Where Private Credit Fits in a Post-Inflation Economy

After two years of runaway inflation and aggressive rate hikes, 2025 feels different. Prices are stabilizing. The Federal Reserve is signaling a pause. Bonds are slowly regaining footing—but few investors believe we’re returning to the low-rate world of the 2010s.

That leaves accredited investors asking:

“If inflation is cooling, what happens to private credit now?”

The short answer: it’s not going anywhere.
In fact, in a post-inflation economy, private credit may be more strategically important than ever.

From Inflation Hedge to Income Anchor

During the inflation spike of 2022–2024, private credit’s appeal was obvious—floating-rate loans protected investors as yields climbed. But as inflation moderates, the conversation is shifting from “protection” to performance consistency.

Even with rates leveling off, private lenders continue to benefit from:

• Elevated base rates that keep yields high;
• Strong borrower demand as banks stay conservative;
• Short-duration structures allowing quick repricing;
• Asset-backed security reducing capital risk.

For many investors, private credit has transitioned from a tactical hedge to a core income-generating strategy.

Why the Post-Inflation Economy Still Favors Private Credit

1. Interest Rates Aren’t Going Back to Zero

Even as inflation cools, economists expect rates to settle in the 4–5% range, not 1–2%. That means traditional bonds will continue to offer limited real yield after taxes and inflation.

Private credit, however, operates in the spread zone above those rates. Senior secured deals yielding 8–10% net remain common in 2025. Investors capture both steady income and a premium for illiquidity.

2. Bank Retrenchment Is Structural, Not Cyclical

Regulatory capital requirements have permanently changed bank lending behavior. Banks are writing fewer middle-market and construction loans—leaving space for non-bank lenders to dominate.

According to McKinsey’s Global Private Markets Report 2025, private credit AUM has surpassed $3 trillion, with continued institutional inflows forecast through 2029.

3. Borrower Quality Is Improving

A cooling economy and disciplined underwriting have shifted the borrower landscape. Many lenders, including LBC Capital, are focusing on first-lien, low-LTV loans to strong borrowers seeking fast, collateral-backed financing outside the banking system.

The result? Fewer speculative loans, more conservative structures, and stronger recovery potential—ideal conditions for post-inflation stability.

4. Real Income Beats Nominal Growth

For investors who’ve lived through inflation’s erosion of purchasing power, stable real cash flow matters more than headline returns. Private credit delivers contractual payments not tied to volatile market prices. That makes it one of the few yield strategies that still “feels” tangible in 2025.

Case Study: The Portfolio Rebalance

Consider an accredited investor, Rachel, who built a diversified portfolio over the past decade: 50% equities, 30% bonds, 20% alternatives. During the inflation surge, her bonds lost value and equity dividends lagged behind cost-of-living increases.

In 2024, she began reallocating part of her fixed-income sleeve into real-estate-backed private lending through LBC Capital Income Fund, LLC’s Income Fund. By early 2025, her portfolio yields 8.7% annualized—more than double her previous fixed-income return—with markedly less volatility.

This simple shift shows how private credit helps maintain purchasing power and predictable income even after inflation cools.

What Could Change in the Next Cycle

Narrowing Spreads

If the Fed begins gradual rate cuts, new loan spreads may compress slightly. However, active managers can offset this by refinancing older, higher-coupon loans or rotating into new borrower segments.

Selectivity Matters

Not all lenders are disciplined. As capital floods into the sector, underwriting quality varies. Investors should favor funds with strict credit criteria, transparent reporting, and consistent first-lien exposure.

Reinvestment Opportunities

As shorter-term loans mature, reinvestment decisions become key. Well-managed funds continuously deploy capital into fresh deals—sustaining yield while managing risk.

Building a Post-Inflation Investment Strategy

1. Reassess Fixed Income Exposure.
   Don’t rush back to long-duration bonds that remain rate-sensitive. Blend traditional fixed income with private credit to diversify income sources.
2. Focus on Manager Discipline.
   The best results come from lenders that balance yield with preservation. Review underwriting policies, historical default rates, and transparency.
3. Prioritize Short-Duration Credit.
   Loans under three years help manage reinvestment risk and allow flexibility if rates change again.
4. Use Private Credit as a Core Income Engine.
   For many high-net-worth and retirement investors, private lending now serves as a permanent portfolio fixture—not a temporary inflation play.

The Broader Perspective

Economists may debate whether the U.S. has achieved a “soft landing,” but one trend is clear: the era of free money is over. A normalized rate environment means investors must be selective, strategic, and patient.

Private credit fits that world perfectly—rewarding prudence, underwriting discipline, and long-term thinking.

Whether inflation stays flat or fluctuates mildly, the fundamentals remain strong: limited bank lending, steady borrower demand, and an investor base seeking tangible yield.

As LBC Capital Income Fund, LLC and other established credit managers demonstrate, this asset class isn’t just surviving the post-inflation transition—it’s defining what disciplined income investing looks like in the next decade. Talk to our fund manager here.