M&G: Balancing returns, protection and impact

October 2, 2026

Impact private credit sits at the intersection of financial return, downside protection and measurable positive impact. Where do you see the biggest tension between these three?

‘Firstly, we believe impact investing should generate market rate return, and ultimately the main return driver in a private credit portfolio is robust origination with downside protection. Therefore, we see the greatest tension between these three objectives in the returns and downside protection area. Given the late-stage credit cycle that we’re in, combined with competitive underwriting in Europe and relatively more concentrated portfolios in private credit (compared to say a broadly syndicated loan or fixed income portfolio), investors’ credit underwriting discipline to preserve the downside protection is becoming more important than ever.’

Is additionality easier to demonstrate in private credit, given the direct relationship with borrowers, or does it create its own challenges?

‘A lot is made of the distinction between owners and lenders of a business, and the ability of owners to control an investee and thereby demonstrate their investor additionality. While this may be true conceptually, the share of ownership is a key factor that is missed. Many public equity markets have caps on the percentage of a company that can be owned by a single investor, usually in the single digits, making them one of many investors competing for influence. Similarly in public fixed income markets, you can have hundreds of lenders invested in a company’s bonds, competing for management’s attention. In private credit, we target the midmarket space, meaning we are often the only or one of a handful of lenders in a business, representing as much as 50% of the investee’s overall capital. This can mean that our influence, and thus additionality to a business can be significant as we engage with them on key elements such as measurability. We factor in our overall level of influence via share of debt provided into a business as part of the additionality section of our impact analysis.’

How do you distinguish between a company that is already impactful and a financing transaction that genuinely enables additional impact?

‘We believe additionality in private credit is broader than simply creating new impact. As lenders, we typically finance established businesses with proven good ideas, and therefore often contribute by supporting, sustaining and scaling existing impact rather than enabling entirely new impact outcomes. This is especially true as we are usually providing additional capital directly to the impactful business rather than buying an existing publicly traded share or bond where the capital is going to another investor. The strength of our additionality depends significantly on the use of proceeds. Financing growth initiatives, strategic acquisitions that enhance impact delivery, or dedicated sustainability investments can demonstrate a strong additionality case. By contrast, financing linked primarily to shareholder distributions is generally less additional, while refinancing can still support impact where the company’s impact delivery is closely aligned with its core business model. Our impact investing approach is focused on investee additionality, but we do analyse our additionality as investors in all cases and seek to pull additional levers, such as engagement, where the opportunity exists.’

Are current market conditions creating more opportunities to finance impactful companies, or making impact underwriting more difficult?

‘The current environment is making all deal flow difficult, regardless of any focus on impact. Higher interest rates and lower exit valuations are constraining M&Arelated deal flow. That said, we are seeing the best opportunities for impact deals within the lower mid-market space, where companies tend to be more innovative and solutions-driven, helped by broader regulatory trends such as EU decarbonisation targets. About a third of our year-to-date deployment has been impact deals largely in this space. If you have the scale and relationships, the deals will find you.’

Which impact themes do you currently find most compelling within private credit, and why?

‘The most compelling impact thematics are those where there is a natural tailwind to the business or industry, improving credit fundamentals and providing a strong impact case at the same time. For example, businesses operating in the circular economy space have a strong impact story, usually by reducing the linear consumption models of the modern world and improving resource use and efficiency by enabling the extension of useful life or reuse of existing resources. We are simply using up natural resources at an unsustainable rate, and regulation in Europe is slowly catching up to this by imposing limits on the amount of waste that goes to landfill, one of many such regulatory initiatives. In credit terms, circular economy businesses will therefore have a stronger underlying demand for their products and services, helping with revenue generation and ultimately profitability if managed well.

We observe there are similar tailwinds in the energy transition space too, particularly following the Russian invasion of Ukraine and the recent attacks on Iran, bringing energy security to the fore. For Europe, pivoting away from fossil fuels and into renewables is a key route to ensure energy sufficiency, providing interesting impactful investment opportunities in renewable energy generation and upgrading of grid infrastructure.’

If you had to name one misconception institutional investors still have about impact private credit, what would it be?

A lingering belief often observed amongst institutional investors is that impact investing involves a trade off with returns, which likely contributes to the amount invested in private-market impact investments at only € 190 billion, or 2.5% of the overall amount of institutional capital that could plausibly be allocated to impact. Direct lending represents the minority of this allocation versus private equity and infrastructure. We are committed to dispelling these myths. We are clear in our impact definition that we are looking to deliver impact outcomes and competitive market returns concurrently.’
 

SUMMARY Impact private credit should deliver market-rate returns alongside measurable positive outcomes. Strong origination and disciplined underwriting are essential to downside protection. Private lenders can achieve significant additionality through direct financing, influence and engagement. Lower mid-market companies offer attractive impact opportunities, supported by innovation and regulatory tailwinds. Circular economy and energy transition investments can combine strong impact with favourable credit fundamentals. Impact investing does not necessarily require sacrificing financial returns.

 

Read the full article in Financial Investigator magazine