Quarterly Market Outlook
Q3 2026

Author

Matthew Pallai
Chief Investment Officer

Key Themes

Private Credit Positioned Better than the Headlines
Late Cycle, Long Runway

Policy Tailwinds, Selective Credit
Stimulus Suppressing the Cycle

We are encouraged by how well both the economy and private credit markets have held up amid an environment dominated by cautious headlines. Entering the year, there were legitimate concerns that higher rates, tighter financial conditions, and isolated pockets of credit stress would lead to a broader deterioration in fundamentals. Instead, the data has generally moved in the opposite direction.

GDP growth remains solid. Labor market dynamics are nuanced: hiring has moderated, and labor force participation is declining, but the deterioration in job openings has arrested. We are not seeing the kind of broad softening that historically precedes recession. Rather, the system appears to be finding a post-COVID equilibrium — one defined by slower but durable growth.

The policy backdrop deserves more credit than markets are giving it. The One Big Beautiful Budget Act represents a substantial injection of fiscal impulse into an economy that is already on reasonably firm footing. Its effects are being felt across multiple dimensions: slowing labor market deterioration, supporting forward consumer wellbeing, and providing a buffer against the more adverse tail scenarios that credit markets have been pricing in.

The AI investment super cycle adds a further dimension. Capital expenditure tied to AI infrastructure — data centers, power, connectivity — is driving a wave of GDP contribution and debt issuance that extends the productive expansion well beyond traditional cycle drivers.

Credit fundamentals have held up better than the bearish consensus anticipated. Delinquencies are down across the board. Covenant default rates and leverage metrics have ticked modestly lower. Commercial banks are beginning to redeploy capital — a constructive signal that confidence in the underlying credit environment is recovering.

On PIK trends, the picture has improved. “Bad PIK” — the kind that reflects borrower distress rather than structured preference — has been declining since late 2025. That said, loan-to-value ratios have been creeping higher across parts of the market, and we are monitoring LTV expansion as a potential leading indicator of future pressure.

Against this backdrop, we remain constructive on asset-based lending and real estate credit. These segments benefit directly from the policy and macro dynamics described above — hard asset collateral, floating rate exposure, and structures that are inherently senior in the capital stack.

We continue to be cautious on direct lending broadly. Spread compression, elevated leverage in parts of the market, and the software sector softness give us pause. The risk/return profile in direct lending is less compelling today than it was two years ago, and selectivity is imperative.

Heading into the back half of the year our posture is one of disciplined optimism: macro landscape is better than feared, the policy environment is supportive, and the best opportunities lie in secured, asset-backed structures over unsecured cash flow lending.

Real Estate Lending

Asset-Based Lending

Corporate Lending

Stabilizing supply-demand dynamics and accelerating transaction volumes have created a prime window for bridge lending. As price discovery solidifies, we are targeting select high-growth markets where risk-adjusted returns are increasingly attractive and fundamental stabilization is imminent.
We are harvesting premium yields by filling the financing gap left by defensive traditional banks, providing flexible bridge and value-add capital to high-quality developers in a less crowded lending environment.

The attractiveness of ABL continues to compound with the “spread migration” away from Corporate Lending. Collateralized, short-duration, amortizing loan structures that are the hallmark of asset-based lending are seeing robust demand from investors looking to diversify risks and maintain high income streams.
Litigation finance, regulatory capital relief and small business financing continue to offer, in our view, some of the most attractive risk-adjusted returns. These specialties are especially attractive when juxtaposed against the continued softening in consumer-facing sectors like credit cards and auto finance.

While macro volatility has caused a 25-50bps spread widening in corporate debt, spreads remain historically tight, particularly within the core middle market.
The divergence between SaaS and non-SaaS companies remains, and within tech-focused firms there has been a bifurcation between the top-tier names with healthy balance sheets and cash flows vis-à-vis rest of the SaaS market.
Overall, the fundamental health of the asset class is best evidenced by non-accrual rates, which remain contained at ~1.0% through Q1 2026 across the industry’s largest BDCs.

Views on the Credit Markets

The views expressed in this chart are those of the Investment Team of Nomura Capital Management LLC and are based on the Investment Team’s forward-looking assessment of credit markets as of the date referenced above. The views expressed herein are subject to change at any time following the publication of this report. The arrows in the chart reflect the change in the Investment Team’s outlook of each credit market since its prior quarterly market commentary. This chart is provided for informational purposes only and is not intended to represent a recommendation from Nomura Capital Management LLC to invest in, or divest from, the credit market asset classes referenced herein.

Economic Outlook (12 – 18 Months)

The views expressed in this chart are those of the Investment Team of Nomura Capital Management LLC and are based on the Investment Team’s forward-looking assessment of the general macroeconomic environment as of the date of this report. The Bull/Base/Bear Market (“Market Scenarios”) outcome probabilities noted in this report reflect the Investment Team’s forward-looking estimate of the probability of each Market Scenario occurring within the next 12-18 months from the date of this report. The market metrics noted within this report (Growth, Inflation, Unemployment, Risk Assets, Base Rates and Volatility) represent the Investment Team’s forward-looking estimate of each market metric resulting from the corresponding Market Scenario. All views and estimates contained within this report are as of the date of this report and are subject to change at any time following the publication of this report.

Healthy Leverage Levels in Corporate Sectors

Excluding the pandemic-induced volatility, the private non-financial corporate sector has been engaged in a sustained period of deleveraging since the Great Financial Crisis. While a recent plateauing of the debt-to-GDP ratio suggests this deleveraging cycle has paused, corporate debt accumulation is now expanding at a rate commensurate with broader economic growth.

Data from Federal Reserve

Improving Credit Metrics: Contrary to bearish expectations

Despite mixed sentiment, Private Credit fundamentals remain strong. Stable Q1 2026 covenant default rates (3.1%) reflect disciplined underwriting, while the 8% rise in amendment activity highlights the asset class’s key advantage: structural flexibility.

Data from Lincoln International

Rapid Rise of Asset-Based Lending & Specialty Finance

The past few years have seen robust demand for investments in the Asset-Based Lending space given the strong return profile, portfolio diversification, and low correlation to other asset classes.

Data Sourced from Bloomberg

Normalizing Supply and Rising Transaction Volumes Drive Commercial Real Estate (CRE) Momentum

Strong transaction volumes and a normalizing pipeline favor CRE. As supply dips below historical averages in key regions, we are positioned to capture value through accelerated rent growth and occupancy gains in supply-constrained markets.

Data sourced from Bloomberg, CoStar, Green Street

The NCREIF Property Index (NPI) is a quarterly, unleveraged composite total return for private commercial real estate properties held for investment purposes only. All properties in the NPI have been acquired, at least in part, on behalf of tax-exempt institutional investors and held in a fiduciary environment

Housing Market Conditions Continue to Normalize

We believe the outlook for Residential Real Estate Lending remains exceptionally favorable, supported by a housing market defined by resilient affordability and positive Home Price Appreciation (HPA) forecasts. Balanced inventory levels and efficient listing cycles further enhance market liquidity, ensuring a stable collateral base and a robust pipeline for high-quality loan originations through 2026.

Source: Nomura Asset Management International, Macrobond, National Association of Realtors (NAR), U.S. Census Bureau, Bankrate, U.S. Bureau of Economic Analysis (BEA), Freddie Mac, S&P Global, U.S. Bureau of Labor Statistics (BLS), National Association of Home Builders, Zillow

Conclusion

Resilient Macro Outlook and “Mid-to-Late-Stage” Positioning:

Contradictory Headlines: Despite pessimistic headlines regarding defaults and Private Credit (PC), the actual data suggests a stronger economy than expected, bolstered by significant fiscal stimulus and the “Big Beautiful Bill.”

Labor Market Firming: The labor market appears to be warming up again; while hiring is currently depressed and the participation rate is declining, job openings are no longer worsening.

AI Influence: The AI boom is a primary driver of market activity, extending even into debt issuance. This is a large contributor to GDP growth.

Cycle Maturity: Current macro levels suggest the economy is in a mid-to-late-stage cycle. GDP remains solid, and the pace of monetary tightening has slowed as the system finds a post-COVID equilibrium.

Credit Markets & Default Performance

Improving Credit Metrics: Contrary to bearish expectations, delinquencies are down across the board. Covenant default rates have declined, and leverage has ticked down slightly.

Spread Behavior: Credit spreads remain relatively stable, though they have widened slightly at the “tight end,” specifically within the software sector.

PIK & LTV Trends: “Bad PIK” (Payment-in-Kind) has been declining since late 2025, providing a positive signal, though an increase in Loan-to-Value (LTV) ratios remains a point of concern.

What we still like:

Asset-based lending: Loans collateralized by non-real-estate physical assets such as equipment, infrastructure, or inventory.

Residential real estate: Home equity loans, residential transition loans and other home loan products in high home price appreciation (HPA) geographies backed by healthy levels of borrower equity.

Commercial real estate: Short-duration bridge and gap loans for multifamily, student housing, and warehouses.

Specialty finance: Cash flows backed by diversified packages of consumer / small-and-medium sized enterprise (SME) loans, intellectual property, and royalties.

What we don’t like:

Corporate credit: Cyclical tights in corporate credit spreads makes their risk/reward profile asymmetric and highly primed for market volatility.

This is for informational purposes only and is not intended to represent a recommendation from Nomura Capital Management LLC to invest in, or divest from, the credit market asset classes or security types referenced herein.

Nomura Capital Management LLC (“NCM”) is a registered investment adviser. The information set forth herein, or in any of NCM’s market commentaries or similar writings or publications, is for informational purposes only and does not constitute financial, investment, tax or legal advice. This information is intended to be informational in nature and, by receiving this communication, you agree with its intended purpose described above. The views and/or strategies described in this communication may not be suitable for all investors. Prior to making any investment or financial decisions, an investor should seek individualized advice from personal financial, legal, tax and other professionals that consider the particular facts and circumstances of an investor’s own situation. All investments are subject to varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy or product referenced directly or indirectly in this communication will be profitable, perform equally to any corresponding indicated historical performance level(s), or be suitable for your portfolio.

These materials reflect the opinion of NCM on the date of production. Opinions and statements of financial market trends that are based on current market conditions constitute our judgement and are subject to change without notice. Past performance does not guarantee future results. Where data is presented that is prepared by third parties, such information will be cited, and these sources have been deemed to be reliable. However, NCM does not independently verify or otherwise warrant the accuracy of this information. All investments are subject to risks, including the risk of loss of principal.