Private debt

20 August 2026, 20:30 UTC Chief Investment Office GWM Investment Research

Private debt CIO View: Private debt Karim Cherif, Head Alternative Investments, UBS Switzerland AG Richard Huang, CAIA, Private Market Strategist, UBS AG Hong Kong Branch Antoinette Zuidweg, Alternative Investments Strategist, UBS Switzerland AG

• Direct lending returns moderated in the first half of 2026, returning a modest 3%. This, however, outpaced US leverage loans (+1.3%) and US high yield (+1.9%).

• Sentiment remains cautious, weighed down by concerns over loan portfolios and increased redemptions from perpetual private business development companies (BDCs).

• The risk environment remains elevated, underscoring the importance of selectivity and quality.

• With income returns under pressure and default rates likely to Source: UBS and GettyImages normalize, we expect risk-adjusted returns to stay moderate. For investors with heavy allocations, diversifying into other alternative Figure 1: Direct lending delivers strategies—while carefully considering differing income and risk profiles—is advisable. modest returns in 1H26 Performance across credit segments

Private debt in the current environment • CIO continues to believe a diversified allocation to direct lending, sized to individual investor risk and liquidity preferences, can add value over a full economic cycle. In the near term, however, we think risk-adjusted Note: As of 30 June2026. Returns for the CDLI are returns are likely to moderate. unlevered gross of fees. Source: Cliffwater Direct Lending Index, LSTA Leveraged Loan Index, BofA US • Direct loans returned a modest but positive 3% in 1H26, outpacing US High Yield, Bloomberg, UBS August 2026 leverage loans (1.3%) and US high yield (1.89%).

• Lending volumes saw signs of improvement over the last three months Figure 2: 2021-22 vintage experiencing until end-July. However, still-limited sponsor-backed lending saw deals greater stress decline to the second-lowest level since mid-2023. Cautious sentiment Breakdown of non-accruals added in LTM 1Q26, by among lenders persists, and software deals have made way for health vintage (as % of total) care and professional services as leading lending categories.

• Private lenders have, however, been very present in the AI infrastructure build-out—in early August, NVIDIA and six blue-chip asset managers formed a strategic partnership to establish independent AI infrastructure financing platforms, mobilizing over USD 500bn in capital. The deal underscores the growing role of private markets in financing the AI ecosystem, with private capital increasingly deployed across the value chain, from equity investment in AI companies to credit financing for compute and infrastructure expansion, and infrastructure capital supporting the development of data centers and related digital assets. Source: Cliffwater Direct Lending Index (CDLI), UBS, as of August 2026 • GPU financing is likely to be a major theme for private credit in the coming quarters, in our view. Although it falls mainly within asset-based finance rather than traditional direct lending, growing competition

This report has been prepared by UBS Switzerland AG, UBS AG Hong Kong Branch. Please see important disclaimers and disclosures that begin on page 5.

among private-credit, infrastructure and institutional investors could Figure 3: Our base-case scenario points pressure spreads. to further moderation in returns • Fundraising however remains weak, with capital raised in 1Q26 Estimated net of fees levered fund returns over 12 months under UBS CIO scenarios representing only 17% of the full-year 2025 total and the run-rate tracking more than 30% below 2025's level, reflecting softer returns and more cautious investor sentiment.

• This is reflected in public business development company (BDC) results. Portfolios contracted for a third consecutive quarter as repayments continued to exceed new fundings, while portfolio yields declined year over year. Credit performance remained mixed, with some public BDCs reporting lower non-accruals following restructurings, but others seeing a notable increase in problem loans and fair-value markdowns.

• Spreads on newly…