Institutional investors are expected to diversify their private credit portfolios away from direct lending over the next year, according to new research from Rede Partners.

The firm’s Private Credit Market Intelligence Report 2026 found that 70 per cent of limited partners (LPs) expect diversification beyond direct lending to become the leading trend across the asset class over the next 12 months.

Direct lending remains a core part of investors’ private credit portfolios, with 62 per cent of respondents citing it as a primary or secondary focus. However, few investors expect to grow their exposure to the strategy, with only 6 per cent saying they plan to increase allocations to mid and upper-mid-market direct lending.

Rede said the shift reflects growing maturity across private credit portfolios, as well as pressure on direct lending from spread compression, competition and concerns around underwriting standards.

Read more: UK insurers “resilient” under stress despite growing private credit allocations

The report also found that private credit now typically accounts for 18 per cent to 20 per cent of LPs’ private markets assets under management, compared with less than 10 per cent for most investors in Rede’s 2022 survey.

More than four in 10 investors said they plan to increase their private credit allocation over the coming year, while just 8 per cent expect to reduce their exposure to the asset class.

However, institutional investors also flagged a number of concerns around private credit. The biggest was competition-driven compression of spreads and terms in direct lending, cited by 70 per cent of respondents, followed by the emergence of portfolio challenges or fraud due to poor underwriting standards, cited by 58 per cent.

As capital diversifies beyond direct lending, Rede said “satellite strategies” are likely to benefit, with asset-based finance, capital solutions, special situations and credit secondaries identified as the main areas of investor focus.

The report also found that semi-liquid private credit structures are becoming more mainstream, with almost half – 46 per cent – of investors having already invested in evergreen structures with redemption options, while 30 per cent  have invested in open-ended structures more broadly.

Read more: More than half of insurers set to increase private credit exposure