The Power of Credit

The film Back to the Future opens with a wall of ticking clocks: some broken, some in sync, all measuring time but telling different stories. It is a fitting metaphor for today's credit markets, where speed, timing, and structure matter more than ever. If Doc Brown were around today, he wouldn't need to power the DeLorean himself. With access to an array of financing options, from sale-leasebacks to venture capital, he could bring in the right partners, align capital to purpose, and get his machine on the road. The market of 2025 looks nothing like the world of 1985, when Doc and Marty McFly first hit 88 miles per hour. But in some ways, Back to the Future got the arc right: it imagined a world where disconnected technologies - video, communication, navigation - converged into a single machine. Decades later, that vision feels familiar within the credit markets.

Today, while the basic function of connecting borrowers and lenders remains, the architecture has evolved. What was once a rigid system of siloed instruments has become a dynamic, cross-asset interface that is customizable, modular, and integrated. As we wrote at the start of the year, this is no longer a world of standalone loans or bonds. It's an integrated ecosystem of multiple financing lanes, where public and private markets intersect and investors operate across structures, geographies, and risk profiles. The real difference between now and 1985 (or even 1955) is the toolkit. We now have the infrastructure to facilitate access for a broader set of issuers and investors, enabling capital to flow with greater speed, precision, and purpose. In that way, perhaps the true flux capacitor of our time is the modern capital markets system itself. Although, without sufficient M&A and capital markets activity, there could be a glitch in the system.

Indeed, we have been emphasizing for some time the critical link between M&A and credit markets, particularly in the leveraged loan and direct lending market, a connection coming into even sharper focus now. While M&A activity lagged expectations earlier this year, contributing to a widening of the supply/demand gap, recent quarters have shown a modest turnaround. This time, strategics are leading rather than sponsors with corporate-to-sponsor transactions, corporate carve-outs, and structured equity taking center stage. But we should not get ahead of ourselves: activity is improving, but not sufficient yet.

Like Doc Brown's flux capacitor, we believe today's market demands precision and ingenuity. However, instead of 1.21 gigawatts of raw power, it runs on creative structuring and cross-asset solutions. These tools would have been foreign to most in the 1980s, except for a few visionaries who helped shape the market. Back in 1989, the leveraged finance market was predominantly high yield bonds and totaled ~$189 billion. Today, the U.S. high yield is $1.5 trillion. But more importantly, the opportunity set has transformed. The total addressable global credit market now spans more than $45 trillion across corporate, asset-based and structured credit. This growth has been fueled by innovation, the globalization of capital flows, structural demand for diversified income, broadened access and the institutionalization of origination.

In our May note "V for Volatility: Part II? " we emphasized that not all volatility is created equal, a distinction powerfully underscored on Liberation Day. The volatility we saw in Q2 demonstrated the credit markets' enhanced ability to distinguish signals from noise, displaying remarkable resilience relative to listed equities or rules-based products such as ETFs and CLOs. This resilience supports our continued stance in a carry over convexity environment, especially as spreads near all-time tights. At KKR, we are of the mindset that patient capital strategies are not rewarded for overreaching for risk to chase yield. Right now, we believe it is important to stay selective and disciplined. We would be remiss if we did not acknowledge that markets have been slightly exuberant and we feel it is prudent to recognize the interplay between fundamentals, technicals, and investor psychology. In other words, we appreciate it has not been easy to navigate these markets.

As our colleague Henry McVey notes in "Make Your Own Luck", the capital formation landscape is undergoing profound transformation. The growth of alternative lenders and private company formation has directly contributed to the growing demand for non-traditional financing, and that is reshaping the capital stack. The private markets are not only expanding, they are also deepening, with broader institutional participation, scale, and increasingly segmented specialization that is translating into new, non-traditional M&A.

EXHIBIT 1: Global Credit Remains a Resilient & Consistent Source of Income

Year-to-Date Returns Across Global Credit Markets