How Tokenized Private Credit is Reshaping Institutional Portfolios

Background:

At DigiFT, I wrote this article as part of a comprehensive content marketing strategy to promote iSNR, the Invesco US Senior Loan Strategy token.

Format: 

Blog article | Published 11 March 2025 here

Private credit has emerged as one of the fastest-growing alternative asset classes, attracting institutional capital at an unprecedented rate. What was once a niche market has now evolved into a mainstream investment strategy, offering diversification, stable income, and downside protection.

But what is fueling this growth? And what challenges do investors face when allocating capital to private credit?

The Private Credit Boom: A Market on the Rise

Private credit, also referred to as non-bank lending, has expanded from $1 trillion in 2020 to an estimated $1.5 trillion at the start of 2024, with projections to reach $2.8 trillion by 2028.

Market Value of Global Market Portfolio

Several factors have contributed to this rise:

• Decline of Traditional Bank Lending – Post-2008 financial regulations have constrained banks’ ability to extend credit to mid-sized and leveraged borrowers, creating opportunities for private lenders to fill the financing gap.

• Growing Institutional Adoption – Pension funds, insurance companies, and sovereign wealth funds are increasingly allocating capital to private credit, seeking higher yields amid volatile public markets. Today, institutional investors are targeting around an 8% allocation to private credit.

• Higher Yield Potential vs. Public Markets – Private credit strategies, particularly senior secured loans, offer attractive risk-adjusted returns compared to traditional fixed-income investments.

Asset Class Yields (as of 31 December 2024)

What Are Institutional Investors Looking for in Private Credit?

As more investors enter the private credit space, not all opportunities are created equal. Institutional investors prioritize:

• Security & Capital Preservation – Senior secured loans, where the lender holds a priority claim over a borrower’s assets, provide strong downside protection compared to unsecured credit strategies

• Liquidity Considerations – Historically, private credit has been illiquid, requiring multi-year lockups. However, new models such as tokenized credit offer enhanced liquidity solutions, enabling faster redemption cycles.

• Diversification & Non-Correlation – Private credit has exhibited low correlation to public markets, making it a strong portfolio diversifier, particularly in times of economic uncertainty.

• Inflation Protection – Many private credit investments, including floating-rate senior loans, can help mitigate inflation risks as they adjust to rising interest rates.

Challenges in Private Credit Investing

While private credit presents strong opportunities, investors must navigate several challenges:

• Illiquidity Risks – Unlike public bonds, private credit investments often have long lock-up periods. However, tokenization and structured solutions are emerging to address this limitation.

• Access & High Minimums – Traditional private credit funds require substantial minimum commitments. Newer structures, including tokenized credit, aim to lower these barriers.

• Market Transparency & Pricing – Pricing private loans is inherently more complex than public market assets due to limited trading data and bespoke structures. The increased use of blockchain technology offers potential solutions to enhance transparency in this sector.

The Future of Private Credit

The evolution of private credit markets is ongoing, and certain key trends are shaping the next phase of institutional adoption:

• Increased Institutional Allocations – The once niche market has become a sought-after option for investors. Family offices, private banks, foundations, and endowments are likely to boost allocations to the $1.7 trillion asset class over the next two years.

• New Liquidity Solutions – Structured secondary markets for private credit are becoming more sophisticated, providing greater flexibility for investors.

• Tokenization & Digital Marketplaces – The adoption of tokenized private credit strategies is expected to grow as regulatory clarity improves and platforms offer institutional-grade access.

Tokenized private credit now represents the fastest-growing and largest share of total tokenized real-world assets (RWAs), significantly outpacing other asset classes such as U.S. Treasuries and corporate bonds.

Total RWA Value

Source: RWA.xyz, March 3, 2025

Bringing Institutional-Grade Private Credit On-Chain

As private credit continues to gain traction among institutional investors, new financial structures are emerging to address traditional challenges such as liquidity constraints, high entry barriers, and limited transparency. One of the most promising innovations in this space is tokenization.

Tokenization is the process of digitizing financial assets and representing them as blockchain-based tokens. In the case of private credit, this means investors can gain exposure to traditionally illiquid credit strategies in a more flexible, transparent way.

Some of the key benefits include:

• Increased Liquidity – Tokenization introduces new liquidity mechanisms, enabling improved access and redemption options compared to traditional private credit structures. While traditional private credit funds often require multi-year lockups, tokenized structures offer the potential for enhanced flexibility through digital infrastructure.

• Broader Access – Institutional investors can access high-quality credit strategies with significantly lower minimums compared to traditional private credit funds.

• Enhanced Transparency & Efficiency – Transactions and holdings are recorded on an immutable blockchain ledger, improving operational efficiency and reducing settlement times.

Tokenized Private Credit in Action

This move aligns with a broader industry trend of bringing private credit on-chain. Other firms, such as Apollo, have also entered the space, launching initiatives like the Apollo Diversified Credit Securitize Fund (ACRED).

ACRED is a tokenized private credit fund with quarterly liquidity significantly improving redemption cycles compared to conventional private credit structures.

These developments mark a paradigm shift in private credit investing, as tokenization continues to enhance liquidity, transparency, and efficiency for institutional investors.

What’s Next?

Private credit is no longer an alternative investment on the sidelines—it has become a core allocation for institutional portfolios. As financial innovation continues, tokenization is set to reshape how investors access private credit, unlocking liquidity, transparency, and efficiency in an asset class historically defined by lock-ups and complex structures.

For institutional investors seeking stable, risk-adjusted returns with capital preservation, private credit—particularly senior secured loan strategies—continues to attract institutional interest. And with tokenization now enabling new levels of access and liquidity, the future of private credit investing is only just beginning.