decline sharply.”

A Holistic Approach to Portfolio Construction

The emergence of private credit as an asset class can be traced back to the aftermath of the 2008 Global Financial Crisis. As regulators tightened the rules around traditional banking, private markets stepped in to fill the lending void. “Banks are increasingly regulated – Basel III, Basel IV, Dodd-Frank,” Jansen notes. “That has fundamentally constrained their ability and willingness to lend. Someone has to fund the real economy, and that someone is increasingly private capital.” Jansen sees no sign of this structural trend reversing. “The world needs financing – whether for green infrastructure, innovation, or defense – and private markets are stepping in where banks can’t.”

At Formue, private credit is not treated as a standalone product but as part of a well-diversified, institutional-style portfolio. The firm uses six asset class “building blocks,” –including unlisted real estate, hedge funds, private equity, traditional fixed income, traditional public equities and private credit – to build portfolios tailored to each client’s specific risk and liquidity preferences.

“Today, we believe private credit deserves a larger role in portfolios, primarily by reallocating from the traditional fixed income and liquid credit buckets.”

To determine each client’s allocation to private credit, the team at Formue evaluates their risk appetite, tolerance for illiquidity, and overall investment objectives. “If a client doesn’t have the tolerance for illiquidity, they simply can’t hold private equity, unlisted real estate, or private credit,” explains Jansen. “We essentially use a matrix that considers illiquidity tolerance, risk appetite and the expected return the client is aiming for.” For those who fall somewhere in the middle of that matrix, a typical allocation to private credit within their overall portfolio is currently around 2 percent.

“Today, we believe private credit deserves a larger role in portfolios, primarily by reallocating from the traditional fixed income and liquid credit buckets,” he emphasizes. Private credit serves multiple purposes within a well-diversified portfolio, according to Jansen. “It can be a powerful income generator, offering yields well beyond what’s typically achievable in public investment-grade or high-yield markets with comparable credit quality.”

Long-Term Mindset and Semi-Liquid Structures

However, Jansen underscores the importance of maintaining a long-term mindset – not just when investing in private markets, but also in public markets. “What matters is that you start out with a long-term mindset – and that it doesn’t suddenly shift when markets get volatile,” Jansen emphasizes. “If you’re committed to that long-term view, it helps you avoid selling at the wrong time.”

This philosophy holds even for semi-liquid or evergreen fund structures, which are increasingly popular in private markets. Formue has been an active advocate in the industry for the broader adoption of such structures since 2017. “However, we’re also highly critical of those launching them purely for asset gathering, especially when the structures present a clear mismatch between the liquidity offered and the underlying assets.”

Investors should be mindful of potential asset-liability mismatches and approach these structures with realistic expectations. “They should invest for reasons of capital efficiency, not purely for the promise of liquidity,” says Jansen. “In fact, investors should appreciate when managers implement features like initial lock-ups and investor- or fund-level gates – these mechanisms help protect the integrity of the fund and ensure that remaining investors aren’t penalized by others redeeming.”

“Investors should invest for reasons of capital efficiency, not purely for the promise of liquidity.”

On the manager side, Jansen warns against the risk of becoming “forced to deploy” amid strong inflows. “That pressure can lead to compromised terms, weaker covenants, or even style drift just to get capital invested.” Managers often face pressure to deploy capital quickly, “but sometimes holding more cash or liquid assets is the prudent choice,” argues Jansen. “Especially when markets tighten and there are fewer quality deals available, it could be better to slow down deployment than to compromise on terms and/or quality.”

He sees the growing momentum behind evergreen structures as a way to broaden access, especially for investors lacking the infrastructure to manage capital calls, distributions, and cash flow forecasting. “Ultimately, the reasons to invest in private credit via evergreen funds are the same as with traditional closed-end funds,” Jansen explains. “You’re seeking excess returns driven by illiquidity premiums, complexity premiums, among others, and to get compensated for higher risk.” This comes in addition to cost efficiencies, “because with a semi-liquid structure, we can avoid legal fees associated with using external lawyers for every re-up to a new vintage of the same strategy.” However, “it is critically important that the continuous evaluation and due diligence is not compromised.”

Adapting Loan Selection to Structure

In semi-liquid structures, managers must align loan selection with the fund’s liquidity profile, prioritizing assets with features that support more flexible redemption terms. “Segments with faster refinancing cycles or companies with predictable amortization schedules – rather than bullet payments – are more attractive for these lenders,” Jansen explains. He stresses that investors need to understand the difference in asset types between semi-liquid and closed-ended structures. “Avoiding asset-liability mismatches is key. While such mismatches rarely cause issues, when they do, the consequences can be significant.”

“Avoiding asset-liability mismatches is key. While such mismatches rarely cause issues, when they do, the consequences can be significant.”

Ultimately, Formue sees opportunity – but also caution – in the democratization of private markets. “These structures open access to more investors,” says Jansen. “But with access comes responsibility. We believe it iscritical that professional investors oversee these investments on behalf of non-professional investors to ensure the right incentives and risk controls are in place.”

For end investors – or those investing on their behalf – understanding the underlying loans made by private credit managers is crucial to assess whether the investments fit within a semi-liquid structure. Transparency is key, and the team at Formue has made it a priority to obtain that from their managers. “We invest in semi-liquid structures – some are UCI Part II, some Cayman offshore perpetual vehicles, and is diligently evaluating ELTIF 2.0 structures – however, all of these do not require similar reporting standards to LPs.”

“We require transparency into the loan tape for new investments since 2020, on a non-disclosure basis.”

But Formue goes further by negotiating and securing side letters that provide deeper access. “We require transparency into the loan tape for new investments since 2020, on a non-disclosure basis,” Jansen explains. “That means access to borrower terms, new deal details, and financials at entry, current status, or exit.” This level of detail is vital to ensure there isn’t style drift or pressure to deploy capital at unfavorable terms. “If a manager is forced to compromise on terms, at least we know and they know we’re aware – and that creates a disciplinary effect.”

This article features in the “2025 Private Markets” publication.